CHAPTER 2
Constitutional Bases for
Business Regulation
INTRODUCTION
The Constitution is the supreme law of
the land. The Constitution is the source
of federal power. This power was
received from the States. Powers not
delegated to the federal government are
retained by the States and the people.
STRUCTURE of
GOVERNMENT
All powers not expressly given to the
federal government in the United States
Constitution belong to the States.
Federal law is supreme, and prevails
over state law in the event of a conflict
between the state and federal
governments.
SEPARATION OF POWERS
 The Judicial Power under Article III.
 Subject matter jurisdiction
 Appellate jurisdiction
 Original jurisdiction
 Article I Courts: Tax, Bankruptcy.
 Judicial Review. Marbury v. Madison, 5 U.S. (1
Cranch) 137 (1803). The Supreme Court has the
power to declare acts of the Executive or Legislative
branches unconstitutional.
 The Supremacy Clause-Constitution is supreme.
SEPARATION OF POWERS
 The Executive Power
 Presidential appointees
 Presidential pardons and reprieves
 Veto powers
 Legislative Powers, Article 1 Section 8:
 Regulate commerce with foreign nations and between states
 Provide for the common defense and general welfare
 Coin money
 Establish post offices
 Lay and collect taxes
 Issue patents and copyrights
 Declare war
 Raise and support armies
SEPARATION OF POWERS
 Conflicts between the Branches
 Checks and Balances.
 Executive privilege. Clinton v. Jones, 520 U.S.
681 (1997).
 Line-item veto. In Clinton v. City of New York,
524 U.S. 417 (1998) the Court declared the lineitem veto unconstitutional holding that it gave
the President legislative powers.
SUPREMACY CLAUSE
AND PREEMPTION
Supremacy clause states that the
Constitution and treaties take precedence
over state laws and state judges must follow
federal law. Doctrine of preemption holds
that state law in direct conflict with federal
law, or state law in an area under Congress’
exclusive jurisdiction is preempted.
SUPREMACY CLAUSE
AND PREEMPTION
 Crosby v. National Foreign Trade Council, 120 S.Ct. 2288
(2000): state law preempted by later federal legislation
because it imposed legal obstacles to Congressional
intentions.
 Geier v. American Honda Motor Co., 120 S.Ct. 1913 (2000):
National Traffic and Motor Vehicle Act (1996) preempted
state product liability based upon manufacturer’s failure to
equip a vehicle with air bags.
 Duncan v. Northwest Airlines, Inc., 208 F.3d 1112 (2000):
federal Airline Deregulation Act did not preempt class
action claim.
FEDERALISM
Federal government’s powers are limited to
those expressly set forth in the U.S.
Constitution. These powers are also subject to
specific restrictions such as those found in the
Bill of Rights.
TH
11
AMENDMENT
Further protects the balance between the
powers of the federal government and the
states by granting immunity to states
sued in federal court.
TH
11
AMENDMENT
Case 2.1--Kimel v. Florida Board of Regents.
FACTS: Plaintiffs filed suit against state
universities in federal court alleging violation of
Age Discrimination in Employment Act (ADEA).
HELD: For Defendants because the ADEA did
not abrogate the states’ immunity under the 11th
Amendment.
DUAL SOVEREIGNTY
U.S. Supreme Court struck down the Brady
Handgun Violence Prevention Act requiring
state law enforcement officers to conduct
background checks and receive reports from
handgun sellers.
COMMERCE CLAUSE
Found in Article 1, Section of the Constitution,
gives Congress exclusive jurisdiction to
regulate commerce with foreign nations, with
Indian Tribes and between the states. This is a
restraint of state action and a source of federal
authority.
COMMERCE CLAUSE
 (1824 to 1887) In Gibbons v. Ogden (1824) a state
navigation monopoly (or almost any activity that
impacted interstate commerce) violated a federal
statute governing interstate commerce clause.
 (1887 to 1937) Court developed a much narrower view
of interstate commerce than Gibbons. Predominately
local activity that did not cross state lines did not fall
under the purview of Congress.
COMMERCE CLAUSE
 (1937 to 1995) In NLRB v. Jones & Laughlin Steel Corp. (1937)
Roosevelt’s “New Deal” Court considerably widened the scope of
federal interstate commerce powers by holding that Congress
could regulate a plant’s labor relations because a strike would
impact steel shipped across interstate lines. In Heart of Atlanta
and Katzenbach v. McClung (both 1964) the Court held federal
civil rights legislation applied to “local” businesses because a
substantial portion of the guests or food moved in interstate
commerce.
 (1995 to 2000) Court changed course and limited interstate
commerce powers in U.S. v. Lopez (2000), by striking down the
Gun-Free School Zones Act banning guns near schools as beyond
the power of Congress.
COMMERCE CLAUSE
Case 2.2--U.S. v. Morrison, 120 S. Ct. 1740
(2000). As in Lopez, the Court struck down
the Violence Against Women’s Act because
gender-motivated crimes of violence are not
economic activity. HELD: Congress may not
regulate non-economic violent criminal
conduct based solely on that conduct’s
aggregate effect on interstate commerce.
FEDERAL FISCAL
POWERS
Federal taxing powers limited and must be
allocated among the states in proportion to the
population. Plus, all custom duties and excise
taxes must be uniform among the states.
PROTECTION OF
INDIVIDUAL LIBERTIES
The “Contracts” Clause found in Article 1,
Section 10 of the Constitution prohibits States
from impairing the obligation of existing
contracts. Calfarm Insurance Company v.
Deukmejian (1989). See also Ex Post Facto
laws and Bills of Attainder found in Article 1,
Sections 9 and 10.
PROTECTION OF
INDIVIDUAL LIBERTIES
The Bill of Rights
The first 10 amendments to the U.S. Constitution are
called the Bill of Rights which contain specific
guarantees of individual liberties and limitations on the
federal government from infringing with those liberties.
Those rights that are “essential to liberty in the
American scheme of justice” (Duncan v. Louisiana,
1968) have been held applicable to the states via the
Fourteenth Amendment’s Due Process and Privilege and
Immunities clauses.
FREEDOM OF SPEECH
AND PRESS
 Government cannot violate the right to free speech by either
preventing it or by commanding it (Hurley v. Irish American
Gay, Lesbian and Bisexual Group of Boston, 1995).
 “Clear and Present Danger” Test. During WW I, Defendant, a
dissident, was convicted for passing out literature against U.S.
Government (Schenk v. U.S., 1919), but 50 years later Court
allowed speech of dissident (Brandenburg v. Ohio, 1969).
Printed material that targets people to help them create bombs
and become professional killers is not protected speech (Rice
v. Palladin Enterprises, 1998).
FREEDOM OF SPEECH
AND PRESS
 Defamation of Public Figures in Media: Plaintiff must show
“actual malice” to prevail (see Chapter 9).
 Obscene material is not protected speech. Material is obscene if
it: (i) appeals to prurient or perverted interest in sex; (ii) has no
serious literary, scientific or political merit; and (iii) offensive to
the average person in the community. Although in bad taste,
beer bottle label with frog giving the “finger” is not obscene
(Bad Frog v. N.Y. State Bottling Authority, 1998).
 Academic Research is also protected Free Speech.
FREEDOM OF SPEECH
AND PRESS
 View from Cyberspace. The Communications Decency Act of 1995
was Congress’ attempt to protect children from internet
pornography. The U.S. Supreme Court struck down portions of the
CDA because it burdened the right to free speech (Reno v. ACLU,
1997).
 Commercial Speech has usually been subject to substantial
regulation.




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Liquor and Cigarette Advertising
Gambling
Non-Speech Business.
Encryption.
English-Only Laws (see Chapter 15).
GAMBLING
Case 2.3 Synopsis. Greater New Orleans
Broadcasting Association v. United States, 527
U.S. 173 (1999). Federal law that prohibits
radio and TV stations from advertising
privately owned gambling establishments in a
state where gambling is legal is
unconstitutional because it violates
broadcasters’ rights to free speech.
FREEDOM OF SPEECH
AND PRESS
Prior Restraints on speech in a public forum in
advance are scrutinized closely and will be held
invalid unless there is a compelling state interest. A
city’s attempt to regulate adult-oriented businesses
was held invalid. FW/PBS, Inc. v. City of Dallas, 493
U.S. 215 (1990). Reasonable restrictions on time,
place and manner of speech are generally valid.
RIGHT OF ASSOCIATION
 First Amendment right closely related to free speech and
freedom of the press most protected when the association is
formed for political ends.
 Case 2.4 Synopsis. Boy Scouts of America v. Dale, 120 S. Ct.
2446 (2000). BSA canceled Dale’s membership because he
was homosexual. N.J. Courts said yes. BSA appealed.
ISSUE: Does BSA’s forced inclusion of Dale violate BSA’s
freedom of association? HELD: Yes. Reversed. Supreme
Court agreed with BSA’s right to association, holding that
Dale’s forced inclusion of an unwanted person in BSA
significantly affect its freedom of expression and
association.
FREEDOM OF RELIGION
 Establishment Clause - prohibits the
establishment of religion by the federal
government or the states via the Due Process
clause of the 14th amendment.
 Free Exercise Clause - prohibits certain, but not
all, religious practices.
FREEDOM OF RELIGION
 Government Must Remain Neutral in Religion
 In Santa Fe Independent School District v. Doe, 120 S. Ct.
2266 (2000) the Court banned student-led prayers at high
school football games.
 Employment Division, Oregon Department of Human
Resources v. Smith, 494 U.S. 872 (1990).
 In City of Boerne v. Flores, 521 U.S. 507 (1997), the Supreme
Court struck down the Religious Freedom Restoration Act as
unconstitutional encroachment of Congress of the powers of
the Judiciary to interpret the Constitution.
DUE PROCESS
 Procedural Due Process - focuses on fairness of the legal
proceeding.
 Substantive Due Process - focuses on fundamental rights
protected by the due process clauses.
 Limits on Economic Regulation.
 Limitation on Punitive Damages.
 Protection of Fundamental Rights: Right to Privacy.
Substantive due process invoked to find the right to
privacy in the “penumbra” of the Fourth Amendment of
the Constitution. Griswold v. Connecticut, 381 U.S. 479
(1965).
COMPENSATION FOR
“TAKINGS”
 Eminent Domain
 Fifth Amendment prohibits state or federal
governments from “taking” private property for
public use without just compensation. (See
Chapter 19).
 Government regulations may amount to a taking of
private property even if there is no physical taking.
Nollan v. California Coastal Commission, 483 U.S.
825 (1987).
EQUAL PROTECTION
 Establishing Discrimination—on the face of a statute, in
its application, or in its purpose.
 Validity of Discrimination:
 Rational Basis Test: applies to all matters concerning
economics or social welfare.
 Strict Scrutiny Test: a classification or “suspect class” (e.g.,
race) exercising a fundamental right will be valid only if
necessary to promote a compelling state interest.
 Substantially Related Test.
 Other Forms of Discrimination- Gender, Illegitimacy and
Alienage
EQUAL PROTECTION
 Racial Discrimination. All racial classifications are
subject to strict scrutiny. Adarand v. Pena, 515 U.S.
200 (1995).
 Case 2.6 Synopsis. Tuttle v. Arlington Country
School Board, (2000). Public school adopted a
policy to achieve racial and ethnic diversity in its
admission criteria. ISSUE: Is diversity a compelling
state interest? HELD: For Tuttle. Court concluded
that “diversity is not a compelling governmental
interest” and remanded the case for an evidentiary
hearing.
RIGHT TO JURY TRIAL
Seventh Amendment provides for a
right to jury trial at common law where
the amount in controversy shall
exceed twenty dollars.
REVIEW
1. Discuss whether or not freedom of speech
should be limited for the Internet.
2. When should religious accommodation be
made by employers?
3. Since sexual orientation is not federally
protected, should an employer care about this
issue?
4. Discuss the pros and cons of racial diversity in
public and private institutions.