Market Participant Doctrine

1

• Market Participant Doctrine
• March 29, 2006

2
Market Participant Doctrine

• State laws that discriminate against IC are
  presumptively invalid
• What about states own purchases?
• Doesnt it have to favor 1 supplier over others?
• Or states own sales (e.g., timber sales)
• Doesnt it have to favor 1 buyer over others?
• When state is acting like private party, does it
  have same freedom of action?
• Should there be a distinction between the
  governmental proprietary functions of govt?

3
Market Participant Doctrine

• Hughes v. Alexandria Scrap (1976)
• Maryland car recycling program pays bounties for
  re-processing of junk cars
• Bounty available only to in-state processors
• As if the state were buying only from MD firms
• Note no regulatory distinctions for in-state vs
  out-state reprocessing
• Can state refuse to buy from out-staters?
• Is this like regulating business entry or
  discriminating against IC?

4
Reeves v. Stake (1980)

• SD-owned cement plant favors in-state buyers
• What is a nice state like SD doing making cement?

5
MPD Theories

• State is not regulating anything
• DCC operates as a negative preemption of state
  laws, but when the state is not regulating, there
  is nothing to preempt preclude
• DCC fails on formalism grounds
• Commerce Cl. designed to limit state taxing
  regulatory powers, not market activities
• DCC fails on originalism grounds

6
MPD Theories

• When regulating, states exercise sovereign power
  over market but when participating, states are
  governed by market forces
• Theory since markets are self-correcting (punish
  favoritism) there is no need for judicial
  intervention
• Sovereign / proprietary distinction
• When participating in market, states act as
  fiduciaries over public funds
• Sovereignty basis for exempting states
• See Powell dissent (no sovereignty under DCC)

Arent these contradictory?
7
Sovereign vs. Proprietary Interests

• States act in a sovereign capacity when they
  are regulating
• i.e., as parens patriae of their citizenry
• States dont act in a sovereign capacity when
  they are merely participating in a market
• When states are market participants, they are
  acting at the height of their sovereignty
• because they are protecting economic
  self-interest
• which implicates their treasury
• which they hold in trust as parens patriae
• Isnt state sovereignty fun?

8
Federalism Basis for MPD

• Two different sovereign interests at stake
• sovereign power over own citizens
• sovereign power over its own conduct
• Note parallels to 10th amendment
• the 1st sovereign interest gives way to domin-ant
  federal interest (in DCC and fed reguln)
• the 2nd sovereign interest gives rise to a form
  of immunity (reflected in MPD and 10th amd.)
• State market activity subject to fed reguln
• if valid per 10th amd

9
MPD Theories

• Under MPD, states can be protectionist
• Despite their effect on interstate markets
• But, if truly a market participant,

• Then subject to federal laws regulating markets
• Including antitrust laws

• Test for MPD
• Does state action more resemble that of a private
  trader, or of a market regulator?

10
White v. Mass. Council (1983)

• Boston local hire law
• Are municipal laws ordinarily subject to DCC?
• What is Boston buying or selling?
• Is discrimination in labor also exempt from DCC
• Is the City exempt from other constitutional
  limits on state discrimination (e.g., equal
  protection)?
• Is Boston a participant re federal funds?
• If not, why is the City exempt from DCC?
• Congress not bound by DCC may authorize state
• Has it here?
• City action is harmonious with federal
  regulations

11
S.Central Timber v. Alaska (1984)

• Down-stream regulating under guise of MPD
• Low-price timber sales to firms processing in AK
• What market is AK a participant in?
• Timber sales?
• Lumber processing?
• Can it use its MPD exemption in the former to
  impose conditions on the latter?
• No. AK is engaging in downstream regulation
  outside of the discrete, identifiable class of
  economic activity in which it is a participant
• Designed to protect local lumber industry

12
S.Central Timber v. Alaska (1984)

• Market participant or market regulator?
• With its in-state processing conditions, AK is
  acting more like a sovereign than a proprietor
• Rehnquist dissent distinction w/o a difference
• AK could sell only to companies with in-state
  mills
• Could process the timber itself, then sell
  products
• Could directly subsidize in-state mills
• Is formalism important here?

• Does it matter that most of AKs timber sales
  were to Japan?

13
Exceptions to MPD

• When state has monopoly power in the market in
  which it participates
• Monopolists enjoy market power, i.e., the
  ability to regulate the market
• Sale of natural resources
• States have special stewardship responsibilities
  (akin to regulatory power) over natural resources
• Foreign commerce
• The dormant foreign commerce clause is even
  stronger than the DCC, and may not admit of an
  exception for state market activities

14
Taxation as Market Activity

• New Energy of Indiana v. Limbach (1988)
• Tax credit for ethanol produced in Indiana
• Note state subsidies ordinarily not subject to
  DCC
• Otherwise, state could never provide benefits for
  its residents
• But when coupled with taxes, treated as discrim.
  tax
• State not buying/selling gas just taxing it
• Why is this subsidy not equivalent to Hughes?
• Maybe Hughes was not really a MPD case

15
Taxation as Market Activity

• Camps Newfound-Owatonna v. Harrison (1997)
• tax exemption for camps serving residents
• Taxing is a sovereign function, not a function of
  market participants
• tax exemption viewed as a subsidy is still not a
  proprietary function
• This exception would swallow the rule (against
  discriminatory taxes)
• a prime target of the DCC

16
Criticism of MPD

• States never act in non-sovereign capacity
• even when promoting economic self-interest, it is
  for benefit of taxpayers as shareholders
• confusing federalism basis for doctrine
• Skews marketplace
• encourages states to buy previously regulated
  enterprises so as to be exempt from DCC
• Landfills airports
• Manifestation of judicial balancing
• discarded in Garcia
• SCt hasnt found MPD since Garcia