The Constitutional Environment of Business

The United States has a federal system of government. This means that a central government (the federal government) regulates matters of national concern and states regulate matters of local concern.

The U.S. Constitution establishes the structure of the government. It also establishes the fundamental powers of the federal and state governments and limitations upon those powers.

The Constitution created a tripartite (three-part) federal government comprised of a legislative branch (Congress) to make laws, an executive branch (President) to execute the laws, and a judicial branch (federal courts) to interpret the laws. Congress is a bicameral (two-house) body (Senate and House of Representatives).

Delegated powers: Certain powers (“delegated powers”) were given by the states to the federal government. These powers are stated in the U.S. Constitution.

Shared powers: The federal government has the exclusive right to exercise certain delegated powers. Example: power to make war. Other delegated powers are shared with states, meaning that states can also exercise these powers. Example: power to tax.

State police power: Subject to certain limits states have the “police power” to adopt laws that are necessary to protect the health, welfare, safety, and morals of people.

Prohibited powers: The Constitution prohibits federal and state governments from doing certain acts, e.g., making ex post facto laws (laws that make criminal an act that has already been done).

The Constitution embraces the concept of federal supremacy, which makes federal law supreme over state law. If a federal law conflicts with a state law, the federal law prevails. A state law is invalid if the state law directly conflicts with federal law or the state law relates to a subject that Congress has preempted (i.e., has taken over). A subject is preempted if Congress expressly or by implication indicates an intent to exclusively regulate the subject.  A failure by Congress to regulate a subject may still indicate an intent to preempt the subject, particularly if uniform national regulation of the subject is needed.

Conflicting Theories about the Purpose and Interpretation of the Constitution

  • Bedrock view: The Constitution states fundamental rules for all time. The Constitution should be interpreted narrowly, thereby giving the federal government only limited power.
  • Living document view: The Constitution states only goals. It is intended to change to meet the needs of society, and it is interpreted broadly to give the federal government expansive power.

The Constitution’s meaning and its protections have been amended (changed): (1) expressly through constitutional amendment; (2) by judicial interpretation; and (3) by practice.

Article V states rules for express constitutional amendments. There have been few express amendments; most constitutional changes have resulted from judicial interpretation.

During the past century the Supreme Court has generally followed the living document view. Consequently, the Constitution has been liberally interpreted resulting in the following:

  • Strong government: The federal government has been permitted to become a strong government.
  • Strong president: The U.S. President is strong and is actively involved in the lawmaking process.
  • Eclipse of the states: The federal government (not states) has the greatest power to regulate business.
  • Administrative agencies: Agencies exercise immense power in regulating business.
  • Human rights: The constitutional rights of individuals have expanded greatly and these rights, both express and implied, cannot be violated by the federal or state governments.

The federal government has the power to regulate interstate commerce. Today, interstate commerce is interpreted very broadly. It includes virtually all business and labor activities. It is no longer limited to goods or activities that directly cross state lines. The Constitution expressly provides that Congress can regu­late commerce with foreign na­tions, interstate commerce, and commerce that affects in­terstate commerce.  This provi­sion has had a greater impact on business than any other provision in the Constitution.  This power was delegated to the fed­eral government to ensure a uni­formity of rules governing the movement of goods through the states.

States do not have the authority to regulate interstate commerce. When state regulations affects in­terstate commerce, the state’s interest in the merits and purposes of the regu­la­tion must be balanced against the burden placed on interstate commerce.  It is difficult to predict the outcome in a particular case.

Although a state may regulate commerce, it cannot do so if: (1) regulation is preempted by the federal government; (2) state law conflicts with federal law; (3) state law discriminates against interstate commerce (e.g., tax is imposed on only interstate commerce); or (4) state law imposes an unreasonable burden on interstate commerce (i.e., burden on interstate commerce outweighs the need for the state law).

Bill of Rights: The first ten amendments to the Constitution embody protections against various types of interfer­ence by the federal government.  The guarantees include protec­tion of the freedoms of religion and speech.  Also held to be fun­damental is a personal right to privacy, derived from guarantees found in some of these amendments.

Financial Powers: The federal government has the power to tax, borrow, spend, and make money. However, direct taxes must be allocated among the states according to the population of the states. Indirect taxes (all other federal taxes) need not be apportioned according to population, but they must uniformly apply to all states. State and municipal governments cannot be directly taxed by the federal government. Federal and state taxes can be imposed for only public purposes. The federal government can tax income from state or local municipal bonds.  The federal government can borrow and spend money for any purpose. State governments can tax, borrow, and spend, although state law frequently limits the amount of state borrowing.

The federal and state governments can own and operate businesses. They can also sell goods produced by these businesses, and they can generally compete with private businesses.

Some of the most important constitutional limitations on government are constitutional provisions that guarantee fundamental individual rights. Constitutional limits, such as due process, only apply to government action. These limits do not apply to conduct by private parties; statutes and administrative rules limit private conduct.

The Fifth and Fourteenth Amendments to the Constitution prohibit the federal and state governments, respectively, from depriving any person of life, liberty, or property without due process of law. The “due process clause”: (1) prohibits unreasonable government procedures and laws; and (2) guarantees certain fundamental individual rights and interests. Examples of due process guarantees: right to reasonable notice and an opportunity to be heard; right not to be sued in a state unless one has reasonable contacts with the state in question.

Due process does not nullify a law merely because the law is of debatable value. In general, if the government proposes to take an action that will substantially interfere with a person’s fundamental personal or property rights, due process guarantees that person a right to notice and an opportunity to defend his or her rights.

Procedural Due Process: A government decision to take life, liberty, or property must be made fairly. Fair procedure has been interpreted as requiring that the person have at least an opportunity to object to a proposed action before a fair, neutral decision maker (who need not be a judge).

Substantive Due Process: If a law or other governmental action limits a fundamental right, it will be held to violate substantive due process unless it promotes a compelling or overriding state interest.  Fundamental rights include interstate travel, privacy, voting, and all First Amendment rights. Compelling state interests could include, for example, the public’s safety.  In all other situations, a law or action does not violate substantive due process if it rationally re­lates to any legitimate governmental end.

The equal protection clause prohibits the federal and state governments from discriminating against persons because they are members of a particular class. The equal protection clause does not always require equal treatment for everyone.  A law may treat classes of persons or businesses differently if the law is reasonably related to and furthers a sufficiently important, legitimate government purpose.

Examples of invalid laws (classifications): (1) laws that discriminate on the basis of race, religion, or national origin; (2) laws that are not rationally or reasonably related to accomplishing a legitimate government interest; (3) certain laws that discriminate on the basis of moral standards or cultural patterns.

The Bill of Rights consists of the first ten amendments to the U.S. Constitution. Adopted in 1791, the Bill of Rights embodies protections for individuals against interference by the federal government. Some of the protections also apply to business entities. The First Amendment guarantees the free­doms of re­ligion, speech, and the press, and the rights to assemble peaceably and to petition the government.

The freedoms guaranteed by the First Amendment have been applied to the states through the due pro­cess clause of the Fourteenth Amendment  Symbolic speech (gestures, clothing, etc.) is protected.

Reasonable Restrictions: A balance must be struck between the government’s obligation to protect its citizens and those citizens’ exercise of their rights. If a restriction imposed by the government is content neutral (aimed at combating a societal problem such as crime, not aimed at suppressing expressive conduct or its message), then a court may allow it.

Corporate Political Speech: Speech that otherwise would be protected does not lose that protection simply because its source is a corporation.  For example, corporations cannot be entirely prohibited from mak­ing political contri­bu­tions that individuals are permitted to make.  Corporations may, how­ever, be prohibited from using corpo­rate funds to make independent expressions of opinion about po­litical candidates.

Commercial Speech: Freedom-of-speech cases generally distinguish between com­mercial and noncom­mer­cial messages.  Commercial speech is not protected as extensively as noncommercial speech.  Even if commercial speech concerns a lawful activity and is not misleading, a restriction on it will generally be con­sidered valid as long as the restriction (1) seeks to implement a sub­stantial government interest, (2) directly advances that in­ter­est, and (3) goes no further than necessary to accomplish its objective.

Unprotected Speech: Constitutional protection has never been af­forded to certain classes of speech – the lewd and obscene, the profane, the libelous, and the insulting or ‘fighting’ words – those which by their very utterance inflict in­jury or tend to incite an im­mediate breach of the peace.

Material is obscene if (1) the average per­son finds that it violates contemporary community standards; (2) the work taken as a whole appeals to a prurient interest in sex; (3) the work shows patently offensive sexual conduct; and (4) the work lacks serious redeeming literary, artistic, political, or scientific merit.  Aside from child pornography, however, there is little agreement about what material quali­fies as obscene.

The Miller test, also called the three prong obscenity test, is the United States Supreme Court’s test for determining whether speech or expression can be labeled obscene, in which case it is not protected by the First Amendment to the United States Constitution and can be prohibited. The Miller test was developed in the 1973 case Miller v. California[1] It has three parts:

  • Whether “the average person, applying contemporary community standards”, would find that the work, taken as a whole, appeals to the prurient interest,
  • Whether the work depicts or describes, in a patently offensive way, sexual conduct or excretory functions specifically defined by applicable state law,
  • Whether the work, taken as a whole, lacks serious literary, artistic, or scientific value.

For legal scholars, several issues are important. One is that the test allows for community standards rather than a national standard. What offends the average person in Kansas City, Kansas, may differ from what offends the average person in Manhattan, New York. The relevant community, however, is not defined.

Another important issue is that the Miller Test asks for an interpretation of what the “average” person finds offensive, rather than what the more sensitive persons in the community are offended by, as obscenity was defined by the previous test, the Hicklin test, stemming from English precedent. Regina v. Hicklin (1868),

In practice, pornography showing sexual acts is not ipso facto obscene according to the Miller test. For instance, in 2000 a jury in Provo, Utah, took only a few minutes to clear Larry Peterman, owner of a Movie Buffs video store, in Utah County, Utah, a region which had often boasted of being one of the most conservative areas in the United States. Researchers had shown that guests at the local Marriott Hotel were disproportionately large consumers of pay-per-view pornograph material, accessing far more material than the store was distributing.

Online Obscenity: Portions of the Communications Decency Act of 1996 were struck as unconstitutional. The “community” of the Internet is “nationwide” — too large for applying the “standards of the community” test. The Child Online Protection Act of 1998 has been suspended. The Children’s Internet Protection Act of 2000, which requires libraries to use filters, was held not unconstitutional.

The Constitution generally prohibits a state from treating residents and nonresidents of the state differently. Example: Residents and nonresidents generally have the same right to do business, practice a profession, and own property in a state.

The Supreme Court has expanded the constitutional protection of many individual rights, including rights not expressly stated in the Constitution. The Constitution protects only living persons. A person’s freedom of action may be limited if needed to protect others, the government, or society.

Expansion of individual rights guarantees the freedom of choice of individuals, but in certain situations this process may limit the democratic notion that the majority rules.

 

[1] 413 U.S. 15 (1973)

Author: William Glover

I received my B.B.A. from the University of Mississippi in 1973 and his J.D. from the University of Mississippi School of Law in 1976. I joined the firm of Wells Marble & Hurst in May 1976 as an Associate and became a Partner in 1979. While at Wells, I supervised all major real estate commercial loan transactions as well as major employment law cases. My practice also involved estate administration and general commercial law. I joined the faculty of Belhaven University, in Jackson, MS, in 1996 as Assistant Professor of Business Administration and College Attorney. While at Belhaven I taught Business Law and Business Ethics in the BBA and MBA programs; Judicial Process and Constitutional Law History for Political Science Department; and Sports Law for the Department of Sports Administration. I still teach at Belhaven as an Adjunct both in the classroom and online. In 2004 I left Belhaven for a short stay at Wells Marble & Hurst, PLLC, and then joined the staff of US Legal Forms, Inc., 2006 where I draft forms, legal digests, and legal summaries. My most recent publications and presentations include: • Author: Sports Law Handbook for Coaches and Administrators, Sentia Publishing, 2017. • Co-Author: In the Arena published by the New York State Bar Association in 2013; • Co-Author: Criminal Justice Communications - Corinthian Colleges, Inc. in 2014. • Co-Author: Business Law for People in Business, Sentia Publishing, 2017.