ArtI.S8.C3.7.6 State Proprietary Activity (Market Participant) Exception

Article I, Section 8, Clause 3:

[The Congress shall have Power . . . ] To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes; . . .

The Supreme Court has recognized limited exceptions to the per se invalidity of discriminatory state laws under the Dormant Commerce Clause. Under the market participant exception, states that “themselves ‘participat[e] in the market’” may “'exercis[e] the right to favor [their] own citizens over others.’” 1 For example, a state does not unconstitutionally discriminate against out-of-state businesses when it chooses to buy or sell goods or services with its own residents or businesses

In Hughes v. Alexandria Scrap Corp., the Court upheld a Maryland bounty scheme by which the state paid scrap processors for each “hulk” automobile destroyed, and which substantially disadvantaged out-of-state processors.2 Reasoning that the scheme was a means of participating in the market to bid up the price of hulks rather than a regulation of the market, the Court held that “entry by the State itself into the market itself as a purchaser, in effect, of a potential article of interstate commerce [does not] create[ ] a burden upon that commerce if the State restricts its trade to its own citizens or businesses within the State.” 3 In Reeves, Inc. v. Stake, the Court held that South Dakota could limit the sale of cement from a government-operated plant to in-state residents in times of shortage.4 The Court noted that “[t]here is no indication of a constitutional plan to limit the ability of States themselves to operate freely in the free market.” 5

Despite these decisions, the scope of the market participant exception has not been carefully defined, particularly with respect to whether a state acts as a market participant in “downstream regulation.” 6

Dep’t of Revenue of Ky. v. Davis, 553 U.S. 328, 339 (2008) (quoting Hughes v. Alexandria Scrap Co., 426 U.S. 794, 810 (1976)). back
426 U.S. 794. back
Id. at 808; see also McBurney v. Young, 569 U.S. 221, 236 (2013) (to the extent that the Virginia Freedom of Information Act created a market for public documents in Virginia, the Commonwealth was the sole manufacturer of the product, and therefore did not violate the Dormant Commerce Clause when it limited access to those documents under the Act to citizens of the Commonwealth). back
447 U.S. 429 (1980). back
Id. at 437; see also White v. Mass. Council of Constr. Emps., 460 U.S. 204 (1983) (holding that a city may favor its own residents in construction projects paid for with city funds). The Court reached a different result in S.-Cent. Timber Dev., Inc. v. Wunnicke, 467 U.S. 82 (1984), in which it held unconstitutional a requirement that timber taken from state lands in Alaska be processed within the state. The Court distinguished Alaska’s requirement from the laws at issue in other market-participant doctrine cases based on the fact that the Alaska law restricted resale, affected foreign commerce, and involved a natural resource). back
See S.-Cent. Timber Dev., Inc., 467 U.S. at 97–98 (cautioning that “[u]nless the ‘market’ is relatively narrowly defined, the doctrine has the potential of swallowing up the rule that States may not impose substantial burdens on interstate commerce even if they act with the permissible state purpose of fostering local industry” ). back