Chapter 2

Business and the Constitution

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter Overview

• The structure of the U.S. Constitution and individual state constitutions, and their respective roles in the American legal system.

• The specific powers granted to the government

in the Constitution.

• The protections afforded by the Constitution

in the Bill of Rights and the 14th Amendment.

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Functions of the Constitution

• (1) establishing a structure for the federal government and rules for amending the Constitution;

• (2) granting specific powers for the different branches of government;

• (3) providing procedural protections for U.S. citizens from wrongful government actions.

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Structure of the Constitution

• Preamble

• Seven articles

• 27 amendments

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Overview of Articles I, II

• Article I Establishes the legislative branch (A Congress composed of the House of Representatives and the Senate); sets qualifications for members; grants congressional powers (lawmaking).

• Article II Establishes the executive branch (president); sets qualifications for the presidency; grants executive powers (enforcement of laws).

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Overview of Articles III, IV, V

• Article III Establishes the judicial branch with a federal system of courts, including a Supreme Court; grants certain judicial powers.

• Article IV Establishes the relationship between the states and the federal government; describes how to admit new states to the Union.

• Article V Describes the process for amending the Constitution.

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Overview of Articles VI, VII

• Article VI Establishes the Constitution and federal law as the supreme law of the United States over any conflicting state law; authorizes the national debt (Congress may borrow money); public officials must take an oath to support the Constitution.

• Article VII Lists the requirements for ratification of the Constitution.

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FEDERAL POWERS

The powers that generally impact business owners: • (1) the power to regulate commerce

• (2) taxing the citizenry and commercial entities and spending government funds (tax and spend provisions)

• (3) bankruptcy, patents, and copyrights

• (4) a more general implied authority to make all laws necessary for carrying out its enumerated powers

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Constitutional Checks and Balances

• This system of checks and balances is called the separation of powers.

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Judicial Review

• One of the central concepts in federal Constitutional law is the notion that federal courts have the right to invalidate state or federal laws that are inconsistent with the U.S. Constitution.

• The U.S. Supreme Court is the ultimate judge

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Standards of Review

• Court classifies the action into one of three categories of scrutiny:

• (1) the rational basis category, or

• (2) intermediate-level scrutiny, or

• (3) strict scrutiny.

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Supremacy Clause and Preemption

• U.S. Constitution provides that valid federal laws (those made pursuant to Congress’s constitutional authority and that are constitutionally sound) are always supreme to any conflicting state law

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Cipollone v. Liggett Group, Inc., et al., 505 U.S. 504 (1992)

• “Article VI of the Constitution provides that the laws of the United States shall be the supreme Law of the Land. Thus, [. . .] it has been settled that state law that conflicts with federal law is ‘without effect.’

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COMMERCE POWERS

• Congress’s broadest power is derived from the Commerce Clause whereby Congress is given the power to “regulate Commerce among the several states.”

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Application of Commerce Powers

• Congress has the express constitutional authority to regulate:– (1) channels of interstate commerce such as

railways and highways,– (2) the instrumentalities of interstate

commerce such as vehicles used in shipping, – (3) the articles moving in interstate commerce

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Constitutional Restrictions on State Regulation of Commerce

• The U.S. Supreme Court has ruled that the mere existence of congressional commerce powers restricts the states from discriminating against or unduly burdening interstate commerce.

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Cavel International, Inc. v. Madigan, 500 F.3d 551 (7th Cir., 2007)

“The state statute regulates even-handedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it should be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.”

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TAX AND SPEND POWER

• Congress has a far-reaching power to tax the citizenry and to spend the federal government’s money in any way that promotes the common defense and general welfare.

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Necessary and Proper Clause

• Congress may also place conditions on the use of federal money in order to achieve some public policy objective.

• Congress generally cites the Necessary and Proper Clause as authorization to set conditions on the spending.

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CONSTITUTIONAL PROTECTIONS

• The Constitution provides protection for the citizenry from unlawful or repressive acts by the government.

• The Bill of Rights (the first ten amendments) and other amendments that guarantee the right of due process.

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First Amendment

• “Congress shall make no law”:

• That allows government encroachment in the areas of religion, press, speech, assembly, and petition of grievances.

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Speech by Corporations

• Commercial Speech

• Political Speech

• Which can be regulated?

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Pagan v. Fruchey and Village of Glendale, 492 F.3d 766 (6th Cir., 2007)

“Glendale’s attempt to justify its ordinance amounts to nothing more than a conclusory articulation of governmental interests.”

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Political Spending and Corporations

• Traditional distinctions between free speech vs. spending limits on political advertising.

• General rule prior to 2010 was that spending limits were legal.

• See recent case on following slide.

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Citizens United v. Federal Election Commission

• In a 2010 case that attracted significant media attention, the U.S. Supreme Court ruled that the government may not ban all political spending by corporations in candidate elections.

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Fourth Amendment

• The U.S. Supreme Court has systematically applied a reasonableness test to define the limits of when the government may search without a warrant based on probable cause that criminal activity is possible.

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Fifth Amendment

• This amendment does not apply to corporate entities when the government is seeking certain business records, individual corporate officers and employees are entitled to Fifth Amendment protection when facing a criminal investigation.

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DUE PROCESS PROTECTIONS

• Fifth and Fourteenth Amendments

• These clauses protect individuals from being deprived of “life, liberty, or property” without due process of law

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Fourteenth Amendment

• Perhaps the most important role of the Fourteenth Amendment is that it makes the Bill of Rights applicable to the states.

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Equal Protection under the 14th Amendment

• Fundamentally, the clause guarantees that the government will treat people who are similarly situated equally.

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State Farm Mutual v. Campbell538 U.S. 408 (2003)

“States possess discretion over the imposition of punitive damages, but it is well established that there are constitutional limitations-the Due Process Clause of the Fourteenth Amendment prohibits the imposition of grossly excessive or arbitrary punishments.”

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PRIVACY

• Although not explicitly mentioned in the Constitution, privacy rights play a central role in our legal system.

• Common law origins

• Statutory law examples

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Federal Statutes

• Health Insurance Portability and Accountability Act (HIPPA)

• Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (called the USA Patriot Act)

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Workplace Privacy

• Most privacy rights afforded by the U.S. Constitution do not extend to the workplace.

• Nonetheless, privacy rights have become increasingly important to business owners and managers as Congress and state legislatures seek to clarify workplace privacy rights by statute.

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learning outcome checklist

• 2 - 1 Explain the federal system in the context of the U.S. Constitution.

• 2 - 2 Describe the purpose and structure of the Constitution.

• 2 - 3 List the major provisions of the first three articles of the Constitution and explain the underlying assumptions of coequal branches of government.

• 2 - 4 Identify the powers of Congress that impact individuals and businesses.

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learning outcome checklist

• 2 - 5 Recognize the role of judicial review in interpreting the Constitution.

• 2 - 6 Understand the various applications and limits of congressional power under the Commerce Clause.

• 2 - 7 Apply Constitutional restrictions on state regulation of commerce in the business environment.

• 2 - 8 Explain how the tax and spend powers impact business.

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learning outcome checklist

• 2 - 9 List the major protections in the Constitution’s Bill of Rights and explain how they apply in the business environment.

• 2-10 Understand limits imposed on government overreaching by virtue of the Due Process Clause and Equal Protection Clause.

• 2 - 11 Explain the right of privacy that has been recognized by the U.S. Supreme Court and Congress.