'Substantial Effect' Commerce Clause Power

Activities Having a Substantial Effect on Interstate Commerce

This fourth category of Commerce Clause power is far more complex than the previous areas discussed. It is best understood by examining a partial history of Supreme Court cases that have upheld, or less frequently struck down, federal legislation under the Commerce Clause.

In 1824, the Supreme Court decided its first major Commerce Clause case in Gibbons v. Ogden, 9 Wheat. 1 (1824). Gibbons and Ogden were competitors both operating steamboats which ran from New York to New Jersey. Ogden was granted a monopoly by the New York legislature and requested, and was issued, an injunction from the state of New York against Gibbons’ competing steamboat business. The Supreme Court found the injunction was invalid because it conflicted with a federal statute. The authority for the federal statute itself came from the Commerce Clause. The case is important because the New York injunction was not to be enforced in any state other than New York, and so it might appear that the federal statute here should not reach into the state. The Court found, however, that the Commerce Clause empowered Congress to pass acts that would have an effect within a single state so long as the activity regulated had some commercial connection with another state. Otherwise, Congressional power to act in some cases would be only illusory, as a state could prevent a federal law from having full force and effect.

EXAMPLE: The state of Massahampshire passes a law requiring all commercial bus lines to register with the state and purchase a license. Federal law prohibits “any interference with the interstate operation of commercial buses.” The state law would infringe upon the federal law so the state law would be invalidated. For more on this, see “Subchapter 3: The Dormant Commerce Clause.”

Importantly, the Gibbons Court pointed out that no area of interstate commerce was reserved for control by the states. Regarding economic regulation, however, the Court eventually declared that while regulation was partially the federal government’s domain, other areas, in accordance with the Tenth Amendment, were the domain of the states.

Ninety years after Gibbons, the Court decided Houston East & West Texas Railway Co. v. U.S., 234 U.S. 342 (1914). Referred to as the Shreveport Rate Cases, it involved a dispute over the different rates charged by carriers for travel within the state of Texas than for travel between Shreveport, Louisiana and Texas. The Interstate Commerce Commission, upon being made aware of the rate differential, ordered the offending carriers to

“desist from charging higher rates for the transportation of any commodity from Shreveport to Dallas and Houston.”

Houston at 347. The carriers sued, claiming the Interstate Commerce Commission had overstepped its bounds. The Supreme Court disagreed. The Court held:

[I]n all matters having such a close and substantial relation to interstate commerce [and when] the interstate and intrastate transactions of carriers are so related that the government of the one involves the control of the other, it is Congress, and not the State, that is entitled to prescribe the final and dominant rule, for otherwise Congress would be denied the exercise of its constitutional authority and the State, and not the Nation, would be supreme within the national field” -Houston at 355.

This, of course, is quite similar to the reasoning in Gibbons. Crucial here are the words "substantial relation," as we are now on the verge of a rule of law: When intrastate commerce has a substantial economic effect on interstate commerce, Congress may regulate the activity pursuant to the Commerce Clause.

EXAMPLE: Frank operates a fireworks store in Southernstate. The fireworks he purchases from his suppliers are made entirely within Southernstate from materials found locally in the state. Despite the modern trend toward even the smallest of shop owners selling online across state lines, Frank sells only from his storefront. In other words, everything Frank does is intrastate. In an effort to end the increasingly heated price war among fireworks retailers, Congress passes a law establishing minimum prices for fireworks. Frank is fined for violating the law, and defends himself claiming the law exceeds Congress’ constitutional powers as the activity regulated is entirely intrastate.

What would be the result in the Frank’s Fireworks case above? The view taken by the Court today would be that Congress is fully within the bounds of the Commerce Clause.

There was a time, however, after Gibbons and the Shreveport Rate Cases, when the outcome would have been otherwise. In Schechter Poultry Corp. V. U.S., 295 U.S. 495 (1935) and Carter v. Carter Coal Co., 298 U.S. 238 (1936) the Court struck down acts of Congress refusing to find support in the Commerce Clause. In 1937, however, the Court decided NLRB v. Jones & Laughlin Steel Corp, 301 U.S. 1, and between 1937 and 1995 the Court did not strike down a single federal statute as exceeding the powers granted Congress in the Commerce Clause.

In NLRB, the Court found Commerce Clause power to regulate the unfair labor practices of Jones & Laughlin Steel, which manufactured steel and iron in Aliquippa, Pennsylvania, employing approximately 10,000 workers at that location. Jones & Laughlin also owned mines in two other states and shipped “a large portion of its finished product across state lines.” The Court noted,

“the principle that an industrial dispute having the necessary effect of substantially burdening commerce would be within the control power of Congress,”

and that

“the scope of the control power extends to recurring evils which in their totality constitute a burden on interstate commerce.”

In NLRB, both principles apply. First, a strike or other industrial dispute involving the 10,000 workers at this steel plant could surely have an effect on interstate commerce. Second, the “recurring evils” of the unfair practices, even absent a major dispute, would have a cumulative effect. Similarly, returning to Frank’s Fireworks; if enough individuals were to sell fireworks the way Frank does, there would be a cumulative effect on interstate commerce, even though each participant is engaging in solely intrastate business.

EXAMPLE: Frank’s Fireworks has been thriving for the past two years. People from nearby Alassippi have started stopping by his Spark Shack on their way through Alassippi. In addition, other fireworks shops in Georglina and Floriana have started to use Frank’s business model and sell only locally produced fireworks in an effort to sidestep federal legislation. Clearly, at some point, this intrastate activity will affect interstate sales of fireworks by those who comply with the federal law. The intrastate activity can be regulated as a means of enforcing the federal statute.

The cumulative effect argument discussed above was firmly established by the Court in Wickard v. Filburn, 317 U.S. 111 (1942). 7 U.S.C.S. §§ 1281 and 1340 (the Agricultural Adjustment Act of 1938) established production quotas for wheat farmers and imposed a penalty on excess production. Filburn, a farmer in Montgomery County, Ohio, was not engaged in growing wheat for commercial purposes on a large scale. Instead, he grew wheat

“to sell a portion of the crop; to feed part to poultry and livestock on the farm, some of which is sold; to use some in making flour for home consumption; and to keep the rest for the following seeding.”

Wickard at 114. Under the Act, Filburn’s 1941 allotment was 11.1 acres of wheat, for a total of approximately 223 bushels. But Filburn harvested 23 acres in total, which yielded 239 bushels in excess of his quota. In accordance with the Act he was subject to a penalty of 49 cents per bushel, which he refused to pay.

Wickard is important because while Filburn harvested more than double his quota it is nonetheless clear that his extra 239 bushels of wheat could not, of itself, have any significant impact on interstate commerce. Furthermore, the excess wheat in question was not intended to be placed into the stream of commerce, but rather was to be used primarily for home consumption. The rationale for finding Congressional authority to regulate this activity pursuant to the Commerce Clause comes from cumulative effect that many similar farmers   raising wheat for their personal use would have on the demand for wheat purchased in the marketplace.

“Home-grown wheat in this sense competes with wheat in commerce… [and] would have a substantial effect in defeating and obstructing the purpose of the Act."

Wickard at 128-129. So even if an activity in itself does not have a substantial effect on interstate commerce, Congress may still regulate the activity if there is a substantial cumulative economic effect on interstate commerce.

EXAMPLE: As more people become environmentally aware, increasing numbers of homeowners are installing solar-powered generators to supplement the electricity that they purchase from more traditional sources. The amount of electricity the average homeowner can generate using a modest solar-powered system is minimal. Nonetheless, the combined effect of hundreds of thousands of such systems could have a substantial effect on the price of electricity, due to the cumulative decrease in demand. Because of the substantial cumulative economic effect of producing even a small amount of electricity oneself, Congress could regulate the use of personal solar-powered generators under Wickard and the Commerce Clause.

Starting with NLRB and Wickard, and lasting until 1995, the Supreme Court refused to strike down as unconstitutional any Congressional exercise of the Commerce Clause. With U.S. v. Lopez, 514 U.S. 549 (1995) that changed. In Lopez, the issue was the constitutionality of 18 U.S.C. § 922(q)(1)(A), the Gun-Free School Zones Act of 1990. The Act made it illegal for

“any individual knowingly to possess a firearm at a place that the individual knows, or has reasonable cause to believe, is a school zone.”

If you are wondering just what this regulation has to do with “commerce”, you are not alone. The Lopez Court emphasized that the Act did not fit into the other categories of Commerce Clause power and so “the proper test requires an analysis of whether the regulated activity “substantially affects” interstate commerce.” Lopez at 559. The Court went on to say that “where economic activity substantially affects interstate commerce, legislation regulating that activity will be sustained,” and pointed out that even Wickard involved economic activity. Lopez at 560. Crucial to the Court’s decision was that the Act “is a criminal statute that by its terms has nothing to do with “commerce” or any sort of economic enterprise, however broadly one might define those terms.” Lopez at 561.

So the Lopez Court made clear that the “substantial effect” must be an economic effect, and that as far as Congress’ powers might extend under the Commerce Clause, the regulation must somehow involve commerce. In defending the Act, the government argued that possession of firearms in school had an effect on commerce insofar as the costs of crime are spread via insurance throughout the population and that violent crimes tend to reduce people’s willingness to travel to certain areas. See Lopez at 563-564. Furthermore, the argument goes, there is a negative impact on the learning environment which

“will result in a less productive citizenry…[and] will have an adverse effect on the Nation’s economic well-being.”

Lopez at 564.

The government’s argument in Lopez might have been too convincing and could be used to extend Commerce Clause power to regulation of almost any area of life. Consider the following examples:

EXAMPLE (1): Studies show that school uniforms tend to increase student’s self-esteem and reduce the amount of peer conflict experienced by some students. If the government’s argument in Lopez held true, then Congress could mandate that all schools, public and private, establish a dress code, which includes uniforms. The rationale would be that by not making students wear uniforms schools are producing less-than-ideal students, which in turn creates a citizenry which is less economically fruitful than it otherwise would be. The cumulative economic effect is quite significant

EXAMPLE (2): Noticing the beneficial effects of a new theory in child rearing, Congress mandates that all parents begin to employ the “Frankinson” theory in raising their children. The argument would be that this is establishing valuable skills in the children, which will aid them in the workplace. This example is similar to the frightful outcome contemplated by the majority in Lopez if the Court were to use the government’s rationale in reaching its holding. See Lopez at 566.

Concurring in Lopez, Justice Kennedy pointed out that

“The statute now before us forecloses the States from experimenting and exercising their own judgment…by regulating an activity beyond the realm of commerce in the ordinary and usual sense of that term.”

Lopez at 583 (emphasis added). Kennedy discussed the Commerce Clause case history at length, emphasized the importance of stare decisis and strengthened the point made in the majority decision that in this case

“neither the actors nor their conduct have a commercial character, and neither the purposes nor the design of the statute have an evident commercial nexus.”

Lopez at 580, citing Lopez at 559-561. In other words, while Lopez was the first case in almost 60 years in which the Court refused to find federal power within the Commerce Clause, the case is limited to federal regulation of an essentially non-commercial activity. Unlike NLRB, the imaginary case of Frank’s Fireworks, or even Wickard, the connection here between the activity regulated and the economic effect on interstate commerce is too far removed to warrant the exercise of Commerce Clause power.

Lopez, however, was not an anomaly to be forgotten in the law. Five years later the Court decided U.S. v. Morrison, 529 U.S. 598 (2000). In Morrison, 42 U.S.C.S. § 13981 was at issue. The statute provided a civil remedy for victims of gender-motivated violence, and the Fourth Circuit had struck it down citing, among others, Lopez. Granting certiorari, the Supreme Court affirmed. While there were some important differences in Morrison, including the existence of detailed findings by Congress examining the effect that the regulated conduct has on interstate commerce, the Court emphasized the non-commercial nature of the activity being regulated.

“Gender-motivated crimes of violence are not, in any sense of the phrase, economic activity. While we need not adopt a categorical rule against aggregating the effects of any noneconomic activity in order to decide these cases, thus far in our Nation's history our cases have upheld Commerce Clause regulation of intrastate activity only where that activity is economic in nature.”

Morrison at 614. So while the Court “need not” decide on a rule regarding Congress' power to use the Commerce Clause to regulate noncommercial activity with a substantial cumulative economic effect, we have two cases in the period of five years in which the Court has refused to uphold such laws.

From Lopez and Morrison we can finally glimpse a somewhat reliable rule of law as it stands today: The Commerce Clause will support federal regulation of commercial or economic activity which has a substantial effect on interstate commerce or which in the aggregate has a substantial effect on interstate commerce, but the effects of noneconomic activity cannot be aggregated this way in order to fall under Commerce Clause power.

EXAMPLE (1): Following extensive studies, Congress finds that the high-powered dryers used by many hair salons emit harmful gases, which exacerbate people’s allergies, causing them to travel less frequently to certain areas of the country where their increasingly-sensitive allergies are affected. In response, Congress passes a law under which every hair salon will be limited in the amount of time they run their dryers any given month. Because the activity is certainly within the meaning of “commerce,” and because in the aggregate the activity has a substantial effect on interstate commerce, this statute would likely be upheld.

EXAMPLE (2): In a shocking discovery, a Congressional study shows that high-school students are favorably impacted by the clothes their teachers wear and often seek to copy them. Equally surprisingly, the study found that an inordinate number of high-school teachers wear imported European designer clothing. The study found that this has had a significant effect on the interstate sales of American made clothing. In an effort to reverse this harmful effect on the American clothing industry, Congress enacts a statute banning all teachers from wearing imported clothing. Although the aggregate effect on interstate commerce is substantial, and although there is a commercial activity involved at a certain level (the teachers must buy the clothes at some point), the activity itself of wearing the clothes is noncommercial, and the statute is too similar to Lopez and Morrison to be upheld.

It is important to note, however, that even though Congress may regulate commerce, specifically commerce that is wholly intrastate, Congress may not force Americans to participate in commercial activity.  In other words, Congress cannot regulate commercial “inactivity.”  In what is considered the most important federalism decision since the New Deal cases, the Supreme Court held in National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012), that Congress may not employ the Commerce Clause to force Americans to buy health insurance.  Writing for the Court, Chief Justice Roberts opined:

The individual mandate cannot be upheld as an exercise of Congress's power under the Commerce Clause. That Clause authorizes Congress to regulate interstate commerce, not to order individuals to engage in it. .  . . The Federal Government does not have the power to order people to buy health insurance.

As you may know, however, much of the Healthcare law was upheld in Sebelius. But instead of relying on the Commerce Clause, the majority concluded that Congress had the authority to enact the Healthcare mandate under Congress’ power to tax.