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How does the government regulate business

how does the government regulate business

The Federal Commerce Power

The Issues: How far do the powers of Congress extend under the Commerce Clause of Article I?

Introduction The United States is a government of enumerated powers. Congress, and the other two branches of the federal government, can only exercise those powers given in the Constitution.

The powers of Congress are enumerated in several places in the Constitution. The most important listing of congressional powers appears in Article I, Section 8.


No enumerated power has justified more exercises of congressional power than the Article I, Section 8 power to "regulate commerce among the several states." (Congress is also given the power to regulate commerce "with foreign nations" and to regulate commerce "with Indian Tribes.") The first major challenge to the exercise of congressional power under the Commerce Clause came in the 1824 case of Gibbons vs Ogden. when two steamship operators with exclusive licenses granted by New York to ferry passengers from New York City to Elizabethtown, New Jersey sued to block Gibbons, a new steamship operator granted a license to ferry passengers on the same route by Congress, from competing against them. Chief Justice Marshall found that the Commece Clause granted Congress ample power to issue the license to Gibbons. Commerce, wrote Marshall, is more than just the buying and selling of objects--it includes all branches of commercial intercourse between states, including navigation.

The next series of cases illustrate two divergent approaches to analyzing whether an activity is reachable under the commerce power. In U. S. vs E. C. Knight the Court concluded that the Congress lacked the power to reach a monopoly in the "manufacture" of refined sugar, but could reach a "monopoly of commerce" involving sugar. The Knight case illustrates the formal (or "categorical") approach to analyzing the reach of the commerce power. The formal approach focuses on such questions as whether the regulated activitity is "in" or "outside" the stream of commerce, whether the activity is "local" or "interstate," or whether the effects of the activity on interstate commerce are "direct" or "indirect." The contrasting empirical approach, illustrated by Houston E. & W. Ry. Co. vs U. S. looks to the magnitude of the effect that the regulated activity has on interstate commerce, without special regard to how the activity is categorized. In Houston. the Court upheld a federal agency's regulation of freight rates on travel wholly within Texas because the freight transporation within Texas was found to be substantially affecting interstate commerce.

Hammer vs Dagenhart (1918) considered the constitutionality of the Child Labor Act, which banned items produced by child labor from interstate commerce. Adopting the formal approach, the Court saw the Act as unconstitutional attempt to regulate a purely local matter, workplace conditions. The harm of child labor, the Court concluded, had nothing to do with interstate commerce and thus fell outside the reach of congressional power.

Two girls working in Loudon Hosiery Mills (Tennessee) in 1910.

N.L.R. B. vs Jones (1937) represented an important turning point in the Court's Commerce Clause jurisprudence. The year before, in a case called Carter vs Carter Coal Co. the Court had invalidated a New Deal program that attempted to regulate the wage and hour practices of coal companies on the ground that such practices were "local" and had only an "indirect" effect on interstate commerce. Enraged by the Court's decision in Carter and other cases, President Roosevelt proposed "packing the Court" with sympathetic justices by increasing its size from nine to fifteen. In N.L.R. B. vs Jones. Chief Justice Hughes and Justice Roberts side with the government in voting to uphold an N.L.R.B. action ordering the reinstatement of union organizing employees protected by federal law at a Pennsylvania steel plant--the "switch in time that saved nine." Over the objections of four dissenting justices who called the interstate effects of the regulated activity "too indirect," the Court concluded that the steel industry is an interstate web of activities stretching from the iron mines of Minnesota to the steel plants of Pennsylvania and thus the manufacturing of steel is properly reachable under the Commerce Clause.

U. S. vs Darby (1941), in unanimously overruling Hammer vs Dagenhart. demonstrated how much the Court had changed its approach to Commerce Clause in a generation. Using a "substantial effects" test, the Court upheld the Fair Labor Standards Act--an important piece of legislation that effectively set national minimum wage and maximum hour laws by prohibiting the interstate shipment of goods manufactured in violation of the federal standards.

Roscoe Filburn with his wheat

Once having established that congressional exercises of power were valid if shown to regulate activities "substantially affecting" interstate commerce, the Court proceeded to open up more opportunities for exercise of the commerce power by holding that an activity only trivially affecting interstate commerce might nonetheless by regulated if all of the regulated activities of various individuals--taken

cumulatively--had substantial interstate effects. In Wickard vs Filburn (1942), for example, the Court upheld a $117 penalty imposed on a Ohio farmer for growing wheat on 12 more acres than he was permitted to under the Agricultural Adjustment Act. The Court relied on Wickard in the 2005 case of Gonzales v Raich. upholding the power of Congress to authorized seizure of doctor-prescribed marijuana allowed under the laws of California and other states. The Court in Gonzales noted that local use of medical marijuana had a cumulative effect on the black market for marijuana.

President Lyndon Johnson signing the 1964 Civil Rights Act

The cumulative effects test also convinced the Court to uphold provisions of the 1964 Civil Rights Act that required the 216-room Heart of Atlanta Motel to rent its rooms to persons regardless of race (Heart of Atlanta vs U. S .) and outlawed racial discrimination at small restaurants such as Ollie's Bar-B-Q in Birmingham (Katzenbach vs McClung ). In 1971, legislation making loansharking a federal crime was upheld on a similar basis (Perez vs U. S .). The Heart of Atlanta, McClung, and Perez cases led to speculation that perhaps any activity might be regulated under a loose application of the cumulative effects test.


Moreton Rolleston Jr. owner of the Heart of Atlanta motel

(photo: Wayne Wilson/Leviton-Atlanta)

In 1995, however, the Supreme Court--for the first time in more than half a century--invalidated a federal law on the ground that it was outside the scope of the commerce power. In U. S. vs Lopez the Court, by a 5 to 4 vote, found unconstitutional a provision of the Gun-Free School Zone Act that made it a federal crime to possess a gun (even one that never traveled across state lines) within a thousand feet of a school ground. It was unclear whether the government lost because the Congress failed to make adequate factual findings about the impact of school gun violence on interstate commerce or whether the Court was convinced that the interstate impact of possessing guns near schools had only an insignificant effect on interstate commerce. The four dissenters argued that it was sufficient for the Congress to show it had a rational basis for finding a significant effect on interstate commerce.

Christy Brzonkala, the former student at VPI whose efforts to receive compensation for an alleged rape were ended by the Supreme Court in U. S. vs Morrison.

In U. S. vs Morrison (2000) the Court considered a suit brought by a former student of Virginia Poytechnic Institute who alleged she was raped by two university football players. The defendant players and university argued that the Violence Against Women Act, which allowed victims of gender- motivated violence to bring federal civil suits for damages, was outside of the scope of the commerce power. The Court agreed with the defendants, even though in this case Congress had made specific findings that gender-motivated violence deterred interstate travel, diminished national productivity, and increased medical costs. The Court concluded that upholding the Violence Against Women Act would open the door to a federalization of virtually all serious crime--as well as family law and other areas of traditional state regulation. The Court said that Congress must distinguish between "what is truly national and what is truly local"--and that its power under the Commerce Clause reaches only the former. In a concurring opinion, Justice Thomas went even further, urging abandonment of "the substantial effects" test.

In the closely watched case of National Federation of Independent Business v Sebelius (2012), the Court considered whether the Affordable Care Act of 2010, the Obama Administration's signature piece of legislation was constitutional. The Court, on a 5 to 4 vote, found that the individual mandate provision of the Act, which required all persons to buy health insurance or pay a penalty, was outside of Congress's powers under the Commerce Clause. (The individual mandate, also on a 5 to 4 vote, survived, however, as a valid exercise of Congress's taxing power.) Chief Justice Roberts concluded that the Commerce Clause gave Congress no power to regulate inactivity (here, the decision of an individual not to buy health insurance.) To allow such a power, Roberts argued, would give almost limitless power to Congress because there are "an infinite number" of things people do not do everyday. Congress might even, Roberts wrote, order people to buy broccoli. The four dissenters (Ginsburg, Sotomayor, Breyer, and Kagan) dissented on the Commerce Clause question, accusing the majority of returning to the categorical approach that had properly been long abandoned by the Court. In the view of the dissenters, the failure of healthy individuals to buy health insurance had obvious and substantial effects on the health care market, which represents almost one sixth of the U.S. economy. The dissenters argued that precedents such as Wickard v Filburn supported the exercise of power.

Category: Personal Finance

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