Question 1

Fueling the Fire

A State X statute prohibits the retail sale of any gasoline that does not includeat least 10 percent ethanol,an alcohol produced from grain, which, when mixed with gasoline, produces a substance known as “gasohol.” The statute is based on the following legislative findings: (1) the use of gasohol will conserve domestic supplies of petroleum; (2) gasohol burns more cleanlythan pure gasoline, thereby reducing atmospheric pollution; and (3) the use of gasohol will expand the market for grains from which ethanol is produced.

State X is the nation’slargest producer of grain used for making ethanol. There are no oil wells or refineries in the state.

Oilco is an internationalpetroleum company doing business in State X as a major retailer of gasoline. Oilco does not dispute the legislative findings underlying the statute or the facts concerning State X’s grain production and lack of oil wells and refineries. Oilco, however, has producedreliable evidence showing that, since the statute was enacted, its sales and profits in State X have decreased substantially because of its limited capacity to produce gasohol.

Can Oilco successfullyassert that the statuteviolates any of the following provisions of the United States Constitution:(1) the Commerce Clause, (2) the Equal Protection Clause, (3) the Due Process Clause, and (4) the Privileges and Immunities Clause? Discuss.

Answer 1

This answer provided by Cal Bar Tutorial Review, 800-348-2401 or 800-783-6168; www.CBTRONLINE.com.

I. Oilco v. State X

A. Procedural Considerations

Procedurally, Oilco will successfully assert that the State X statute creates a legitimate case or controversy for federal review given the substantial reduction in its sales and profits that seems connected to the statute’s effect in limiting Oilco’s capacity to produce gasahol. Further, that their lawsuit against State X is ripe due to the immediate threat of economic harm imposed by the statute and that they have standing given their financial and concrete stake in the outcome of the case. Whether the statute violates specific provisions of the Constitution follows.

B. Commerce Clause

Given the fact there is no competing federal regulation that would pre-empt the State X statute through the Supremacy Clause, at issue is whether the statute’s effect is unconstitutionally discriminatory or non-discriminatory and in violation of the Commerce Clause.

1. Discriminatory

Although state regulations that discriminate against interstate commerce to protect local economic interests are usually invalid, they may be valid if an important, non-economic state interest is available with no reasonable non-discriminatory alternatives available. Or, when a state prefers its own citizens when acting as a market participant.

It is unlikely the State X statute will be unconstitutional due to any potential discriminatory effect it may impose on Oilco’s ability to produce sufficient supplies of gasahol so that its sales and profits will increase. Although the “10 percent ethanol” additive requirement for the retail sale of gasoline clearly promotes an economic interest given “State X’s status as the nation’s largest producer of grain for making ethanol,” it is also clear that the legislative intent to “expand the market for grains from which ethanol is produced” may be interpreted as a subsidy for the citizens of State X so that the state is properly acting as a market participant. Further, the legislative intent of the statute promoting the conservation of domestic supplies of petroleum and the reduction of atmospheric pollution supports legitimate non-economic state interests which persuasively outweigh Oilco’s contention that it is a discriminated class due to State X’s prohibition on the expansion of oil wells and refineries in the state.

2. Non-discriminatory

A non-discriminatory state statute will be constitutionally invalid if it burdens interstate commerce unless the burden is outweighed by a legitimate local interest. Here, the court will consider whether less restrictive alternatives are available.

Oilco may have difficulty in establishing the State X statute to burden interstate commerce despite the fact its sales and profits in State X have “decreased significantly because of its limited capacity to produce gasahol.” State X would persuasively argue that legitimate state interests are served by the effect of the statute in assuring the reduction of atmospheric pollution and, as noted above, the expansion of their market for grains from which ethanol is produced. State X can also point to the benefit of domestic conservation of petroleum supplies. Although Oilco is a major retailer of gasoline in State X and has produced “reliable evidence” connecting the imposition of the statute to its decrease in revenue, State X would counter that Oilco’s revenues and profits are only partially impacted by the statute given Oilco’s position as an “international petroleum company.” On balance, the court would not find the statute violates the Commerce Clause despite its non-discriminatory effect on Oilco’s revenue.

C. Equal Protection

Although there is certainly state action involved through the imposition of the State X statute, it is unlikely Oilco will be successful in arguing that they are a discriminated class and that the statute is unconstitutional as violative of their 14th Amendment equal protection rights.

While Oilco might contend that the motive of the statute discriminates against the class of petroleum companies like themselves substantially producing their product from oil wells and refineries — and not involving a grain related ethanol additive as mandated by the State X statute — even a discriminatory effect would be insufficient to show a violation of their equal protection right. In applying the rational basis test, Oilco would need to additionally prove the discriminatory motive of the State X legislature, such as by evidence of a history of discrimination against such petroleum companies.

Given that the statute is not discriminatory on its face — nor that there is necessarily a discriminatory application of the facially neutral law — State X can persuasively argue that the legislative intent of the statute is rationally related to the conservation, economic and environmental concerns that are legitimate state interests. By comparison, the reduction in revenue that Oilco can reliably connect to the imposition of the statute — and its concession in not disputing the legislative findings supporting legitimate State X interests — on balance, would not overcome the rational bias standard that would undoubtedly be applied in this case.

D. Due Process

Oilco will likely have difficulty proving there is a violation of its substantive 14th amendment due process rights as a result of the State X statute.

Like the equal protection argument discussed above, Oilco will undoubtedly be limited to the rational basis test as the standard for reviewing State X’s statute — not the strict or intermediate scrutiny standard — and will have difficulty proving that their economic interests should outweigh the legitimate state economic, conservation and environmental concerns previously noted. While Oilco may be a “major retailer” of gasoline in State X, it is still experiencing some profit — although evidently reduced — so that the economic impact of the statute is only proportionally marginalizing the amount of its profit, not eliminating it altogether. The court may also find that a “10 percent” ethanol additive is reasonable given the significant state interests served by the regulation.

E. Privileges and Immunities

The Privileges and Immunities Clause guaranteed by Article IV prohibits discrimination by a state against non-residents. Only fundamental rights involving either commercial activities or civil liberties are protected — and the state law may be valid if the state can show that non-residents either cause or are part of the problem that the state is attempting to solve and that there are no less restrictive means to solve the problem. Note, however, that corporations are not protected by the clause.

Given the fact Oilco is an international petroleum company and a major State X retailer of gasoline, it is probably reasonable to presume it is a corporation and not protected by this clause.

Assuming that this has not been conclusively established from the facts, however, it is still highly unlikely that the clause would work in Oilco’s favor given the evident lack of discrimination as noted in the preceding discussion — in addition to the substantial justification that State X will be able to show given the legislative findings underlying the statute and related to the legitimate economic, environmental and conservation concerns of the state. Further, the “10 percent” ethanol additive appears reasonable and would not appear to be unduly restrictive given the wide benefits it provides to State X.