"Dormant Commerce" and Corporate Powers

Some reflections on the decision in Mallory.

Yesterday the Court reversed in Mallory v. Norfolk Southern Railway Co., upholding personal jurisdiction under consent-by-registration statutes. Importantly, the Court distinguished between two different legal questions. Whether a state can use consent as a basis for personal jurisdiction is reviewed under the Due Process Clause of the Fourteenth Amendment. But whether it can offer particular inducements to secure that consent, like the right to conduct local business, is reviewed under other doctrines such as dormant commerce. Justice Alito expressed serious skepticism about Pennsylvania's law on the latter point, but he joined the majority of the Court in leaving the issue open (see footnote 3), to be decided (if at all) on remand.

All that seems quite right to me.  As I've argued here before, the relevant source of law for personal jurisdiction isn't the Fifth or Fourteenth Amendments, but rules of general and international law. Taking away someone's property under a jurisdictionless judgment is a deprivation without due process, so the Fourteenth Amendment's Due Process Clause let federal courts review how a state had applied the general rules.

Under those rules, each state had jurisdiction over its own corporations. It also might have jurisdiction over other corporations allowed to operate within its borders, given that doing so required the state's consent. But once the Court recognized a dormant commerce right for corporations to operate across state borders, consent or no, this theory no longer worked. The doctrine changed to an amorphous notion of "corporate presence," which  soon fell apart under its own weight and was replaced by International Shoe. That quieted these sorts of dormant-commerce questions for a long time, until Pennsylvania's law finally pressed the consent issue in Mallory.

So what should happen if "Mallory II," returning from remand, poses the dormant commerce problem directly?

Under current caselaw, Justice Alito's skepticism seems justified. Forcing out-of-state corporations to answer suits totally unrelated to the forum might well dissuade them from operating across state lines; not every corporation will be willing to incur that exposure, or will tolerate the complications of running fifty separate state-level subsidiaries. So if the Pike test for a dormant commerce violation is whether the burden on interstate commerce is clearly excessive in relation to the local benefits, then one doesn't have to work too hard to imagine a draft opinion finding such a burden here.

(Note that there might be intermediate cases: a state might require corporations to accept France-style plaintiff-based jurisdiction, letting any local citizen sue a registered corporation regardless of where the claim arose, something it couldn't do in the absence of a registration statute. That kind of statute might be quite popular, and it might pass Pike's balancing test even if Pennsylvania's statute doesn't.)

But what if we look past the current caselaw? What follows are my tentative thoughts on the Founding-era law of corporate jurisdiction, and how it would have handled a case like Mallory.

To begin with, a central point: states don't have to have corporate law. We're used to a world of general corporation acts, in which anyone can form a corporation who wants to. But at the Founding, creating a corporation was an important and unusual legal event, and it might have even needed explicit permission from a stingy legislature. States could create thousands of corporations, or handfuls, or no corporations at all.

Moreover, nothing in the Constitution or its amendments changed this. The Fourteenth Amendment does not enact the Delaware General Corporation Law.

So what does this mean for commerce? Imagine that six Pennsylvanians want to run a lemonade stand together in Pennsylvania. If they want to own Pennsylvania property and enter Pennsylvania contracts under the name of some legal entity rather than their own, they'd need a right to do that under Pennsylvania law, and they might have to ask Pennsylvania's legislature for permission. If they write to the Virginia Secretary of State's office and form a Virginia corporation instead, that might give them a right to own property and enter contracts in Virginia—but not in Pennyslvania, where Virginia's law doesn't apply. In Pennsylvania, a group of six Pennsylvanians can't hold property in the name of some imaginary entity ("Lemonade-R-Us"?) any more than the Corleone Family can hold property in the Family's name: they're not a legal entity here, just a group of individuals, whatever the government of Sicily might think. If Pennsylvania refuses them permission (or requires consent to general jurisdiction!), it wouldn't be a forbidden regulation of interstate commerce; it'd be a domestic regulation of the corporate form.

In practice, these distinctions are often muddied by comity principles. Most states will, as a matter of comity, let people who formed a corporation under some other jurisdiction's law exercise corporate privileges here too. They were doing that back in the 1830s, for very good reasons. But they don't have to.

More importantly, this kind of mutual recognition by comity is very different from imagining a group of six Pennsylvanians as actually being an "out-of-state entity" entering or leaving a local market, something that ordinarily sets our Commerce Clause antennae a-quivering. The fin-de-siècle Court's mistake was in taking the corporate metaphor too literally—imagining an "out-of-state corporation" like "Lemonade-R-Us," not as six Pennsylvanians in a trenchcoat, but as some actual object or actor that might actually cross borders. Objects and actors actually crossing borders are actual subjects of constitutional concern! But corporate persons "cross borders" only in a figurative sense; unlike actual persons, their right to act depends on the law. Under Article IV, a Virginian has just as much right as a Pennsylvanian to set up a lemonade stand in Pennsylvania. But a Virginia corporation isn't a citizen of Virginia; state-created corporations never enjoyed and were never given the privileges and immunities of citizens in other states. (As Chief Justice Marshall put it, "that mere legal entity, a corporation aggregate, is certainly not a citizen," though it may sometimes be able to exercise "the rights of the members . . . in their corporate name.")

If we understand a "Virginia corporation" as standing in for a group of people, whether citizens of Virginia or not, given a privilege by Virginia's legislature to do things together that they couldn't do independently, it becomes obvious that nothing in the Constitution gives those same people a right to own and run collectively a lemonade stand in Pennsylvania. The "dormant" Commerce Clause might address the cross-border movement of goods or people; but the only cross-border movement here involves letters to and from the Virginia Secretary of State's office, which Pennsylvania isn't doing anything to stop. The Privileges and Immunities Clause might put Virginians on an equal footing with Pennsylvanians; but it doesn't say anything about the powers of the Virginia legislature, nor does it let that legislature dictate how Pennsylvanians can own or use their property at home. And the Equal Protection Clause might—under its modern reading—stop irrational discrimination designed to extract wealth from out-of-state shareholders; but it wouldn't prevent Pennsylvania from adopting rational social and economic legislation, imposing a standard list of conditions on all persons who want to exercise corporate privileges within its own borders.*

So does the Constitution do anything to let corporations act in other states? Only indirectly. For example, if Congress wanted to, it could mandate interstate recognition of corporate privileges under the "Effect Clause" of the Full Faith and Credit Clause, giving state-created corporations a federal right to act in other states. Or, under the "wakeful" Commerce Clause (and the Necessary and Proper Clause), Congress could give a corporation an affirmative right to carry its corporate privileges along when engaging in trade and traffic across state lines. Or Congress could do the same thing implicitly: awarding a corporation a coasting license to carry goods among the states might impliedly preempt any state restrictions on its corporate privileges wherever federal law empowers it to go. And finally, if the "exclusive power" theory of the Commerce Clause is right, then maybe you don't even need a federal license; maybe Pennsylvania just can't stop a corporate entity from engaging in interstate commerce on its territory, on the theory that this would be "repugnant to the power to regulate commerce in its dormant state." (Would that also work for foreign entities, if there's a Foreign Commerce Clause too? Even the Corleone Family?) But even this logic wouldn't extend to a right to conduct wholly intrastate commerce inside Pennsylvania's borders, like setting up a lemonade stand (assuming, contra Wickard, that such a category exists).

For a long time in the twentieth century, courts argued about what kinds of activities were intrastate enough for a corporation engaging in them to be subject to local licensure or registration requirements. For reasons specific to this case, Norfolk Southern argued in the Pennsylvania courts that it was engaged in some wholly intrastate activities, in addition to the interstate work it did. That might complicate their arguments in any "Mallory II," so it's possible that these original-history questions wouldn't even come up.

But as this case shows, the Court seems to be recognizing the need to revisit its horizontal-federalism jurisprudence. As the Court recently noted in Pork Producers, it's often forced "to mediate competing claims of sovereign authority," without any specific constitutional clause on which to hang its hat. Obviously Pennsylvania can't set speed limits in Virginia, and vice versa; but what part of the Constitution actually says so? My own sense is that many of these rules were "constitutional backdrops" governed by rules of general and international law, which the Founders already used to mediate competing claims of authority among sovereigns, and which the Constitution shielded from various forms of interference even as it left their content in place. Sometimes the text secured these rules through a new institution: say, a Congress that could "prescribe . . . the Effect" of state laws in other states. Sometimes the text secured them through a new mode of procedure: say, a diversity jurisdiction in which federal courts would apply a standardized set of choice-of-law rules,  enforcing state laws only "in cases where they apply." And sometimes the text might have been secured them through more substantive means; perhaps, in a view to which I'm increasingly drawn, under the Privileges or Immunities Clause of the Fourteenth Amendment, which could have given constitutional-law teeth to the general-law limits on a state's police powers. In that case, Justice Alito's discussion of the Privileges or Immunities Clause as a guarantor of crucial rights, and of the due process clause as a "refuge of sorts for constitutional principles that are not 'procedural' but would otherwise be homeless[,] … having been exiled from the provisions in which they may have originally been intended to reside," may turn out be rather prescient.

 

 

---

* This is assuming the modern reading of the EPC as guaranteeing "the protection of equal laws," per Yick Wo, rather than of securing equality in the "protection of the laws," the remedial devices of the legal system (like courts and police) that protect rights already held, per Christopher Green. Given that an artificial entity's power to sue and be sued has to be affirmatively granted, and isn't guaranteed by the Privileges and Immunities Clause the way it would be for citizens, the original Equal Protection Clause wouldn't have done much to let a Virginia corporation operate without permission in other states.

Update 7:43 p.m.: fixed various typos/infelicities.

Update 6/29 8:17 a.m.: added reference to Congress's institutional role.