Dormant Commerce Clause

Here’s another guest post on the Dormant Commerce Clause by our guest guru on that subject, Dick Dean over at Tucker Ellis.  He reports on another possible use for the Dormant Commerce Clause that could provide a win for the our side in an innovator liability situation.  As always our guest bloggers deserve 100% of the credit, and any blame, for their postings.

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On April 25, 2018 this blog advised “Don’t Sleep on the Dormant Commerce Clause.”  It was right.  That post discussed a Fourth Circuit case involving a drug pricing regulation attempt by the State of Maryland.  Since then, two other Circuit court decisions have followed; it’s the Dormant Commerce Clause gone wild.  And both decisions involve subject matter areas of direct interest to readers of this blog.

In Daniels Sharpsmart, Inc. v. Smith, 889 F.3d 608 (9th Cir. 2018), the Ninth Circuit upheld a District Court decision which invoked the Dormant Commerce Clause to strike down the enforcement of a California regulation beyond the state’s border.  Daniels was an Illinois-based corporation that made systems for the disposal of biohazardous medical products including waste syringes and blood collection devices.  It also transported and treated medical waste.  It had a medical waste treatment facility in Fresno, as well as others in several different states.  California’s Medical Waste Management Act (CMWMA) required that California-generated medical waste must be incinerated.  And if medical waste was transported out-of-state, it was required to be “consigned” to a waste treatment facility “permitted” in the “recovery state.”  As of 2014, there were no incinerators within California to treat Daniels’ biohazardous medical waste (why that is the case is not discussed in the decision), and so Daniels transported that waste to other states to have it incinerated.  Eventually, Daniels shipped that waste to Kentucky and Indiana, where that waste was treated by methods other than incineration consistent with the regulations in those states.  In Kentucky, the waste was treated by a method called autoclave; in Indiana, the method was “thermal deactivation.”  Both treatment methods are less expensive than incineration.

California regulators took the position that biohazardous medical waste originating in California had to be incinerated in Indiana and Kentucky, even though the regulations and laws of other states permitted an alternative method.  To that end, the regulators proposed daily fines against Daniels for failure to do so.  Daniels filed a complaint in the Eastern District of California arguing that state officials had violated the Dormant Commerce Clause by its extraterritorial application of the MWMA.  The District Court granted Daniels’ motion for a preliminary injunction and in a short, focused decision, the Ninth Circuit affirmed. It characterized the regulation as “an attempt to reach beyond the borders of California and control transactions that occur wholly outside of the State after the material in question . . . has been removed from the State.”  Id. at *4.  Attempts at direct regulation of out-of-state conduct have generally been struck down without further inquiry.  See Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S. 573, 579 (1986); and Healy v. Beer Inst., 491 U.S. 324, 336 (1989).  Laws neutral on their face, but which have an impermissible protectionist purpose and effect, have also been struck down.  But where there is no obvious protectionist purpose and a state law has only incidental impact on interstate commerce, such laws are subject to a more lenient standard of review.  They are usually upheld unless the burden they impose on interstate commerce exceeds their local benefits. Pike v. Bruce Church, Inc., 397 U.S. 137, 144–46 (1970).

Such a standard was employed in Garber v. Menendez, 888 F.3d 839 (6th Cir. 2018).  The case involved Ohio’s tolling statute, which stops the statute of limitations from running when the defendant is out-of-state.  O.R.C. 2305.15.  This statute had been construed by the Supreme Court in Bendix Autolite Corp. v. Midwesco Enterprises, Inc., 486 U.S. 888 (1988).  There, in a commercial dispute between corporations, the Supreme Court struck down the tolling statute noting:

The State may not withdraw such defenses [i.e., statutes of limitation] on conditions repugnant to the Commerce Clause.  Where a State denies ordinary legal defenses or like privileges to out-of-state persons or corporations engaged in commerce, the state law will be reviewed under the Commerce Clause to determine where the denial is discriminatory on its face or an impermissible burden on commerce.

Id. at 893.

Innovator liability, like the tolling statute, withdraws the legal defense of lack of product exposure so it neatly fits the language of Bendix (more later on that issue). In Bendix, the Supreme Court struck down the tolling statute under the Commerce Clause because Ohio could not justify its statute as a means of protecting its residents given the provisions of the Ohio long-arm statute.  It did not engage in any detailed discussion of the impact on commerce—almost assuming one from the statute.  Concurring in the result only, Justice Scalia noted that applying the Pike balancing factors “is more like judging whether a particular line is longer than a particular rock is heavy.”  Id. at 897 (Scalia, J., concurring).  He wrote that he would not know how to do such a balancing.

In Garber, the District Court and the Sixth Circuit took very different views of Bendix. The District Court, confronted with same statute held to violate the Dormant Commerce Clause in Bendix, not surprisingly reached the same result.  But the Sixth Circuit distinguished Bendix, finding that the statute forced out-of-state companies like Midwesco to face liability forever as a cost of doing business across state lines and noting the Supreme Court’s application of the Pike test in that context.  It viewed the transaction in Garber, which involved one patient suing one doctor (who had left the state), as yielding a different result under the Commerce Clause with there being no demonstrable effect on the same.  In the absence of a record establishing such an effect—there was no such record apparent in Bendix—the challenge failed.

Putting the facts of Garber aside, Bendix clearly remains good law.  Defenses cannot be withdrawn in a way “repugnant” to the commerce clause.  Is there an impact on commerce from the largest state in the country (population wise) radically changing product exposure rules?  At an elementary level, if drug companies are going to have to defend and pay settlements and judgments on products made by other companies in California, that will have a dramatic impact on drug pricing throughout the country.  The difference between the District Court and the Sixth Circuit here is one of what is in the record.  It would not take a particularly high powered economist to establish such a record in regard to the impact of innovator liability.

The Dormant Commerce Clause has been used to invalidate state registration statutes.  See here and here.  So it is not surprising that in addition to the argument that innovator liability may be precluded by lack of personal jurisdiction (see here and here), there is also a Dormant Commerce Clause argument in regard to innovator liability.  Once again—don’t sleep on the Dormant Commerce Clause.

The first year law school class we most anticipated was Constitutional Law.  Then disappointment greeted us when we learned that the first year course covered only broad institutional topics such as judicial review and separation of powers.  The sexy bits – First Amendment, Fourth Amendment, Equal Protection, and Due Process – were reserved for higher level courses.  Con Law I threatened to be a snooze-fest.  No worries.  Our teacher, Cass Sunstein, kept the class lively and made a compelling case that the institutional architecture of the Constitution was, in fact, the primary source of civil rights.  The Bill of Rights  might get asked to the prom, but checks and balances, jurisdictional doctrines, and even the lonely, oft-forgotten Tenth Amendment are lovely, lifelong companions.  And consider the commerce clause.  (U.S. Const. art. I, section 8, cl. 3.)  You might remember reading how there was enormous controversy as to whether the commerce clause could support enactment of the 1964 Civil Rights Act.  How could Congress regulate the dealings of a little BBQ restaurant in Birmingham or a motel in Atlanta? SCOTUS decided that the commerce clause could support such federal intervention.  And yet, if that is so, what couldn’t the commerce clause support?  Our courts are still wrestling with that question.  Remember the challenges to the Affordable Care Act?    

 

There is a flip side to the endlessly elastic, expansive commerce clause: say hello to the dormant commerce clause, which is like the crazy uncle who falls asleep on the couch and wakes up at odd moments to utter something  loud and inconvenient.  The dormant commerce clause perks up every once in a while to announce that a state’s effort to regulate commerce has gone too far.  James Madison originally harbored doubts that states could impose shipping tonnage duties, given that the commerce clause invested such powers in a unitary, federal authority.  In the judicial context, Chief Justice Marshall first alluded to the dormant commerce clause in Gibbons v. Ogden, 22 U.S. 1 (1824).  The notion is that implicit in the power of Congress to regulate commerce is a corollary constraint on the power of states to enact legislation that interferes with or burdens interstate commerce.  A state cannot regulate commerce occurring wholly outside its borders.  A state law violates the dormant commerce clause’s extraterritoriality principle if it either expressly applies to out-of-state commerce or if it has that practical effect, regardless of the legislature’s intent.

 

When we were in law school, the big dormant commerce clause case was City of Philadelphia v. New Jersey, 437 U.S. 617 ((1978), in which SCOTUS held that New Jersey could not exclude Philly’s garbage.  (Insert your favorite Jersey jokes here.)  To a certain extent, the dormant commerce clause came to be thought of as primarily prohibiting a state from discriminating against commerce from another state.  But there is more to the dormant commerce clause than a nondiscrimination principle.  Think of Kassel v. Consolidated Freightways Corp., 450 U.S. 662 (1981), where SCOTUS struck down Iowa’s law against double/tandem tractor trailers as constituting an unreasonable burden on interstate commerce.  There wasn’t discrimination against commerce from another state, but the rule would have had a deleterious affect on trucks rolling through Iowa and other states.

 

All that being said, Justices Scalia and Thomas essentially decried the dormant commerce clause doctrine as a judicial fraud.  That was and remains a minority position.  We certainly do not think the dormant commerce clause is a fraud, and we have hosted a couple of excellent guest posts on this blog about whether the dormant commerce clause might stop states from using their corporation registration statutes to extend personal jurisdiction over companies that played no actual in-state role in the matter being litigated.  See here and here for example.

  

Todays case, Ass’n for Accessible Meds v. Frosh, 2018 U.S. App. LEXIS 9265, 2018 WL 1770978 (4th Cir. April 13, 2018), involves an interesting application of the dormant commerce clause.  It applied to drugs, so we aren’t wandering too far afield.  Maryland enacted a statute (the Act) concerning “Public Health – Essential Off Patent or Generic Drugs – Price Gouging – Prohibition” that regulated drug pricing both inside and outside Maryland.  The Act prohibited manufacturers and wholesale distributors from charging an “unconscionable” price even on initial, upstream sales of drugs that occurred outside Maryland.   A prescription drug manufacturer trade association filed a lawsuit challenging the Act on the grounds that it violated the dormant commerce clause and was unconstitutionally vague.  The district court denied the plaintiff’s motion for a preliminary injunction, and the matter went up to the Fourth Circuit.  The appellate court held that the district court got it wrong, that the antigouging Act’s reach beyond Maryland’s borders was a violation of the dormant commerce clause, and that judgment should be entered in favor of the plaintiff.  Adios, antigouging Act.

 

Only one member of the plaintiff trade association was a drug manufacturer actually based in Maryland.  Drug manufacturers typically sell their products to wholesale pharmaceutical distributors – not one of which was based in Maryland.    Thus, very few of the sales regulated by the Act took place within Maryland’s borders.  In defending the Act, Maryland was forced to acknowledge that it intended to reach the series of upstream, wholesale transactions, not merely the downstream sales to Maryland consumers.  Maryland argued that the effects on upstream, out-of-Maryland sales were indirect effects that could not implicate the dormant commerce clause.  But it is hard to see how such outside-Maryland effects were indirect when they were fully intended by the legislature.  Moreover, the Act explicitly prohibited a manufacturer’s use of a defense that it did not directly sell to a consumer in Maryland.    The inescapable fact is that the Act was a price control on sales outside Maryland.  The Fourth Circuit held that Maryland cannot impose its price preferences outside its borders, even if it thinks it has to do so to create lower prices for consumers within its borders. 

 

Further, the Fourth Circuit considered how the Act might interact with the legitimate regulatory regimes of other states.  Different states could subject prescription drug manufacturers to conflicting requirements with respect to wholesale pricing.  The commerce clause protects against inconsistent legislation arising from the projection of one state regulatory regime onto the jurisdiction of another state. None of this was intended by the Fourth Circuit to say that states cannot enact legislation to secure lower prescription drug prices.  (There was a vigorous dissent in the case, which was longer than the majority opinion and which excoriated the majority for blessing price gouging).  The issue is how a state goes about regulating prices within its borders.  If it tries to do so by  regulating external transactions, it runs afoul of the dormant commerce clause.

 

We cannot read the Frosh case without daydreaming about how its logic applies to the sorts of cases we deal with every day.  We know from preemption precedents that jury verdicts can be treated as a species of state legislation.  When juries are permitted to rewrite product labels and Instructions for Use, how are they not imposing extraterritorial effects?  How are they not setting up prescription drug and device manufacturers to face inconsistent regulatory regimes?  How are they not interfering with interstate commerce?  Perhaps you think that we are extending the logic of the dormant commerce clause too far, but at least, unlike the crazy-quilt of jury verdicts we read about every day, it is logic.

 

 

 

 

 

 

Today’s guest post is by friend of the blog Dick Dean, of Tucker Ellis.  He had an interesting idea the last time he posted about personal jurisdiction, and he’s following up with another one – this time rousing the previously dormant Commerce Clause.  As always, our guest posters are 100% responsible (all credit and any blame) for the contents of their posts.

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Bexis and Kevin Hara recently posted a 50-state survey on consent by registration statues – specifically, analyzing which states have concluded that Daimler AG v. Bauman’s due process holdings “trump” such consent statutes.  See Dec 18, 2017 post.  But besides due process, there is another argument to attack such statutes- the Dormant Commerce Clause. In Re Syngenta AG MIR 162 Corn Litigation, MDL No. 2591, 2016 WL 2866166, (D. Kan. May 17, 2016) (invalidating Kansas registration statute based on the Dormant Commerce Clause); see also my prior guest post, “Corn, Justice Brandeis, Litigation Tourism and the Dormant Commerce Clause.” (July 5, 2016).

There is now a comprehensive article discussing these issues and, within that context, assessing whether registration statutes are constitutional under the Dormant Clause: J. Preis, “The Dormant Commerce Clause as a Limit on Personal Jurisdiction,” 102 Iowa L. Rev. 121 (Nov. 2016).  It is a must-read for those briefing the validity of consent statutes. The introduction  comments on the interplay between Due Process and the Dormant Commerce Clause:

After standing in the background for so long, it is high time for the Dormant Commerce Clause to step forward. In recent years, the Supreme Court has issued a spate of major personal jurisdiction decisions. These decisions have set off a wave of commentary in the legal academy, but the questions raised by these new cases are not simply academic. At present, jurists across the country are wrestling with a new and vexing issue of personal jurisdiction: whether a company’s registration to do business in a state amounts to consent to personal jurisdiction in that state. What no scholar or jurist has recognized, however, is that the Dormant Commerce Clause clarifies modern personal jurisdiction law in a way that the Due Process Clause, on its own, cannot.

Id. at 123-124

Briefly, the Dormant Commerce Clause provides that states may not interfere with commerce in other states.  This is the flip side of the constitutional provision which says the Congress has the power to regulate commerce between the states.  When it comes to general jurisdiction, out-of-state companies have an advantage over in-state companies – the ability to avoid suits unrelated to its activities in the State.  The article examines various scenarios of citizenship and states of injury and whether they pass muster under the Dormant Commerce Clause.  It concludes:

. . . [J]urisdiction-via-registration will be unconstitutional in suits brought by non-residents injured out of state.  In those cases, the local benefit is completely absent and the burden on interstate commerce will be “clearly excessive in relation to the putative local benefits.”  In cases where the plaintiff is a resident or was injured in the state, however, a local benefit exists and jurisdiction-via-registration will be constitutional.

Id. at 147.

Not only does the Dormant Commerce Clause present serious obstacles for registration statutes which impact general jurisdiction, but it may offer an argument to bar cases where specific jurisdiction has been found based on very tenuous “connections” between plaintiff’s injury and the forum state, such as the single-claim situation discussed in my (and Nick Janizeh’s) prior post.  If the Iowa Law Review article’s conclusion that the Dormant Commerce Clause bars claims by non-residents not injured in the state holds true, then that premise transcends issues of general or specific jurisdiction.  Put another way, even if there is general or specific jurisdiction over a defendant, there may still be a defense on the merits based on the Dormant Commerce Clause. The Dormant Commerce Clause is a separate concept from jurisdiction and must be evaluated separately. Comptroller of Treasury of Maryland v. Wynne, 135 S.Ct 1787, 1798-99 (2015).  And of course, that is the clear holding of In re Syngenta, which found a consent-by-registration statute passed due process muster but not Dormant Commerce Clause muster.  Thus, even though the Beck & Hara blog suggested that Kansas was a “murky” state on where it stood on the due process issue, it remains clear that consent-by-registration fails in Kansas because the federal court rejected the statute on Dormant Commerce Clause grounds. This is an important argument available in the continuing saga of litigation tourism.

[Editor’s note:  This dormant commerce clause argument could be particularly useful in Pennsylvania, not just because of the peculiar challenge of the Commonwealth’s registration statute, but also because of yesterday’s “let anybody sue” decision from the Pennsylvania Supreme Court allowing litigation tourists from anywhere to assert the Pennsylvania consumer protection statute against Pennsylvania companies no matter where the transaction occurred.]

We have another guest post for our readers today, this time courtesy of Richard Dean of Tucker Ellis.  His point involves personal jurisdiction.  As we’ve discussed, some courts have allowed “general jurisdiction by consent” as a way to dodge Daimler AG. V. Baumann, 134 S. Ct. 746 (2014), on the basis of an ancient Supreme Court decision from 1917 – Pennsylvania Fire Insurance Co. v. Gold Issue Mining & Milling Co., 243 U.S. 93, 95 (1917).  This posts points out that this argument can be countered successfully with Supreme Court decisions (almost as old) involving the Dormant Commerce Clause.  It’s a nice counter, and it has worked.

As always, our guest poster deserves full credit (and any blame) for the contents that follow.

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Last weekend I attended my 50th high school reunion in rural Indiana.  While driving to the reunion, there were literally cornfields to the North, South, East and West.  There was corn as far as the eye can see.  Ironically, that weekend I had my first occasion to read In re: Syngenta AG MIR 162 Corn Litigation, 2016 WL 2866166 (D. Kan. May 17, 2016).  I don’t think there has been any significant commentary about this case.  It deserves some.

The issue in this case was whether an MDL court located in Kansas had general jurisdiction over the defendant in cases direct-filed in the MDL, some of which had been selected for bellwethers, where none of the defendants were incorporated in or had their principal place of business in Kansas.  Kansas has a registration statute, which had been interpreted by the Kansas Supreme Court to establish consent jurisdiction.  Syngenta argued that such consent by registration of a business agent was effectively negated by Daimler AG. V. Baumann, 134 S. Ct. 746 (2014), and by earlier Supreme Court cases.  Originally the MDL Court had rejected this argument based upon the fact that the Supreme Court had not directly addressed the issue and there was Supreme Court authority supporting the constitutionality of such statutes from pre-Daimler days.  2016 WL 1047966 at * 2.  It denied the reconsideration on that basis on the merits.

But Syngenta  also asked the Court to reconsider based on the argument that giving effect to the consent statute would violate the Dormant Commerce Clause—an argument which Syngenta had previously raised only in passing.  That judicially created doctrine addresses the validity of state legislation that may unconstitutionally burden commerce in another, unrelated state. See Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970).  The Court was persuaded by Syngenta’s motion, finding it “presented a much more thorough analysis of the application of the commerce clause.” Syngenta, 2016 WL 2866166 at *4.  And even though the court said it was not obligated to consider a motion for reconsideration, it believed that the issue was of sufficient importance to decide it.

Continue Reading Guest Post – Corn, Justice Brandeis, Litigation Tourism and the Dormant Commerce Clause