Commercial regulation in the United States: a constitutional perspective.

A constitution is a document that sets up and serves as the basis of a system of government. It describes the organization and function of the government, its permitted powers and duties, and limits power to engage in activities that its drafters deem unsuitable. Thus, the U.S. Constitution provides for a legislature, a chief executive, and a system of courts. It empowers the government to levy taxes, provide for the protection of intellectual property, wage war, and engage in a number of other activities.

The Nature of the Constitution

In the United States, as in most countries, the Constitution is the original source of law. The Constitution seems remote in that it offers no day-to-day guidance, advice, or prohibitions (or so it seems). Reading the Constitution seems to confirm this at first glance - there is a great deal of language setting up the Congress, the presidency, the courts, and a variety of technical administrative rules for each of these to follow in the performance of their duties. It authorizes armed forces, a census, and other miscellaneous items. There is also general language about commerce, taxes, and customs. So far as a first reading is concerned, most of the mundane governance - from tax regulation to recordkeeping to criminal statutes - is done by virtue of statutes or administrative rules, with little influence from the Constitution itself.

In actuality, every other source of law - statute, regulation, court case, or other - depends upon the Constitution's authorization and can only exist and operate insofar as it complies with the strictures of the Constitution and its attendant body of interpretive case law. Equally important are the constitutional limits on the power of the federal government.

The United States is a federation of 50-plus semi-independent states (including Indian nations and territories). The federal government has no inherent legislative power: "This government is acknowledged by all as one of enumerated powers." (McCulloch v. Maryland, 17 US [4 Wheat] 316, 4 L.Ed. 579 [1819]) The Constitution limits and enumerates the powers of federal authority: "The powers not delegated to the United States by the Constitution nor prohibited by it to the States, are reserved to the States respectively or to the people." (US Const, Amend 10) In other words, any area not explicitly given to federal authority by the Constitution is an area where states have exclusive jurisdiction, and the federal government is powerless.

Constitutional Control of Commercial Activity

Despite this simple formula, there exists considerable tension between the federal and state governments regarding the extent of their respective domains. Consider the Constitution's interstate commerce clause: "Congress shall have power to regulate commerce with foreign Nations and among the several States and with the Indian Tribes." (US Const, Art I [section] 8) The quoted language is all there is to this clause, and it appears to have little substance and rather limited scope. However, this short sentence has had a profound impact on the development of commercial law (and a great deal of other law) in the United States.

How is this so? Congress, in passing laws and the courts, in interpreting this provision, have taken the position that anything which affects interstate commerce - even remotely - can be regulated by Congress. This frequently supercedes or eliminates the ability of the states to regulate in areas where the commerce clause is deemed to be in effect. This federal preemption is a matter of considerable consequence, since the 10th Amendment would otherwise preclude federal regulation in many of these areas.

Examples of subjects deemed matters within the scope of the interstate commerce clause are wage and hour provisions for stockyard workers (Stafford v. Wallace, 258 US 495, 42 S.Ct., 397, 66 L.Ed. 735 [1922]), racial discrimination at a barbecue restaurant (Katzenbach v. McClung, 379 US 294, 85 S.Ct. 377, 13 L.Ed.2d 290 [1964]), loan-sharking (Perez v. United States, 402 US 146, 91 S.Ct. 1357, 28 L.Ed.2d 686 [1971]), and the growing of wheat for personal use (Wickard v. Filburn, 317 US 111, 63 S.Ct. 82, 87 L.Ed.2d 122 [1942]), among many others.

The federal government's ability to regulate within an area is significant because federal regulation means that a single, nationwide scheme may be in effect, rather than potentially dozens of conflicting or overlapping state schemes. On the other hand, federal regulatory schemes are usually more pervasive and detailed than state schemes, and the federal government's ability to enforce them is greater than that of most states, due to the federal government's greater resources. This may mean far more intrusive regulation and enforcement.

State vs. Federal Control

In typical American fashion, however, preemption of state regulation by federal regulation is by no means a sure thing. The Constitution provides that federal regulation and "the laws of the United States which shall be made in Pursuance thereof...shall be the Supreme law of the Land..." (US Const, Art VI, para. 2), and state laws are preempted if they are "an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." (Jones v. Rath Packing Co., 430 US 519, 97 S.Ct. 1305, 51 L.Ed.2d 604 [1977])

The question is, do state laws stand as such obstacles? Often, the question boils down to whether the federal government intended to completely eliminate state regulation, for example, by intending a uniform national system of regulation (e.g., 21 C.F.R. Part 808, Exemptions from Federal Preemption of State and Local Medical Device Requirements) or whether the federal government merely intends its scheme to be a base set of regulations, from which the states can deviate by imposing higher standards if they choose. In some cases, federal regulation can even authorize or rescue a state regulatory action that might be improper for a state to enact without federal legitimization (e.g., Prudential Insurance Co. v. Benjamin [1946], wherein a state scheme authorizing discriminatory taxation of out-of-state insurance companies was upheld due to a federal statute authorizing state control in this area).

Effects on Information Management

The complexities of these doctrines have considerable day-to-day importance in information management. Many areas of regulation - for example, employment - operate under a system of concurrent federal-state laws. Thus, employers face a plethora of state and federal laws, all equally binding and enforceable.

If a federal law requires that a record be kept for some period of time, and the state law requires a shorter period, the federal law preempts the shorter state period, and the record must be kept for the longer federal period. On the other hand, such federal laws are often intended as minimums, with the states free to choose a more restrictive scheme (e.g., 40 C.F.R. sec. 50.2 (d), "The proposal, promulgation, or revision of national primary and secondary ambient air quality standards shall not prohibit any state or Indian country from establishing ambient air quality standards for that state or area under a tribal CAA program or any portion thereof which are more stringent than the national standards"). If the state law mandates a longer retention period than the federal law, then the state law wins, and the record must be retained for the longer state period.

Finally, in some areas, Congress permits state regulation subject to federal approval. For example, states typically draft and manage air pollution attainment plans, but such plans are subject to the approval of the Environmental Protection Agency (e.g., 40 C.F.R. sec. 61.02, "[N]o State or political subdivision of a State may establish or continue in effect any requirement with respect to a medical device intended for human use having the force and effect of law [whether established by statute, ordinance, regulation, or court decision], which is different from, or in addition to, any requirement applicable to such device under any provision of the act and which relates to the safety or effectiveness of the device or to any other matter included in a requirement applicable to the device under the act"). In such a case, the federal law effectively preempts state action and the state is operating as a semiautonomous agency of the federal government.

How does one know that the federal law is intended to preempt state regulation? Sometimes, the federal statute in question explicitly states an intention to preempt state regulation (21 C.F.R. 808.1 [b]), but often, one does not know; there may simply be both federal and state law in an area, with no indication of whether there is conflict or preemption. A lawsuit may be necessary to decide the question, since the states may already have their own laws on the books, or may resent the intrusion of the federal government. In resolving the dispute, the courts consider such factors as the pervasiveness of the federal scheme, the potential for conflicts between state and federal schemes, whatever congressional intent can be gleaned, and similar matters. Even when congressional intent is clear, there may still be litigation if the states feel that Congress overstepped its authority in preempting state action.

A further complication is that, in some areas (for example, workplace safety regulation), many states lack the desire or resources to regulate more extensively than the federal government. These states may simply adopt the federal scheme in its entirety, either by copying the federal laws on the subject, or by passing a law adopting the federal regulations by reference (e.g., the New Mexico Occupational Health and Safety Regulations).

For the information manager, this tangle of jurisdictional questions has the effect of producing both uncertainty and much additional legal research in uncovering all laws potentially governing an information set.

Indirect Federal Control

Federal control, sometimes very pervasive, often extends to areas where the federal government has no authority to legislate. How can this be?

The Constitution provides that "Congress shall have Power to lay and collect taxes...and provide for the...general Welfare of the United States." (US Const, Art I [section] 8) This is the so-called "power of the purse," the ability to control states' activities by controlling the monetary aspects rather than the activities themselves. Thus, many tax schemes are not designed to raise revenue, but to further what Congress has deemed a worthy societal goal - for example, raising taxes on tobacco products to reduce smoking by children, or giving tax incentives to organizations that use solar energy.

Many others use the power of the purse another way: federal money is provided for some desirable purpose, but with strings attached. Information managers in both government and private organizations often encounter this. Federal grant money is available for some activity, but many conditions, usually including requirements for collection, reporting, and recordkeeping are attached to it, and the recipient must contractually agree to them (e.g., 10 C.F.R. Part 455, Grant Programs for Schools and Hospitals and Buildings Owned by Units of Local Government and Public Care Institutions). Refusal to comply with the conditions precludes access to the money.

Where federal money provides the funding for an activity, and states or other entities accept it, federal conditions effectively preempt any notions the states may have had on how to regulate the area. For example, highway speed limits. Notwithstanding strong opposition from many states and many constituent groups, the federal government for many years imposed a uniform national speed limit by simply making the availability of federal highway construction funds conditional upon a state's adoption of a 55 mph speed limit. Since federal funds typically account for as much as 90 percent of a state's highway funding, the states had little choice but to comply. This introduces a strong federal regulatory component in areas that would otherwise be completely out of the federal arena.

Another Area of Influence

The Constitution and its interpretation also have considerable influence on day-to-day commercial activity. Consider the stricture that "Congress shall make no law...abridging the freedom of speech..." (US Const, Amend I) This provision is binding on the states as well because "No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States..." (US Const, Amend XIV) Personal and political speech enjoys strong protection under the terms of this provision and its attendant case law. But what of commercial speech advertising, signs, and the like?

Such forms of speech enjoy substantially less protection than political or personal expression. For example, false, deceptive, or misleading commercial speech enjoys no constitutional protection (Friedman v. Rogers, 440 U.S. 1, 99 S.Ct. 887, 59 L.Ed.2d 100 [1979]). General regulation of speech is allowed if the regulation furthers a substantial government interest (e.g., Central Hudson Gas & Electric Co. v. Public Service Commission, 447 U.S. 557, 100 S.Ct. 2343, 65 L.Ed.2d 341 [1980]).

This standard is considerably lower than that used for personal or political expression, the so-called "strict scrutiny" standard. Other doctrines that severely limit the government's ability to regulate personal or political speech are also inapplicable to commercial speech. Examples include the Overbreadth Doctrine, which forbids regulation of speech that is broader than necessary to accomplish its goal (e.g., Bates v. State Bar of Arizona, 433 U.S. 350, 97 S.Ct. 2691, 53 L.Ed.2d 810 [1977]), and the Prior Restraint doctrine, which forbids anticipatory regulation of speech (e.g., Central Hudson Gas & Electric Co. v. Public Service Commission, supra). On the other hand, courts have overturned blanket prohibitions on commercial speech, such as advertising bans (e.g., Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 US 748, 96 S.Ct. 1817, 48 L.Ed.2d 346 [1976]).

What constitutes commercial vs. non-commercial speech? There is no consistent answer. Many materials from commercial organizations are a combination of outright advertising or public affairs information. Inclusion of public affairs information in an advertising brochure does not necessarily render it commercial, nor does the reference to a product or commercial motivation for the information offering. Courts decide on a case-by-case basis, based upon the total mix of factors (Bolger v. Young Drug Products Corp., 463 US 60, 103 S.Ct. 2875 77 L.Ed.2d 469 (1983), New York Times v. Sullivan 376 U.S. 254, 84 S.Ct. 710, 11 L.Ed.2d 686 [1964]).

Consider the impact of these provisions on the Internet and World Wide Web. The Internet provides enormous opportunities to disseminate information to virtually everyone interested in receiving it. Web pages are often a complex mixture of outright commercial solicitation and valuable reference material provided as a lure to get consumers to visit the site. Web pages are a fertile source of detailed technical, social, and other information, and an equally fertile source of misinformation. In addition, the Internet delivers information on a range of topics considered socially unacceptable by some and of interest to others, many of which already have a long history of free speech litigation that is likely to continue. Regulating this vast ocean of instant and universally available information is the subject of considerable debate, and the constitutional doctrines governing speech will have a considerable effect upon the outcome.

Due Process of Law

Finally, promulgation, enforcement, or violation of a law has constitutional implications as well. "No person shall be...deprived of life, liberty, or property, without due process of law..." (US Const, Amend V) This provision also applies directly to the states: "Nor shall any State deprive any person of life, liberty or property, without due process of law." (US Const, Amend XIV) Due process of law is a vague and elastic concept, subject to many variations depending upon the circumstances; generally, due process requires fair treatment and fair procedures in enforcing a law against any individual or entity when life, liberty, or property interests are at stake. Thus, for example, if a business or occupation requires a government permit, revoking the permit requires at least an opportunity for a hearing (e.g., Barry v. Barachi, 443 U.S. 55 [1979]).

Procedures that arbitrarily deprive individuals or entities of due process are stricken down by the courts when challenged (Logan v. Zimmerman Brush Co., 455 U.S. 422 [1982] [procedural rule whereby complaint dismissed if a commission did not schedule a hearing within 120 days stricken down because commission had total control of its scheduling, and complainant had no input or control at all]). So, state and federal agencies (and the courts) generally have well-defined, published procedures for hearings, and other devices for adjudicating disputes whenever such an interest is at stake (40 C.F.R. Part 24, Rules Governing Issuance of and Administrative Hearings on Interim Status Corrective Action Orders [environmental requirements hearings]).

On the other hand, legislative and rulemaking processes are not deemed to have a constitutional due process component, so both statutes and regulations may be passed without the constitutional necessity of due process of law (Florida v. East Coast Railway, 410 US 224 [(1973] [evidentiary hearings unnecessary in ICC proceeding to set nationwide rail charges]).

Public interest in legislation is considered adequately served by the political and electoral process, and administrative rule-making receives public input through the provisions of the Administrative Procedure Act, in one form or another, in all of the states and the federal arena. Thus, the information manager has no constitutional right to give input into the wording of a statute or regulation, only the right to a hearing or other reasonable procedure when he or she violates it.

The Constitution and its attendant case law have an enormous influence on a variety of information-related issues. As our economy becomes more information oriented and global, this influence and its importance will only rise.

John C. Montana, J.D., is "chief records brain" of BrainCare, a records management consulting firm. Montana specializes in records retention and destruction and the legal requirements and ramifications of records retention. He is also a practicing attorney. He may be reached at [e-mail].