6th Circuit Buries Protectionist Statute in Tennessee Casket Case

December 6, 2002. The U.S. Court of Appeals (6thCir) issued its opinion in Craigmiles v. Giles, a constitutional law case that may make it easier to overturn some protectionist state statutes that impede electronic commerce. The Court held unconstitutional a state statute that it found to be an "attempt to prevent economic competition".

This case does not specifically involve Internet commerce, the use of technology, or even technology companies. It deals with the sale of caskets. This case involves a challenge to an obscure Tennessee statute regarding funeral directors. Nevertheless, this case may have broader consequences for other businesses, and particularly those involved in electronic commerce. The Court held unconstitutional on Due Process and Equal Protection grounds a statute enacted to protect state funeral directors from competition.

Numerous state protectionist statutes have the effect of banning many forms of e-commerce, including sales of cars, wines, contact lenses, and other products. These types of laws also obstruct Internet based travel agencies, pharmacies, mortgage brokers, and many other services. See, for example, story titled "House Subcommittee Holds Hearing on State Impediments to E-Commerce", TLJ Daily E-Mail Alert No. 518, September 27, 2002.

E-commerce proponents have had some success in challenging these types of statutes under the Constitution's Commerce Clause. For example, the U.S. District Court (SDNY) held on November 12 in Swedenburg v. Kelly, that New York state's ban on the direct shipment of out of state wine is unconstitutional. Small wineries that are prohibited from selling directly to New York customers over the Internet, or by other direct means, brought the challenge. See, opinion [32 pages in PDF].

However, this 6th Circuit case is remarkable because it is not a Commerce Clause case; rather, it is a Due Process and Equal Protection case. The Court followed over six decades of precedent in determining that the statute is an economic regulation. It also followed precedent in determining that the rational basis test applies. However, in applying the rational basis test to the statute in question, the Court parted with precedent. It turned the rational basis analysis into rigorous review in which it weighed the policy arguments in support of and against the regulation, reviewed the evidence in the record in support, and subjected the statute to economic analysis. The Court then found that the economic regulation failed to meet the mere rational basis test.

So much for Carolene Products and its progeny.

The New Deal Supreme Court began a method of constitutional interpretation in the landmark case of U.S. v. Carolene Products, 304 U.S. 144 (1938). Other cases clarified this approach. It basically bifurcated the analysis of certain constitutional challenges to statutes and other government actions. A very high standard is to be applied in in fundamental or individual rights cases, while a very low standard is to be applied in commercial or economic rights cases. (A smaller category of regulations now receive an intermediate level of scrutiny.)

For example, the Supreme Court wrote in Carolene Products that "the existence of facts supporting the legislative judgment is to be presumed, for regulatory legislation affecting ordinary commercial transactions is not to be pronounced unconstitutional unless in the light of the facts made known or generally assumed it is of such a character as to preclude the assumption that it rests upon some rational basis within the knowledge and experience of the legislators.4" The famous footnote four then went on to suggest a higher level of scrutiny for individual rights.

Subsequent cases elaborated a "strict scrutiny" test for challenges to statutes affecting certain individual rights, which test, as a practical matter, is rarely met by the statute under challenge. Subsequent cases also elaborated a "rational basis" test for challenges involving economic regulation, which test, as a practical matter, is almost always met.

The 6th Circuit wrote that "strict scrutiny" test requires that "the regulation must serve a compelling state purpose and be narrowly tailored to achieving that purpose", while the "rational basis" test requires "only that the regulation bear some rational relation to a legitimate state interest".

Leading cases in which the Supreme Court upheld protectionist state economic regulations include Williamson v. Lee Optical, 348 U.S. 483 (1955) and Ferguson v. Skrupa, 372 U.S. 726 (1963).

In a few rare cases the Supreme Court has found that the rational basis test is not satisfied. For example, in Metropolitan Life v. Ward, 470 U.S. 869 (1985), the Court overturned on Equal Protection grounds an Alabama statute that imposed a discriminatory tax on out of state insurance companies.

In the present case, the state of Tennessee required that only licensed funeral directors could sell caskets. It further required an extensive course of training to become a funeral director, much of which is unrelated to selling caskets. Nathaniel Craigmiles, and others, sold caskets without first obtaining funeral director licenses. The state shut down their businesses.

They filed a complaint in the U.S. District Court (EDTenn) seeking declaratory and injunctive relief that the Tennessee statute violates the Equal Protection, Due Process, and Privileges and Immunities clauses of the Fourteenth Amendment. The Institute for Justice, which also represents the plaintiffs in the New York wine case, represents the plaintiffs in this case.

The District Court ruled for the plaintiffs on Equal Protection and Due Process grounds, but rejected their Privileges and Immunities claim. See. Craigmiles v. Giles, 110 F. Supp. 2d 658. Tennessee appealed.

The Appeals Court affirmed on both Equal Protection and Due Process grounds. However, it declined to address the Privileges and Immunities claim. It wrote that the statute "appears directed at protecting licensed funeral directors from retail price competition", and that it "harms consumers in their pocketbooks".

This 6th Circuit case did not challenge the longstanding Constitutional principal that the rational basis test is to be applied in cases involving economic regulation. And, it purported to maintain continuity in the application of the rational basis test. In fact, the opinion of the Court gives new meaning to the rational basis test.

The Court began by stating that "The question before this court is whether requiring those who sell funeral merchandise to be licensed funeral directors bears a rational relationship to any legitimate purpose other than protecting the economic interests of licensed funeral directors."

The state of Tennessee offered several arguments as to why it "promotes both public health and safety and consumer protection". The Court addressed these one at a time, and rejected each. In some cases it simply found that countervailing arguments make more sense. In others, it cited a lack of "evidence in the record" to support Tennessee's arguments. In some situations it engaged in an analysis of competition. The Court addressed "retail price competition", "package pricing", "marginal costs", and the extraction of "monopoly rents".

The Court gave the rational basis analysis far more teeth that the Supreme Court gave it in cases such as Carolene Products, Lee Optical and Ferguson. Moreover, the references to concepts such as "rent seeking" sounds like an incorporation of "Chicago school" economic analysis into Equal Protection jurisprudence.

The Court concluded with this. "Judicial invalidation of economic regulation under the Fourteenth Amendment has been rare in the modern era. See West Coast Hotel v. Parrish, 300 U.S. 379 (1937). Our decision today is not a return to Lochner, by which this court would elevate its economic theory over that of legislative bodies. See Lochner v. New York, 198 U.S. 45 (1905). No sophisticated economic analysis is required to see the pretextual nature of the state's proffered explanations for the 1972 amendment. We are not imposing our view of a well-functioning market on the people of Tennessee. Instead, we invalidate only the General Assembly's naked attempt to raise a fortress protecting the monopoly rents that funeral directors extract from consumers. This measure to privilege certain businessmen over others at the expense of consumers is not animated by a legitimate governmental purpose and cannot survive even rational basis review."

The Court did not reference Carolene Products, Lee Optical, or Ferguson.

The plaintiffs were fortunate in the assignment of judges to this case. Judge Danny Boggs, an outspoken, free market, Federalist Society, conservative, wrote the opinion. Judges Robert Krupansky and David Lawson joined. Krupansky and Boggs were both appointed to the 6th Circuit by President Reagan. Lawson is a District Court judge appointed by President Clinton.

The significance of this opinion is that this interpretation of the rational basis test could be used to strike down barriers to electronic commerce, as well as barriers to casket sales. The consequence may be that, at least in the 6th Circuit (Michigan, Ohio, Kentucky, and Tennessee), opponents of protectionist state statutes and rules will now have another effective legal argument for challenging legal barriers to electronic commerce.