Article I, Section 8, Clause 3 — Historical Background

ArtI.S8.C3.5.1 Sherman Antitrust Act of 1890 and Sugar Trust Case

To curb the growth of industrial combinations, Congress passed the Sherman Antitrust Act (Sherman Act) in 1890. Under the Sherman Act, Congress sought to regulate commerce as “traffic.” The Sherman Act prohibited “every contract, combination in the form of trust or otherwise,” or “conspiracy in restraint of trade and commerce among the several States, or with foreign nations”¹ and made it a misdemeanor to “monopolize or attempt to monopolize any part of such commerce.”²

In 1895, the Court considered the Sherman Act in United States v. E. C. Knight Co. (Sugar Trust C)³ in which the government asked the Court to cancel certain agreements whereby the American Sugar Refining Company had acquired “nearly complete control of the manufacture of refined sugar in the United States.”⁴ The Court rejected the government’s claim on the grounds that the activities of the Sugar Trust had only an indirect effect on commerce, which Congress’s Commerce Clause powers did not reach. Although the Court did not directly rule on the Sherman Act’s constitutional validity, it analyzed the scope of Congress’s commerce power when considering what activities the Sherman Act barred. Explaining the federal government’s role in mitigating commercial power, Chief Justice Melville Fuller stated:

[T]he independence of the commercial power and of the police power, and the

delimitation between them, however sometimes perplexing, should always be

recognized and observed, for, while the one furnishes the strongest bond of union, the

other is essential to the preservation of the autonomy of the States as required by our

dual form of government; and acknowledged evils, however grave and urgent they may

appear to be, had better be borne, than the risk be run, in the effort to suppress them,

of more serious consequences by resort to expedients of even doubtful

constitutionality.⁵

The E. C. Knight Court reasoned that a hard and fast line should exist between commercial and police powers based on (1) production being local and subject to state oversight; (2) commerce among the states does not begin until goods “commence their final movement from their State of origin to their destination;” (3) a product’s sale is merely an incident of its production and, while capable of “bringing the operation of commerce into play,” affects it only incidentally; (4) such restraint as would reach commerce, as just defined, in consequence of combinations to control production “in all its forms,” would be “indirect, however inevitable and whatever its extent,” and as such beyond the purview of the Act.⁶ Applying this reasoning, the E. C. Knight Court stated:

The object [of the combination] was manifestly private gain in the manufacture of the

commodity, but not through the control of interstate or foreign commerce. It is true that

the bill alleged that the products of these refineries were sold and distributed among

the several States, and that all the companies were engaged in trade or commerce with

the several States and with foreign nations; but this was no more than to say that trade

and commerce served manufacture to fulfill its function.⁷

. . . [I]t does not follow that an attempt to monopolize, or the actual monopoly of, the

manufacture was an attempt, whether executory or consummated, to monopolize

commerce, even though, in order to dispose of the product, the instrumentality of

commerce was necessarily invoked. There was nothing in the proofs to indicate any

intention to put a restraint upon trade or commerce, and the fact, as we have seen, that

trade or commerce might be indirectly affected was not enough to entitle complainants

to a decree.⁸

Four years later, in Addyston Pipe and Steel Co. v. United States,⁹ the Court applied the Sherman Act to hold an industrial combination unlawful. The defendants in Addyston were manufacturing concerns that had effected a division of territory among them, which the Court held to be a “direct” restraint on the distribution and transportation of the products of the contracting firms. In reaching its holding, however, the Court did not question E. C. Knight, which remained substantially undisturbed until the Court’s 1905 Swift decision.¹⁰

ArtI.S8.C3.5.2 Current of Commerce Concept and 1905 Swift Case

In Swift & Co. v. United States, Justice Oliver Wendell Holmes referred to a “current of commerce” in providing a more expansive interpretation of the Commerce Clause. Swift concerned some thirty firms that bought livestock at stockyards, processed it into fresh meat, and then sold and shipped the fresh meat to purchasers in other states. The government alleged that the defendants had agreed, among other things, not to bid against each other in local markets, to fix prices, and to restrict meat shipments. On appeal to the Supreme Court, the defendants contended that some of the acts they were charged with were not acts in interstate commerce and consequently not covered by the Sherman Act. The Court ruled in favor of the government on the ground that the Sherman Act covered the “scheme as a whole” and that the local activities alleged were part of this general scheme.¹ Explaining why Congress’s Commerce Clause power extended to acts that occurred within a single state, Justice Oliver Wendell Holmes reasoned:

Commerce among the States is not a technical legal conception, but a practical one,

drawn from the course of business. When cattle are sent for sale from a place in one

State, with the expectation that they will end their transit, after purchase, in another,

and when in effect they do so, with only the interruption necessary to find a purchaser

at the stockyards, and when this is a typical, constantly recurring course, the current

thus existing is a current of commerce among the States, and the purchase of the cattle

is a part and incident of such commerce.²

Likewise, the Court held that, even if title passed at the slaughterhouses, the sales were to persons in other states and shipments to such states were part of the transaction.³ Thus, in Swift, the Court deemed sales to be part of the stream of interstate commerce if they enabled the manufacturer “to fulfill its function” although ten years earlier the Court had held in United States v. E. C. Knight Co (Sugar Trust Case)⁴ that such sales were immaterial.

Thus, in Swift, the Court appeared to return to Chief Justice John Marshall’s concept of commerce as traffic, which he had explored in Gibbons v. Ogden. As a result, activities that indirectly affected interstate trade could be deemed interstate commerce. The Swift Court stated: “But we do not mean to imply that the rule which marks the point at which state taxation or regulation becomes permissible necessarily is beyond the scope of interference by Congress in cases where such interference is deemed necessary for the protection of commerce among the States.”⁵ The Court also held that combinations of employees who engaged in intrastate activities such as manufacturing, mining, building, construction, and distributing poultry could be subject to the Sherman Act because of the effect, or intended effect, of these activities on interstate commerce.⁶

ArtI.S8.C3.5.3 Packers and Stockyards Act of 1921 and Grain Futures Act of 1922

In 1921, Congress passed the Packers and Stockyards Act,¹ which brought the livestock industry in the country’s chief stockyards under federal supervision. In 1922, Congress passed the Grain Futures Act² to regulate grain futures exchanges. In sustaining these laws, the Court relied on Swift & Co. v. United States. For example, in Stafford v. Wallace,³ which involved the Packers and Stockyards Act, Chief Justice William Taft stated:

The object to be secured by the act is the free and unburdened flow of livestock from the

ranges and farms of the West and Southwest through the great stockyards and

slaughtering centers on the borders of that region, and thence in the form of meat

products to the consuming cities of the country in the Middle West and East, or, still as

livestock, to the feeding places and fattening farms in the Middle West or East for

further preparation for the market.⁴

The Stafford Court reasoned the stockyards were “not a place of rest or final destination.”⁵ Instead, they were “but a throat through which the current flows,” and the sales there were not “merely local transactions. [T]hey do not stop the flow . . . but, on the contrary, [are] indispensable to its continuity.”⁶

In Chicago Board of Trade v. Olsen,⁷ involving the Grain Futures Act, the Court followed the reasoning in Stafford. Discussing Swift, Chief Justice Taft remarked:

[Swift] was a milestone in the interpretation of the commerce clause of the

Constitution. It recognized the great changes and development in the business of this

vast country and drew again the dividing line between interstate and intrastate

commerce where the Constitution intended it to be. It refused to permit local incidents

of a great interstate movement, which taken alone are intrastate, to characterize the

movement as such.⁸

In Olsen, the Court examined how futures sales relate to cash sales and impact the interstate grain trade. Writing for the Court, Chief Justice Taft stated: “The question of price dominates trade between the States. Sales of an article which affect the country-wide price of the article directly affect the country-wide commerce in it.”⁹ Thus, a practice that demonstrably affects prices would affect interstate trade “directly” and, even though local in itself, would be subject to Congress’s regulatory power under the Commerce Clause. In Olsen, Chief Justice Taft also stressed the importance of congressional deference. He stated:

Whatever amounts to more or less constant practice, and threatens to obstruct or

unduly to burden the freedom of interstate commerce is within the regulatory power of

Congress under the commerce clause, and it is primarily for Congress to consider and

decide the fact of the danger to meet it. This court will certainly not substitute its

judgment for that of Congress in such a matter unless the relation of the subject to

interstate commerce and its effect upon it are clearly nonexistent.¹⁰

ArtI.S8.C3.5.4 New Deal Legislation Generally

Several days after President Franklin D. Roosevelt’s first inauguration, Chief Justice Charles Evans Hughes described a problem the new Administration faced, stating: “When industry is grievously hurt, when producing concerns fail, when unemployment mounts and communities dependent upon profitable production are prostrated, the wells of commerce go dry.”¹ Congress’s legislative response to the Great Depression marked a significant expansion of federal economic regulation. Congress did not limit itself to regulating traffic among the states and the instrumentalities thereof. It also attempted to govern production and industrial relations in the field of production, areas over which states had historically exercised legislative power. Confronted with this expansive exercise of congressional power, the Court reexamined Congress’s interstate commerce power.

ArtI.S8.C3.5.5 National Industrial Recovery and Agricultural Adjustment Acts of 1933

Passed on June 16, 1933, the National Industrial Recovery Act (NIRA) marked Congress’s initial effort to address the Great Depression.¹ NIRA recognized the existence of “a national emergency productive of widespread unemployment and disorganization of industry” that burdened “interstate and foreign commerce,” affected “the public welfare,” and undermined “the standards of living of the American people.” To alleviate these conditions, NIRA authorized the President to approve “codes of fair competition” if industrial or trade groups applied for such codes, or to prescribe such codes if there were no applications. Among other things, NIRA required the codes to provide certain guarantees respecting hours, wages, and collective bargaining.²

In A. L. A. Schechter Poultry Corp. v. United States,³ the Supreme Court held the Live Poultry Code to be unconstitutional. Although practically all poultry Schechter handled came from outside the state, and hence via interstate commerce, the Court held that once the chickens arrived in Schechter’s wholesale market, interstate commerce in them ceased. Although NIRA purported to govern business activities that “affected” interstate commerce, Chief Justice Charles Hughes interpreted “affected” to mean “directly” affect commerce. He stated:

[T]he distinction between direct and indirect effects of intrastate transactions upon

interstate commerce must be recognized as a fundamental one, essential to the

maintenance of our constitutional system. Otherwise, . . . there would be virtually no

limit to the federal power and for all practical purposes we should have a completely

centralized government.⁴

In short, the Court appeared to have returned in Schechter to the rationale of the Sugar Trust case.⁵

Congress next attempted to address the Depression through the Agricultural Adjustment Act of 1933 (AAA).⁶ The Court, however, set the AAA aside in United States v. Butler on the grounds that Congress had attempted to regulate production in violation of the Tenth Amendment.⁷

ArtI.S8.C3.5.6 Railroad Retirement and Securities Exchange Acts of 1934

To assist commerce and labor, Congress passed the Railroad Retirement Act (RRA) in 1934,¹ which ordered compulsory retirement for superannuated employees of interstate carriers and provided they receive pensions from a fund comprised of the compulsory contributions from the carriers and the carriers’ present and future employees. In Railroad Retirement Board v. Alton Railroad,² however, a closely divided Court held the RRA to exceed Congress’s Commerce Clause power and to violate the Due Process Clause of the Fifth Amendment. Writing for the majority, Justice Owen Roberts stated:

We feel bound to hold that a pension plan thus imposed is in no proper sense a

regulation of the activity of interstate transportation. It is an attempt for social ends to

impose by sheer fiat noncontractual incidents upon the relation of employer and

employee, not as a rule or regulation of commerce and transportation between the

States, but as a means of assuring a particular class of employees against old age

dependency. This is neither a necessary nor an appropriate rule or regulation affecting

the due fulfillment of the railroads’ duty to serve the public in interstate

transportation.³

In dissent, Chief Justice Charles Hughes contended that “the morale of the employees [had] an important bearing upon the efficiency of the transportation service.”⁴ He added:

The fundamental consideration which supports this type of legislation is that industry

should take care of its human wastage, whether that is due to accident or age. That

view cannot be dismissed as arbitrary or capricious. It is a reasoned conviction based

upon abundant experience. The expression of that conviction in law is regulation.

When expressed in the government of interstate carriers, with respect to their

employees likewise engaged in interstate commerce, it is a regulation of that

commerce. As such, so far as the subject matter is concerned, the commerce clause

should be held applicable.⁵

In subsequent legislation, Congress levied an excise on interstate carriers and their employees, while by separate but parallel legislation, it created a fund in the Treasury from which pensions would be paid along the lines of the original plan. The Court did not appear to question the constitutionality of this scheme in Railroad Retirement Board v. Duquesne Warehouse Co.⁶

New Deal legislation did not necessarily require expansive interpretations of congressional power. The Securities Exchange Act of 1934⁷ created the Securities and Exchange Commission (SEC), authorized the Commission to promulgate regulations to keep dealings in securities honest, and closed the channels of interstate commerce and the mails to dealers refusing to register under the Act.

ArtI.S8.C3.5.7 Public Utility Holding Company and Bituminous Coal Conservation Acts of 1935

In 1935, Congress passed the Public Utility Holding Company Act (“Wheeler-Rayburn Act”)¹ and the Bituminous Coal Conservation Act.² The Wheeler-Rayburn Act required covered companies to register with the Securities and Exchange Commission and report on their business, organization, and financial structure or be prohibited from using mails and other interstate commerce facilities. Under Section 11, the so-called “death sentence” clause, the Wheeler-Rayburn Act closed channels of interstate communication after a certain date to certain types of public utility holding companies whose operations, Congress found, were calculated chiefly to exploit the investing and consuming public. In a series of decisions, the Court sustained these provisions,³ relying principally on Gibbons v. Ogden.

The Court, however, disallowed the Guffey-Snyder Bituminous Coal Conservation Act (BCCA) of 1935,⁴ which regulated the price of soft coal that was sold both in interstate commerce and “locally,” and the hours of labor and wages in the mines. The BCCA declared these provisions to be separable, so that the invalidity of one set would not affect the validity of the other. However, a majority of the Court, in an opinion written by Justice George Sutherland, held that (1) these provisions were not separable because the BCCA constituted one connected scheme of regulation, and (2) the BCCA was unconstitutional because it invaded the reserved powers of the states over conditions of employment in productive industry.⁵ Taking Chief Justice Charles Hughes’ assertion in A. L. A. Schechter Poultry Corp. v. United States of the “fundamental” distinction between “direct” and “indirect” effects, which, in turn, drew upon the Sugar Trust, Justice Sutherland stated:

Much stress is put upon the evils which come from the struggle between employers and

employees over the matter of wages, working conditions, the right of collective

bargaining, etc., and the resulting strikes, curtailment and irregularity of production

and effect on prices; and it is insisted that interstate commerce is greatly affected

thereby. But . . . the conclusive answer is that the evils are all local evils over which

the Federal Government has no legislative control. . . . Such effect as they may have

upon commerce, however extensive it may be, is secondary and indirect. An increase in

the greatness of the effect adds to its importance. It does not alter its character.⁶

ArtI.S8.C3.5.8 National Labor Relations Act of 1935

In NLRB v. Jones & Laughlin Steel Corporation, the Court reduced the distinction between “direct” and “indirect” effects, thereby enabling Congress to regulate productive industry and labor relations.¹ The National Labor Relations Act (NLRA) of 1935² granted workers a right to organize, forbade unlawful employer interference with this right, established procedures for workers to select representatives with whom employers were required to bargain, and created a board to oversee these processes.³

In an opinion by Chief Justice Charles Hughes, the Court upheld the NLRA, stating: “The close and intimate effect, which brings the subject within the reach of federal power may be due to activities in relation to productive industry although the industry when separately viewed is local.”⁴ Considering defendant’s “far-flung activities,”⁵ the Court expressed concern about strife between the industry and its employees, stating:

We are asked to shut our eyes to the plainest facts of our national life and to deal with

the question of direct and indirect effects in an intellectual vacuum. When industries

organize themselves on a national scale, making their relation to interstate commerce

the dominant factor in their activities, how can it be maintained that their industrial

labor relations constitute a forbidden field into which Congress may not enter when it

is necessary to protect interstate commerce from the paralyzing consequences of

industrial war? We have often said that interstate commerce itself is a practical

conception. It is equally true that interferences with that commerce must be appraised

by a judgment that does not ignore actual experience.⁶

The Court held the NLRA to be within Congress’s constitutional powers because a strike that interrupted business “might be catastrophic.”⁷ The Court also held that the NLRA applied to (1) two minor concerns,⁸ (2) a local retail auto dealer on the ground that he was an integral part of a manufacturer’s national distribution system,⁹ (3) a labor dispute arising during alteration of a county courthouse because one-half of the cost was attributable to materials shipped from out-of-state,¹⁰ and (4) a dispute involving a local retail distributor of fuel oil that it obtained from a wholesaler who imported it from another state.¹¹ The Court stated: “This Court has consistently declared that in passing the National Labor Relations Act, Congress intended to and did vest in the Board the fullest jurisdictional breadth constitutionally permissible under the Commerce Clause.”¹² Thus, the Court implicitly approved the National Labor Relations Board’s jurisdictional standards, which assumed a prescribed dollar volume of business had a requisite effect on interstate commerce.¹³

ArtI.S8.C3.5.9 Agricultural Marketing Agreement Act of 1937

By passing the Agricultural Marketing Agreement Act (AMAA) on June 3, 1937,¹ Congress sought to bolster agriculture by authorizing the Secretary of Agriculture to fix the minimum prices of certain agricultural products, when the handling of such products occurs “in the current of interstate or foreign commerce or . . . directly burdens, obstructs or affects interstate or foreign commerce in such commodity or product thereof.” In United States v. Wrightwood Dairy Co.,² the Court sustained an order of the Secretary of Agriculture that fixed the minimum prices to be paid to producers of milk in the Chicago “marketing area.” The dairy company demurred to the regulation on the ground it applied to milk produced and sold intrastate. Sustaining the order, the Court said:

Congress plainly has power to regulate the price of milk distributed through the

medium of interstate commerce . . . and it possesses every power needed to make that

regulation effective. The commerce power is not confined in its exercise to the

regulation of commerce among the States. It extends to those activities intrastate

which so affect interstate commerce, or the exertion of the power of Congress over it, as

to make regulation of them appropriate means to the attainment of a legitimate end,

the effective execution of the granted power to regulate interstate commerce. The

power of Congress over interstate commerce is plenary and complete in itself, may be

exercised to its utmost extent, and acknowledges no limitations other than are

prescribed in the Constitution. It follows that no form of State activity can

constitutionally thwart the regulatory power granted by the commerce clause to

Congress. Hence the reach of that power extends to those intrastate activities which in

a substantial way interfere with or obstruct the exercise of the granted power.³

In Wickard v. Filburn,⁴ the Court sustained even greater Congressional regulation over production. The Agricultural Adjustment Act (AAA) of 1938, as amended in 1941,⁵ regulated production even when it was not intended for commerce but wholly for consumption on the producer’s farm. Sustaining the AAA amendment, the Court noted that it supported the market, stating:

It can hardly be denied that a factor of such volume and variability as home-consumed

wheat would have a substantial influence on price and market conditions. . . . But if

we assume that it is never marketed, it supplies a need of the man who grew it which

would otherwise be reflected by purchases in the open market. Home-grown wheat in

this sense competes with wheat in commerce. The stimulation of commerce is a use of

the regulatory function quite as definitely as prohibitions or restrictions thereon. This

record leaves us in no doubt that Congress may properly have considered that wheat

consumed on the farm grown, if wholly outside the scheme of regulation, would have a

substantial effect in defeating and obstructing its purpose to stimulate trade therein at

increased prices.⁶

The Court also stated:

[Q]uestions of the power of Congress are not to be decided by reference to any formula

which would give controlling force to nomenclature such as ‘production’ and ‘indirect’

and foreclose consideration of the actual effects of the activity in question upon

interstate commerce. The Court’s recognition of the relevance of the economic effects in

the application of the Commerce Clause . . . has made the mechanical application of

legal formulas no longer feasible.⁷

ArtI.S8.C3.5.10 Fair Labor Standards Act of 1938

In 1938, Congress enacted the Fair Labor Standards Act (FLSA), which prohibited shipping goods in interstate commerce that were manufactured by workmen whose employment did not comply with prescribed wages and hours.¹ The FLSA defined interstate commerce to mean “trade, commerce, transportation, transmission, or communication among the several States or from any State to any place outside thereof.” The FLSA further provided that “for the purposes of this act an employee shall be deemed to have been engaged in the production of goods [for interstate commerce] if such employee was employed . . . in any process or occupation directly essential to the production thereof in any State.”² Sustaining an indictment under the FLSA, Chief Justice Harlan Stone, writing for a unanimous Court, stated:

The motive and purpose of the present regulation are plainly to make effective the

congressional conception of public policy that interstate commerce should not be made

the instrument of competition in the distribution of goods produced under substandard

labor conditions, which competition is injurious to the commerce and to the States from

and to which the commerce flows.³

In support of the decision, the Court invoked Chief Justice John Marshall’s interpretations of the Necessary and Proper Clause in McCulloch v. Maryland and the Commerce Clause in Gibbons v. Ogden.⁴ The Court rejected objections purporting to be based on the Tenth Amendment, stating:

Our conclusion is unaffected by the Tenth Amendment which provides: ‘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.’ The amendment states but a

truism that all is retained which has not been surrendered. There is nothing in the

history of its adoption to suggest that it was more than declaratory of the relationship

between the national and State governments as it had been established by the

Constitution before the amendment or that its purpose was other than to allay fears

that the new National Government might seek to exercise powers not granted, and

that the States might not be able to exercise fully their reserved powers.⁵

Subsequent decisions of the Court took a broad view of which employees should be covered by the FSLA,⁶ and in 1949, Congress narrowed the permissible range of coverage and disapproved some of the Court’s decisions.⁷ But, in 1961,⁸ with extensions in 1966,⁹ Congress expanded the FSLA’s coverage by several million persons, introducing the “enterprise” concept by which all employees in a business producing anything in commerce or affecting commerce were covered by the minimum wage-maximum hours standards.¹⁰ Sustaining the “enterprise concept” in Maryland v. Wirtz,¹¹ Justice John Harlan, writing for a unanimous Court, held the FSLA’s expanded coverage legal based on two theories: (1) all of a business’s significant labor costs, not just those costs attributable to employees engaged in production in interstate commerce, contribute to the business’s competitive position in commerce; and (2) ending substandard labor conditions that affect all employees, not just those actually engaged in interstate commerce, facilitates labor peace, and smooth functioning of interstate commerce.¹²

ArtI.S8.C3.5.11 Dual Federalism and Commerce Clause

Prior to the 1930s, the Court had effectively followed a doctrine of “dual federalism,” under which Congress’s power to regulate activity largely depended on whether the activity had a “direct” rather than an “indirect” effect on interstate commerce.¹ When the Court adopted a less restrictive interpretation of the Commerce Clause during and after the New Deal, the question of how concerns over federalism might impact congressional regulation of private activities became moot. However, in a number of instances, the states themselves engaged in commercial activities, which would have been subject to federal legislation if a privately owned enterprise had engaged in the activity. Consequently, the Court sustained applying federal law to these state proprietary activities.² As Congress began to extend regulation to state governmental activities, the judicial response was inconsistent.³ Although the Court may revisit constraining federal power on federalism grounds, Congress lacks authority under the Commerce Clause to regulate states when federal statutory provisions would “commandeer” a state’s legislative or executive authority to implement a federal regulatory program.⁴