International Economic Law and Policy Blog

Justice Kennedy for the Appellate Body?

If we can't stop internal domestic discrimination, how are we ever going to stop it in the international arena?  The recent U.S. Supreme Court decision in Davis v. Kentucky Department of Revenue dealt with the issue of explict tax discrimination against out-of-staters.  As explained on ScotusWiki:

At issue in Davis is a provision in Kentucky’s income tax law that taxes interest income from bonds issued by other state and local governments while providing an exemption for interest from Kentucky bonds. Two Kentucky taxpayers challenged the law, arguing that the tax discriminated against holders of out-of-state bonds and thus violated the Commerce Clause. Kentucky’s intermediate appellate court agreed. It held that the state’s scheme for taxing bond interest was unconstitutional, “as it obviously affords more favorable taxation treatment to in-state bonds than it does to extraterritorially issued bonds.”

So, the measure at issue is a Kentucky state law that gives a tax advantage to interest income on Kentucky government bonds as compared to other states' bonds.

The Supreme Court majority found that the Kentucky law did not violate the dormant commerce clause.  There were a number of separate opinions, discussing a bunch of issues, but of key importance seemed to be the following two points.  First, as a NY Times piece noted about the majority view:

All 49 other states had filed a brief urging the Supreme Court to overturn the Kentucky court and uphold the state preference. In his majority opinion, Justice David H. Souter cited the states’ unanimity as evidence of the enormity of what the court was being asked by the plaintiffs to do.

Basically, every state does this, and the Court was reluctant to overturn such an established practice.

In addition, there was the notion that this law involved a "public function" of government, as had a recent case, and for that reason did not violate the dormant commerce clause.

What interested me more, though, was Justice Kennedy's dissent.  He started it this way:

Eighteenth-century thinkers, even those most prescient, could not foresee our technological and economic interdependence. Yet they understood its foundation. Free trade in the United States, unobstructed by state and local barriers, was indispensable if we were to unite to ensure the liberty and progress of the whole Nation and its people. This was the vision, and a primary objective, of the Framers of the constitution. History, as we know, vindicates their judgment. The national, free market within our borders has been a singular force in shaping the consciousness and creating the reality that we are one in purpose and destiny. The Commerce Clause doctrine that emerged from the decisions of this Court has been appropriate and necessary to implement the Constitution’s purpose and design.

These general observations are offered at the outset to underscore the imprudent risk the Court now creates by misinterpreting our precedents to decide this case. True, the majority opinion, wrong as it is, will not threaten the whole economy or national unity on these facts alone. The explicit, local discrimination the Court ratifies today likely will result in extra, though manageable, accommodation costs and can be welcomed by existing interests ready to profit from it. This market perhaps can absorb the costs of discrimination; our jurisprudence, unless the decision stands alone as an anomaly, cannot.

Reactive institutions and adjusting forces—for instance mutual funds for state and municipal bonds issued within a single State—already are in place in response to the local protectionist laws here at issue and now in vogue. These mechanisms may allow the market, though necessarily distorted by deviation from essential constitutional principles, to continue to cope in a more or less efficient manner; and the damage likely will be limited to the discrete, and now distorted, market for state and municipal bonds. Many economists likely will find it unfortunate, and inefficient, that a specialized business has emerged to profit from a departure from constitutional principles. Even if today’s decision is welcomed by those who profit from the discrimination, the system as a whole would benefit from a return to a market with proper form, freed from artificial restraints. It does seem necessary, however, to point out the systemic consequences of today’s decision—if only to confine it and to discourage new experiments with local laws that discriminate against interstate commerce and trade.

And he concluded:

... today the Court weakens the preventative force of the Commerce Clause and invites other protectionist laws, thus risking further dislocations and market inefficiencies based on the origin of products and commodities that should be traded nationwide and without local trade barriers.

Wow!  If there had been more of this kind of talk when I was taking con law, I might have focused on that instead of trade law.  After reading this, I'd really like to see Justice Kennedy take on GATT Article III:4!

In addition to Kennedy, Scalia and Thomas also had interesting things to say.  From Scalia:

JUSTICE SCALIA, concurring in part.

I join all but Part III–B and Part IV of the opinion of the Court. I will apply our negative Commerce Clause doctrine only when stare decisis compels me to do so. In my view it is “an unjustified judicial invention, not to be expanded beyond its existing domain.”

I read this as saying he doesn't much like the dormant commerce claus doctrine, but he won't go so far as to get rid of it entirely.  Rather, he'll just keep it as narrow as possible, e.g., no state-imposed tariffs on out of state goods.

As for Thomas, it seems as though he would go further than Scalia in reversing the doctrine:

JUSTICE THOMAS, concurring in the judgment.

I agree with the Court that Kentucky’s differential tax scheme is constitutional. But rather than apply a body of doctrine that “has no basis in the Constitution and has proved unworkable in practice,” I would entirely “discard the Court’s negative Commerce Clause jurisprudence.” ... Because Congress’ authority to regulate commerce “among the several States,” U. S. Const., Art. I, §8, cl. 3, necessarily includes the power “to prevent state regulation of interstate commerce,” United Haulers, supra, at ___ (slip op., at 2) (THOMAS, J., concurring in judgment), the text of the Constitution makes clear that the Legislature—not the Judiciary—bears the responsibility of curbing what it perceives as state regulatory burdens on interstate commerce.

Thomas seems to say that it is entirely up to the (federal) legislature to address the problem of state protectionism.  Would he go so far as to say that tariff duties imposed by a state on products from other states are constitutional?

More commentary from SCOTUSBlog here.

Possible New Investment Treaty Rules for Non-Discrimination

From a Norwegian draft model BIT (MS Word document) that reader Perry Bechky pointed me to:

Article 3: NATIONAL TREATMENT

1. Each Party shall accord to investors of the other Party and to their investments, treatment no less favourable than the treatment it accords in like circumstances[FN2] to its own investors and their investments, in relation to the establishment, acquisition, expansion, management, conduct, operation and disposal of investments.

[FN2] The Parties agree/ are of the understanding that a measure applied by a government in pursuance of legitimate policy objectives of public interest such as the protection of public health, safety and the environment, although having a different effect on an investment or investor of another Party, is not inconsistent with national treatment ... when justified by showing that it bears a reasonable relationship to rational policies not motivated by preference of domestic over foreign owned investment.

Here are a few initial thoughts on this provision.

First, my sense is that perhaps the footnote would only apply to situations involving de facto discrimination.  De jure discrimination (i.e., explicit distinctions between foreign and domestic investors/investments) would be governed by the main text alone.  But I'm not absolutely sure about this.

Second, the substance of the footnote indicates that disparate impact/discriminatory effect on foreign investment/investors will not lead to a violation of national treatment rules in all instances.  Specifically, there will be no violation if the following conditions are met: (1) The measure pursues "legitimate policy objectives of public interest"; (2) the measure "bears a reasonable relationship to rational policies"; and (3) the "policies" at issue are "not motivated by preference of domestic over foreign owned investment."  The first two elements seem to overlap; I'm not sure exactly how they relate to one another.  The last element, the "motivation" behind the measure, involves intent.  However, it's not clear what kind of intent the drafters had in mind, subjective or objective.

Third, what happens if there is no discriminatory effect on foreign investors/investments as a whole?  Does that mean there cannot be a violation?  There are WTO cases that have found a violation where one individual foreign product is treated unfavorably even though there is no overall discriminatory effect against foreign products.  I wonder how the quoted provision would deal with the equivalent situation in the investment context.  The reference to "an investment or investor" makes me think the "individual" test might be applied.

Fourth, it sounds like the burden is on the defending party to show that the measure "bears a reasonable relationship to rational policies not motivated by preference of domestic over foreign owned investment."  So, the complainant first makes its claim of less favorable treatment, but the defending party can then respond with a defense of this kind.

Finally, I thought it was interesting that they put the footnote after "like circumstances."  There is some disagreement over which part of the national treatment provision is the key, with some emphasizing the "less favorable treatment" part and others focusing on the "like"-ness part.  By putting the footnote where they did, it seems that perhaps these drafters thought "like"-ness was the key.

Non-Discrimination: How Others Do It

The proper standard for non-discrimination has long been a vexing question in GATT/WTO law.  Is there anything to be learned from seeing how others do it?  Yesterday the U.S. Supreme Court decided a "dormant" commerce clause case, where non-discrimination is part of the legal standard (at least under the view of some people).  The following summary of the case and the various opinions is from Scotusblog. I focus here on the parts that apply the non-discrimination standard (there is more to the case as well).

The background of the case is as follows:

During the 1980s, the New York counties of Oneida and Herkimer faced, according to the Chief Justice, a “solid waste ‘crisis’” that included not only health and safety problems, but also “price fixing, pervasive overcharging, and the influence of organized crime.” ... In response, the counties enacted ordinances that required all of their solid waste to be delivered to processing sites owned and operated by the Oneida-Herkimer Solid Waste Management Authority, a corporation created by the New York state government. Buoyed by the Supreme Court’s 1994 decision in C & A Carbone v. Clarkstown, which invalidated a similar ordinance that required trash to go to a privately operated processing facility, trash haulers filed suit, alleging that the ordinance violated the dormant Commerce Clause.

In essence, the local government ordinance requires that waste be delivered only to a designated local government owned corporation. A prior Supremore Court case struck down a similar ordinance that required waste to go to a local private corporation.

The majority's opinion finding that the law does not violate the dormant commerce clause is summarized as follows:

Relying on the difference between the privately operated facility at issue in Carbone and the publicly owned Oneida-Herkimer facility, the Court today rejected the trash haulers’ challenge to the “flow control” regulations. In the majority’s view, Carbone could not be dispositive because it did not address the public-private distinction. And because governments have responsibilities – such as health and safety concerns – beyond those of private businesses, the majority posits that “it does not make sense” to subject laws that favor local government to the same level of scrutiny as laws that “favor[] in-state business over out-of-state competition,” as the latter often seek to achieve “simple economic protectionism.” Indeed, the majority emphasizes, “treating public and private entities the same under the dormant Commerce Clause would lead to unprecedented and unbounded interference by the courts with state and local government” – interference that is particularly inappropriate in the area of traditional local government functions such as solid waste.

Thus, the majority thinks this law is permissible because it discriminates in favor of a government-owned corporation rather than a private corporation, referring in this regard to the importance of "traditional local government functions." However, there was also a three person dissent, which held as follows:

Joined by Justices Stevens and Kennedy, Justice Alito would have invalidated the ordinances on the ground that they were “essentially identical” to those at issue in Carbone. In Justice Alito’s view, statements by the Carbone majority “reflect[ed] a clear understanding that the station was, for all purposes relevant to the dormant Commerce Clause, a municipal facility.” More importantly, however, Justice Alito rejects the majority’s public-private distinction as “illusory”: “The Court has long subjected discriminatory legislation to strict scrutiny, and has never, until today, recognized an exception for discrimination in favor of a state-owned entity.” Moreover, there is no justification for the exception that, in the dissent’s view, the majority is creating out of whole cloth today. Contrary to the majority’s assertion, discrimination in favor of a state-owned entity, Justice Alito posits, does serve “local economic interests” (such as providing jobs to local residents and business for local suppliers), while discrimination in favor of privately owned local entities may serve legitimate health and safety purposes. Thus, Justice Alito contends, the proper inquiry in dormant Commerce Clause cases looks not only at the goals of the challenged regulation, but also at “the means by which those goals are realized.” If the means are discriminatory, then the regulation must be subjected to strict scrutiny.

I think I side with the dissent on this one.  If you are going to apply a non-discrimination rule, why carve out an exception for discriminating in favor of a government-owned corporation?  That could be quite a big exception in practice.