Crossing the Line: Can States Regulate Conduct in Other States?

Date: November 17, 2015

We are beginning to see a disturbing trend among state regulators. Increasingly states like California, Minnesota and Colorado are pushing the bounds of the Constitution in a new and controversial way. Without question, these states can regulate conduct occurring within their territorial jurisdiction. Likewise they can generally impose regulatory requirements for goods sold, and services provided, within their state. But, when do such requirements cross the line from permissible regulation, aimed at protecting local interests, to impermissible regulation of national interests?

A basic precept of our constitutional system is that, upon ratification of the Constitution, the United States formed one economic union—such that the individual states surrendered the sovereign power to impose tariffs and to restrain interstate trade. It is for Congress, representing the will of the entire nation, to decide whether to impose regulations affecting interstate Commerce. Thus, the so-called “Dormant Commerce Clause” holds that States are prohibited from affirmatively discriminating against goods produced in other states, and may not impose regulatory restrictions that burden interstate commerce without some commensurate localized justification.

And it is equally true that the Dormant Commerce Clause prohibits the states from regulating conduct occurring beyond their borders. Nonetheless many States are moving toward regimes that effectively regulate out-of-state conduct of energy producers, or manufacturers, by imposing conditions on the right to sell their products within the state. California is probably the most aggressive of these states. For example, California controversially requires manufactures of products to report the chemicals and process for manufacturing goods sold in the state, for the purpose of studying “green chemistry”—presumably with the end goal of developing heightened environmental standards. Similarly, California regulates fuels in consideration of CO2 emissions generated over the life cycle of the product. These life-cycle fuel standards regulate the process for producing fuel, regardless of whether its produced in California or not.

These issues continue to percolate throughout the country. The Eighth Circuit is currently considering a similar issue, as Minnesota requires that out of state energy producers must ensure that Minnesotans receive a certain percentage of their energy from renewable sources. And most recently the Tenth Circuit Federal Court of Appeal held that Colorado’s Renewable Portfolio Standards were constitutional, notwithstanding the fact that they effectively regulate conduct of out-of-state energy producers. Ilya Shapiro of the Cato Institute explains more here

The bottom-line is that the Tenth Circuit has now joined the Ninth Circuit in allowing extraterritorial regulation in the name of environmental regulation. But, as argued in a brief recently filed by Pacific Legal Foundation, Cato Institute, NFIB Small Business Legal Center and Reason Foundation, these opinions would—by their rationale—allow states to regulate labor standards in other jurisdictions. For example, the State of New York might just as well pass a statute requiring that any products sold in New York must be produced by “fair labor,” and might therein seek to impose New York minimum wage requirements on manufacturers throughout the nation. Likewise, California might impose paid sick leave requirements on out-of-state manufactures as a condition of allowing them to sell their product in California. Suffice it to say, that is a very disturbing proposition for small business manufactures in Ohio, Indiana and Texas.

And in the context of the environmental regimes—wherein states seek to regulate out-of-state energy producers—there is a heightened concern that small business owners in other parts of the country may be forced to pay higher energy rates as a result of their neighbor’s public policy choices. Of course it is one thing for the people of Colorado or Minnesota to choose to hamstring their economy with regulatory burdens, but it’s simply not their role to impose regulatory burdens next door. If my rights end where my neighbor’s begin, then my state’s regulatory powers end where they begin to imposing burdens on neighboring states.

Our hope is that the U.S. Supreme Court will take up the case of Environmental Energy Law Institute v. Epel. But if they balk, these issues will continue to percolate throughout the nation. Thus we argue that, given the importance of these issues for our national economy, it would only be appropriate for the Supreme Court to take this case now. For more commentary, check out this article from Law360.

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