Breaking News

Tracking new cases: A test of “protectionism”

NOTE: From time to time, the blog will examine significant new cases as they are filed at the Supreme Court.  This post is one in that series.  Some of these cases very likely will appear later in the blog’s Petitions to Watch feature when the Court is ready to consider them.


UPDATE: The case has been docketed as 09-231.

Investment capital, obviously, moves from state to state as markets attract it, but it is not clear that it travels with constitutional protection.  Does a state, aiming to protect locally owned business, have the constitutional authority to resist the entry of outside money?  And, if traveling capital seeks to do business under the shield of the corporate form, can states resist that?

Those are variations on Commerce Clause themes that are now being tested in the Supreme Court, in a new case filed last Friday. The petition — in Brown, et al., v. Hovatter, et al. – is here; it has not yet been assigned a docket number.  It challenges a Fourth Circuit Court ruling last March; that decision can be found here.

If the Court were to hear the case, it could provide a significant new review of the scope of the so-called “dormant Commerce Clause” — explicitly, whether that Clause’s scope protects the movement of investment capital across state lines, and whether it protects the choice of a particular structure or form for doing business.   Those issues arise in a test of a Maryland law regulating the funeral business, a law that a federal judge who struck down the law (only to be reversed on appeal)  called “the most blatantly anti-competitive state funeral home regulation in the nation.”

The “dormant” version of the Commerce Clause can be traced all the way back to Chief Justice John Marshall in Gibbons v. Ogden, in 1824.  The word “dormant” is a bit of a misnomer; what is involved is the theory that constitutionally it is for Congress to regulate commerce that flows across state borders, so states cannot inhibit that flow as they seek to insulate local businesses from outside competitors.  Thus, the version is sometimes labeled the “negative Commerc Clause”; its effect is to keep states from frustrating Congress’ choice to allow interstate commerce to flow freely in a kind of “common market.”   The new Maryland case tests whether investment capital, and the structure a business takes, are “articles of commerce” under the Clause.  The Fourth Circuit Court said they were not.

The Brown case involves four individuals who want to operate funeral homes or cemeteries in the state of Maryland by using the corporate form.  Some of them also want to send in capital from outside Maryland to build a funeral business. They claim they have been stymied by the state law that controls the funeral market in Maryland.  Except for 58 corporations that already operate in the state as corporations and were allowed to continue to do so, the Maryland law bars corporate ownership of firms in any level of mortuary science.  It also limits ownership to those licensed in Maryland as funeral directors.

Besides testing the law’s impact on capital and business form, the new petition asks the Court to clarify how far states must go to prove that there are local benefits that outweigh any burden a business-regulating law imposes on commerce among the states — essentially, a plea for the Court to revisit  its most important precedent on that issue: Pike v. Bruce Church, in 1970.

The Brown case is part of the long-running campaign to challenge business regulation, particularly as it affects small businesses, by the Institute for Justice, a free-market advocacy group based in Arlington, VA.

To more fully understand what Brown is about, one begins with an economic premise that prompted the lawsuit.  The idea is that entrepreneurs across the country seek to engage in business across state lines, but doing so is sufficiently complex that they want to form a corporation into which they will put capital and business acumen or talent.

According to the theory, “owning an interstate business as a corporation is a practical necessity” in virtually all markets, including that for funeral services.  “Corporations have advantageous attributes that direct personal ownership of a business cannot provide — perpetual existence, superior ability to raise capital, limited liability, ease of transferability, and others,” the Brown petition asserts.  Allowing a business to be set up as a corporation, therefore, allows it to grow and to exploit the capital its backers want to devote to it.

From that perspective, both the movement of capital and the shape a business firm takes involve economic phenomena that should be counted as “articles of commerce” as much as physical goods, the petition contends.  The Fourth Circuit, it complains, simply put both investment capital and the corporate form beyond Commerce Clause protection from state discrimination, by holding that they were not articles of commerce.

The petition quotes the Fourth Circuit as having concluded that the Maryland funeral law’s restrictions were “not aimed at any interstate flow of goods, materials, or other articles of commerce” — phrasing which suggests that only physical goods are insulated from state protectionist legislation.

By restricting ownership in Maryland’s funeral industry to individually owned businesses (except for the 50 corporations that are “grandfathered”), Maryland assures that outside capital will not enter the market, the petition argues.  The only interstate investment that can “seep into” that market, the petition asserts, is through the grandfathered corporate funeral homes.

The state of Maryland will get a chance to defend its funeral home law before the Justices consider whether they will hear the case.