Chapter 11: Constitutional Law

In chapter 5 at 5.1 we learned that the US Constitution is a source of law because: (1) it is “the supreme Law of the Land”; (2) it creates and allocates power between the legislative, executive, and judicial branches of the federal government; and (3) it allocates power between the federal government and the states. We also outlined briefly the Constitution’s structure. Here will we explore in more detail each of the ways in which the Constitution is a source of law. We will then discuss judicial philosophies and standards of review. Finally, we will analyze various clauses in the Constitution’s articles and amendments and discuss how they pertain to business entities.
You may review the Constitution here.
There are many concepts related to the ways in which the Constitution is a source of law including federal supremacy, preemption, separation of powers, checks and balances, and federalism.
11.1     Federal Supremacy
While there has been much debate regarding whether the Constitution is a compact (i.e., contract) among the states or a grant from the American people of certain powers to the federal government,[1] there is no dispute that the Constitution sets out the areas in which the federal government is authorized to make law. It is a well-settled principal that the federal government may not pass laws except in those areas it is expressly authorized to do so. (In practice, however, federal power can be extended through loose interpretations of certain constitutional provisions.)
Article VI, Clause 2 of the Constitution provides in relevant part that the Constitution (and federal statutes and other federal laws made in furtherance of the Constitution) is “the supreme Law of the Land.” This clause is commonly referred to as the Supremacy Clause. Fundamentally, the Supremacy Clause is a conflict-of-laws provision that gives certain federal government actions precedence over directly conflicting state government actions. This means that under the concept of federal supremacy, where there is a direct conflict between a constitutionally permitted federal law and a state law, the federal law makes the state law void. In layman’s terms, federal law trumps state law in those spheres where the federal government is authorized to make law. In addition, the Supremacy Clause implies the rank order of preference of federal laws. The Constitution is listed first and therefore superior to federal statutes and treaties. After the Constitution, however, the founders understood federal statutes and treaties to be of equal force.[2]
11.2    Preemption
Preemption is related to federal supremacy. It arises in situations when there is a state law in the same field (or on the same subject) as a federal law, but the state law and the federal law do not directly conflict. What happens then? Is the state law rendered invalid because of federal supremacy? The answer is, “it depends.” It depends on whether Congress intended for the federal government to act exclusively in the field or on the subject. If the answer is “yes,” then a state is prohibited from legislating in the field or on the subject. In other words, under the concept of preemption, any state law in the field or on the subject is preempted by the federal law. If the answer is “no,” however, then states are free to legislate in the field or on the subject (so long as a state’s law does not directly conflict with the federal law).
11.3    Separation of Powers
The Constitution creates and allocates power between the legislative, executive, and judicial branches of the federal government. The division of power between the branches is called separation of powers.
11.4    Checks and Balances
The interrelationship and sharing of power between the branches of the federal government is called checks and balances. In today’s world, politicians sometimes complain about “gridlock,” that is, a lack of progress resulting in stagnation of federal legislative bills. But as US Supreme Court Justice Antonin Scalia told a Senate Judiciary Committee hearing in October 2011, “Americans should learn to love the gridlock,” because the founding fathers deliberately set up the federal government with separation of powers and checks and balances to make the legislative process difficult. According to Justice Scalia, that way only “good legislation” passes.[3]
11.5    Federalism
The Constitution allocates power between the federal government and the states. How does it do this? The answer is by the Tenth Amendment, which states that “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” The Tenth Amendment expresses the founding founders’ intention that the federal government was to have only limited powers, which are few and defined in the Constitution. In fact, when the proposed Constitution was being considered by the states, James Madison in Federalist No. 45 assured the people of New York that the “powers delegated” to the federal government are “few and defined,” while those reserved to the states are “numerous and indefinite.”[4] This division of power between the federal government and the states is called federalism.
11.6    Judicial Philosophies
Before we analyze specific clauses in Constitution’s articles and amendments, we need to discuss constitutional interpretation. We previously learned (in chapter 5 at 5.4) about judicial review, which is the power of a court to decide on the constitutionality of a statute or other governmental action. When engaging in judicial review, a court may necessarily “interpret” the Constitution. But what exactly does this mean? The answer depends on whom you ask, because there is a great divide regarding how to interpret the Constitution. The split is based on “judicial philosophy.” Some judges believe that the Constitution is “a living, breathing document,” and should be read broadly, flexibly, and in accordance with contemporary society’s views. Justice Stephen Breyer is a proponent of the living Constitution philosophy.[5] Others judges believe the opposite; Justice Scalia is famously quoted as stating, “The Constitution that I interpret is not living, but dead.”[6] Justice Scalia subscribes to originalism when interpreting the Constitution.[7] In oversimplified terms, this means that judges should look to the original understanding (of the ratifiers) or meaning (to the public) of the Constitution. Originalism proponents contend that their view curbs “judicial activism” (sometimes expressed as “legislating from the bench”); they also reason that the Constitution contains a formal amendment process—Article V—for changes that society desires.
11.7    Standards of Review
A court applies a standard of review when engaging in judicial review—that is, when deciding on the constitutionality of a statute or other governmental action (see chapter 5 at 5.4). (Let’s be careful—by “standard of review” we mean something different than “philosophy,” which we discussed above in 11.6 in the context of constitutional interpretation.) The reason that a court applies a standard of review is because the powers of—and restrictions on—government are not absolute under the Constitution. Instead, each power or restriction triggers a standard of review by the court when a party challenges a governmental action as unconstitutional. Governmental actions are most typically in the form of a statute enacted by Congress. A standard of review is called “scrutiny.”
The three general standards of review applied by courts are rational basis scrutiny, intermediate scrutiny, and strict scrutiny. The three standards may be summarized as follows: (1) when applying rational basis scrutiny a court will find that the statute or classification is valid if it is rationally related to a legitimate governmental interest; (2) when applying intermediate scrutiny a court will find that the statute or classification is valid only if it is substantially related to an important governmental interest; and (3) when applying strict scrutiny a court will find that the statute or classification is valid only if it is necessary to promote a compelling governmental interest and narrowly-tailored to that end.
Rational basis scrutiny derives historically from the Necessary and Proper Clause—Article I, Section 8, clause 18 of the Constitution. The Necessary and Proper Clause gives Congress the power “To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.” The “foregoing powers” are those powers expressly granted to the federal government in Article I, Section 8. By its language, the Necessary and Proper Clause specifically restricts Congress’s Article I, Section 8 powers and all other powers of the federal government.[8]
In McCulloch v. Maryland,[9] the Supreme Court through Chief Justice John Marshall set forth the standard of review for determining when a governmental action is permissible under the Necessary and Proper Clause:
Let the end be legitimate, let it be within the scope of the constitution, and all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but consist with the letter and spirit of the constitution, are constitutional.
Chief Justice Marshall’s language has been stretched over the past nearly 200 years into rational basis scrutiny. In fact, the Supreme Court has characterized McCulloch v. Maryland as establishing “means-ends rationality” review.[10] The entire Supreme Court does not agree, however, that the two tests are the same—Justice Thomas has stated that “‘appropriate’” and ‘plainly adapted’ are hardly synonymous with ‘means-end rationality.’”[11] But whether expressed as “means-end rationality” or rational basis scrutiny, it is clear that while Congress does not have unfettered discretion to enact statutes,[12] it may enact statutes that are not absolutely necessary. The reasoning behind rational basis scrutiny is that courts should defer to legislatures on policy judgments.
11.8    Specific Clauses in the Constitution
There are numerous clauses in the Constitution’s articles and amendments that pertain to business entities. We cannot possibly discuss all of the clauses; so we will summarize those that most affect business entities. In order of appearance in the Constitution these clauses are the following: Taxing and Spending Clause; Borrowing Clause; Commerce Clause; Contract Clause; Freedom of Speech Clause; Takings Clause; Due Process Clause; and Equal Protection Clause.
Taxing and Spending Clause. Article I, Section 8, Clause 1 of the Constitution provides that Congress has the power “To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States . . . .” This clause, therefore, gives Congress the power to tax for three reasons: (1) to pay the debts of the United States; (2) to provide for the common defense of the United States; and (3) to provide for the general welfare of the United States. Courts apply rational basis scrutiny when reviewing whether a statute enacted comports with Congress’s spending power under the Constitution.[13]
Taxation is a potent tool of regulation of persons and business entities. Taxes can deter, punish, or encourage certain behaviors. Business entities normally consider tax consequences when making decisions affecting their business. Also, the taxing power of the federal government is very broad; the Supreme Court rarely questions federal taxing schemes so long as they are for the “general welfare” and do not violate the Equal Protection Clause (see infra). Based on Supreme Court precedent, nearly everything today could be considered for the “general welfare”; the only check is political constraint.
Similarly, Congress’s spending power is extremely broad. In fact, through its spending power Congress may do indirectly what it may not do directly. This means that Congress may attach conditions on the states’ receipt of federal funds, even if those conditions are not within Congress’s direct power under the Constitution. For example, the Supreme Court has held that Congress may condition receipt of federal highway funds on a state having a minimum drinking age of 21, even though Congress lacks the constitutional power to impose a national minimum drinking age; the Court ruled that this was valid exercise of Congress’s spending power.[14]
Borrowing Clause. Article I, Section 8, Clause 2 states that Congress has the power “to . . . borrow Money on the credit of the United States.” This is called the Borrowing Clause. Unlike with the Taxing and Spending Clause, there is no express limitation in the Constitution on Congress’s borrowing power. Other than the check of political constraint, the only control is the marketability (i.e., debt rating) of US Treasuries. In addition, Congress has the responsibility to honor (and not alter or destroy) the United States’ debt obligations.[15]
Commerce Clause. Article I, Section 8, Clause 3 provides that Congress has the power “To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” This is called the Commerce Clause. The Commerce Clause grants virtually complete power to Congress to regulate commerce throughout the United States. The Supreme Court has stated that “the power of Congress to promote interstate commerce also includes the power to regulate the local incidents thereof, including local activities in both the States of origin and destination, which might have a substantial and harmful effect upon that commerce.”[16] This has been termed the “substantial effects” test. Therefore, Congress may regulate even purely local activities (i.e., intrastate activities) that in the aggregate substantially affect interstate commerce. This is called the affectation doctrine.
The present state of Commerce Clause jurisprudence is not uniformly accepted, however, by the entire Supreme Court. Justice Clarence Thomas expressed two concerns in a recent dissenting opinion: (1) that the “‘substantial effects’ test is a ‘rootless and malleable standard’ at odds with the constitutional design”; and (2) that the Supreme Court has improperly extended “commerce” beyond its original meaning of trade or exchange of goods for value (and shipping for these purposes) to include mere possession of goods and noneconomic activities.[17] In that case—Gonzales v. Raich—the Court held that the Drug Enforcement Agency (under the federal Controlled Substances Act) may confiscate locally grown marijuana for medical purposes, even though the marijuana was legally grown under California state law, did not cross state lines, and was not sold in commerce; the Court ruled (in a 6-3 split decision) that this was valid exercise of Congress’s commerce power.[18]
The issue of the outer limits of the Commerce Clause reached the Supreme Court again in 2012. Twenty six states (led by Florida), several individuals, and the National Federation of Independent Business challenged the constitutionality of the Patient Protection and Affordable Care Act of 2010 (PPACA), often referred to as “Obamacare.” The states’ chief claim was that the Minimum Essential Coverage Provision (commonly referred to as the “individual mandate”) requiring a citizen to purchase health insurance from a private vendor—or pay a “penalty”—was beyond the outer limits of the Commerce Clause. In essence, the states argued that a citizen’s failure or refusal to purchase health insurance was not “economic activity”—and thus not subject to federal regulation under the Commerce Clause. In June 2012, the Court issued an extremely controversial decision in which the majority (joined, to the surprise of many, by Chief Justice Roberts) ruled that the individual mandate was not a valid exercise of federal commerce power, but that the penalty associated with the individual mandate was a valid tax under the federal taxing power.[19] The Court, therefore, disregarded Congress’s designation of the payment as a penalty, and said that it may also be read as imposing a tax on those who go without insurance.
There is also an inferred dormant commerce clause under the Constitution. Because Congress has the power to regulate interstate commerce, the Supreme Court has inferred a negative restriction for the states. This means that states may not pass statutes that discriminate in favor of in-state and against out-of-state economic interests in interstate commerce. But sometimes the dormant commerce clause may conflict with a state’s police powers. This is because under its police powers, a state may pass statutes for the protection and maintenance of the public’s health, safety, or welfare. If a state’s exercise of police powers conflicts with the dormant commerce clause, a court balances the interests against each other. That is, a court determines if the benefits to the state by exercising its police powers outweigh the burden on interstate commerce.
Contract Clause. Article I, Section 10, Clause 1 asserts that “No State shall . . .  pass any . . . Law impairing the Obligation of Contracts . . . .” This is called the Contract Clause. It prevents states from interfering with or modifying the terms of private contracts, including contracts among and between persons and business entities.
Freedom of Speech Clause. The First Amendment provides that “Congress shall make no law . . . abridging the freedom of speech, or of the press . . . .” This is the Freedom of Speech Clause. Americans deeply value their free speech protections under the Constitution; therefore, it should not be surprising that courts customarily keep a watchful guard on those protections.[20] Speech includes not only words, but nonverbal expressive conduct—that is, “symbolic speech.” Common examples are a person’s gestures or actions, and writings or images on clothing. Business entities also have freedom of speech protections; and the amount of protection given by the courts depends on the type of speech involved. The two types of speech in which business entities typically engage are corporate political speech and commercial speech.
Courts apply strict scrutiny when reviewing statutes relating to corporate political speech. This means that courts will uphold a statute only if it is narrowly tailored and necessary to promote a compelling governmental interest. The Supreme Court has found unconstitutional a Massachusetts statute prohibiting corporations from making political contributions and expenditures[21]; it has also found unconstitutional a Massachusetts statute prohibiting corporations from including inserts with bills to express their political views.[22] In 1990, however, in Austin v. Michigan Chamber of Commerce, the Supreme Court upheld a Michigan statute prohibiting corporations from using treasury money for independent expenditures to oppose or support candidates for state office elections.[23] But in January 2010, the Supreme Court decided Citizens United v. Federal Election Commission, and reversed its Austin decision.[24] The landmark case involved a dispute regarding whether Citizens United—a non-profit corporation—could air its documentary film Hillary: The Movie within 30 days of the 2008 Democratic primary in violation of the Bipartisan Campaign Reform Act of 2002, more commonly known as the McCain-Feingold Act. The documentary film was critical of then-Senator Hillary Clinton who was running as a Democratic candidate for president. In a 5–4 decision, the majority led by Justice Kennedy found that the McCain-Feingold Act’s prohibition of independent corporate expenditures was invalid and that the government could not ban spending for   corporate political speech such as the documentary film at issue.
Courts give less protection to commercial speech. Statutes relating to commercial speech—such as advertising and marketing—receive intermediate scrutiny in some situations and rational basis scrutiny in others. One reason that commercial speech receives less protection than corporate political speech is that states have an interest in protecting consumers from misleading or fraudulent advertising and marketing practices. Generally, if a statute prohibits commercial speech (such as a statute that bans advertising in specific locations), a court applies intermediate scrutiny; if, however, a statute compels disclosure of purely factual and uncontroversial information, a court applies rational basis scrutiny. As an example of the latter, the Second Circuit Court of Appeals recently upheld under rational basis scrutiny a New York City health code requiring fast food restaurants to post calorie content information on their menus and menu boards.[25] We will discuss consumer protection in chapter 16.
Finally, there are some types of speech that receive no protection under the First Amendment.[26] These include incitement,[27] defamation (which we will discuss in chapter 15), obscenity,[28] child pornography,[29] “true threats,”[30] “fighting words,”[31] and speech owned by others (e.g., expressions protected by copyright law).[32] Actual workplace harassment is also not protected speech, although workplace harassment law sometimes overreaches and violates the First Amendment.[33]
Takings Clause. The last clause of the Fifth Amendment states “. . . nor shall private property be taken for public use, without just compensation.” This is called the Takings Clause, and is sometimes referred to as the Public Use Clause. The power of government to take private property for public use is called eminent domain. Courts apply rational basis scrutiny when reviewing statutes authorizing eminent domain.[34] We will discuss eminent domain further in chapter 25.
Due Process Clause. The Fifth Amendment provides that “No person shall . . . be deprived of life, liberty, or property without due process of law . . . ”; and the Fourteenth Amendment provides “. . . nor shall any State deprive any person of life, liberty, or property, without due process of law . . . .” Each is referred to as a Due Process Clause. The clause in the Fifth Amendment applies to the federal government and the clause in the Fourteenth Amendment applies to the states. The concept of due process of law in the Constitution may be traced back to the Magna Carta in 1215; but the phrase “due process of law” first appeared in a 1354 version of the Magna Carta. To be sure, the federal government and state governments may take a person’s life (by the death penalty), liberty (by incarceration), or property (by eminent domain); but prior to being deprived of any of these, a person has a right to due process of law.
There are two types of due process—procedural and substantive. Procedural due process requires that deprivations of life, liberty, or property must be consistent with fundamental fairness. In practice, the minimum requirement is a fair hearing before a neutral decision maker. This requirement may require judges to recuse themselves in some instances. In a recent case, a sharply divided 5–4 Supreme Court held that procedural due process required a justice of the Supreme Court of Appeals of West Virginia to recuse himself from an appeal because he had received large campaign contributions from the board chairman and principal officer of a party in the appeal.[35] In dissent, however, Justice Scalia stated, “The Court today continues its quixotic quest to right all wrongs and repair all imperfections through the Constitution. Alas, the quest cannot succeed—which is why some wrongs and imperfections have been called nonjusticiable.”[36]
The second type of due process is thorny to grasp. Substantial due process derives historically from “footnote four” of United States v. Carolene Products Company, where Justice Stone envisioned the possibility in future cases of some rights “to be subjected to more exacting judicial scrutiny.”[37] Today, these are called “fundamental rights” and they include interstate travel, voting, and privacy. Substantive due process, therefore, considers the content of a statute, not the procedure involved. Courts apply strict scrutiny when reviewing a statute relating to a fundamental right—that is, when a statute relates to interstate travel, voting, or privacy. If a statute does not relate to a fundamental right, however, courts apply rational basis scrutiny.
Equal Protection Clause. The relevant clause of the Fourteenth Amendment states that “No State shall . . . deny to any person within its jurisdiction the equal protection of the laws.” This is called the Equal Protection Clause. This means that states must provide similarly situated persons the same legal rights. Equal protection is similar to substantive due process in that both consider the content of a statute, not the procedure involved. But equal protection differs from substantive due process in one significant way. If a statute limits the liberty of all persons, it raises a substantive due process issue; if, however, a statute limits the liberty of only some persons (i.e., the statute classifies on some basis), it raises an equal protection issue.
If a statute classifies based on race, alienage, or national origin—which are called “suspect” classes—the court will apply strict scrutiny. For example, if a state legislature were to pass a statute that treats persons differently based on their race, the state would have to prove that the statute was necessary to promote a compelling governmental interest and narrowly-tailored to that end. Otherwise, a court would find the statute violated equal protection. If a statute or governmental action classifies based on sex or legitimacy—which are called “semi-suspect” classes—the court will apply the intermediate scrutiny test. Finally, if a statute does not classify on the basis of a “suspect” or “semi-suspect” class, the court will apply rational basis scrutiny. The Supreme Court has stated that the Equal Protection Clause “is not a license for courts to judge the wisdom, fairness, or logic of legislative choices.”[38]

[1] See Robert G. Natelson, The Original Constitution (Tenth Amendment Center 2010), 41. The “compact theory” versus “popular grant” debate is beyond the scope of this book.
[2] See Robert G. Natelson, The Original Constitution (Tenth Amendment Center 2010), 57.
[3] See Justice Antonin Scalia, testimony, “Considering the Role of Judges under the Constitution of the United States,” US Senate Committee on the Judiciary Committee, October 5, 2011.
[4] James Madison, Federalist No. 45, January 26, 1788.
[5] Andrea Seabrook, “Justices Get Candid about the Constitution,” NPR Online, October 9, 2011.
[6] See, e.g., Justice Antonin Scalia, interview by Peter Robinson, “Uncommon Knowledge: Antonin Scalia,” The Hoover Institution, February 23, 2009.
[7] Andrea Seabrook, “Justices Get Candid about the Constitution,” NPR Online, October 9, 2011.
[8] See, e.g., Jinks v. Richland County, 538 U.S. 456 (2003).
[9] 17 U.S. 316 (1819).
[10] Sabri v. United States, 541 U.S. 600 (2004).
[11] Sabri v. United States, 541 U.S. 600 (2004) (Justice Thomas, concurring).
[12] See, e.g., “Whatever meaning this [Necessary and Proper] clause may have, none can be admitted, that would give an unlimited discretion to Congress.” James Madison, Speech in Congress Opposing the National Bank, February 2, 1791.
[13] Sabri v. United States, 541 U.S. 600 (2004).
[14] South Dakota v. Dole, 483 U.S. 203 (1987).
[15] Perry v. United States, 294 U.S. 330 (1935).
[17] Gonzales v. Raich, 545 U.S. 1 (2005).
[18] 545 U.S. 1 (2005).
[20] For a succinct analysis of the free speech general rules that have developed in the case law during the past century, see Eugene Volokh, “Freedom of Speech and of the Press,” Heritage Guide to the Constitution Online (Heritage Foundation 2012).
[23] 494 U.S. 652 (1990).
[24] 558 U.S. 50 (2010).
[26] See, generally, Eugene Volokh, “Freedom of Speech and of the Press,” Heritage Guide to the Constitution Online (Heritage Foundation 2012).
[27] Brandenburg v. Ohio, 395 U.S. 444 (1969). “Incitement” is often misunderstood. Even inflammatory speech is protected unless the speaker intends to urge others who agree with the speaker to commit “imminent lawless action” and the speech is likely to cause the action. The “imminent lawless action” standard effectively overruled the lesser “clear and present danger” standard from Schenck v. US, 249 U.S. 47 (1919). The Schenck case was made famous by Justice Oliver Wendell Holmes Jr.’s quotation, “falsely shouting fire in a theater and causing a panic”—which is also often misunderstood. As some political commenters have pointed out, the “falsely” element of the quotation is frequently omitted and used to promote the notion that speech that causes public disorder may be restricted. But, as Mark Steyn observed, “if the theatre [sic] is on fire, you’re certainly entitled to point that out[, and] that, as a metaphor, is simply a ludicrous metaphor.  [Justice Holmes] was talking about gaslight, 19th century theatres. By 1919, the Winter Garden on Broadway . . . was an electrified theatre, and it wasn’t in danger of burning down. The metaphor is lazy and irrelevant.” Mark Steyn, “Droning Cliches in a Burning Theater,” National Review Online, February 12, 2009.
[28] Miller v. California, 415 U.S. 13 (1973).
[30] Virginia v. Black, 538 U.S. 343 (2003) (“‘True threats’ encompass those statements where the speaker means to communicate a serious expression of an intent to commit an act of unlawful violence to a particular individual or group of individuals”; “Intimidation . . . is a type of true threat, where a speaker directs a threat to a person or group of persons with the intent of placing the victim in fear of bodily harm or death.”)
[31] The Supreme has described “fighting words” as words “which by their very utterance inflict injury or tend to incite an immediate breach of the peace” (Chaplinsky v. New Hampshire, 315 U.S. 568, 572 (1942)) and “those personally abusive epithets which, when addressed to the ordinary citizen, are, as a matter of common knowledge, inherently likely to provoke violent reaction.” Cohen v. California, 403 U.S. 15, 20 (1971).
[33] See, e.g., Rodriguez v. Maricopa Comm. Coll. Dist., 605 F.3d 703 (9th Cir. 2010). For a detailed examination of the conflict between workplace harassment law and freedom of speech, see Eugene Volokh, “Freedom of Speech vs. Workplace Harassment Law —A Growing Conflict,” UCLA School of Law.
[34] Hawaii Housing Authority v. Midkiff, 467 U.S. 229 (1984); see also Berman v. Parker, 348 U.S. 26 (1954).
[36] Caperton v. A. T. Massey Coal Co., 556 U.S. ___ (2009) (Justice Scalia, dissenting).
[37] 304 U.S. 144 (1938).
[38] FCC v. Beach Communications, Inc., 508 U.S. 307, 313 (1993).