Pelican Chapter, Associated Builders & Contractors, Inc. v. Edwards , 128 F.3d 910 ( 1997 )

REVISED
UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 95-31239
PELICAN CHAPTER, ASSOCIATED BUILDERS & CONTRACTORS, INC., HARMONY
CORP., CAJUN CONTRACTORS, INC., and AUSTIN INDUSTRIAL, INC.
Plaintiffs-appellees,
VERSUS
HONORABLE EDWIN W. EDWARDS, K. DON PILGREEN and KEVIN REILLY
Defendants-appellants.
Appeal from the United States District Court
For the Middle District of Louisiana
November 25, 1997
Before KING, JOLLY and DENNIS, Circuit Judges.
DENNIS, Circuit Judge:
The Louisiana State Board of Commerce and Industry (Board) is
authorized by the state constitution to “enter into contracts for
the exemption from ad valorem taxes of a new manufacturing
establishment or an addition to an existing manufacturing
establishment, on such terms and conditions as the board, with the
approval of the governor, deems in the best interest of the state.”
La. Const. 1974, Art. 7, §21(F); See also La. Const. 1921, Art. 10,
§ 4(10)(substantially identical predecessor provision). Pursuant
thereto, the Board incorporates in each such tax exemption its Rule
One (Rule One), which requires that, inter alia, the manufacturer
and its contractors in acquiring goods and services for the new or
additional construction must give preference and priority to
Louisiana manufacturers, suppliers, contractors and labor “except
where not reasonably possible to do so without added expense or
1
substantial inconvenience or sacrifice in operating efficiency.”
In an action brought by the Pelican Chapter, Associated Builders
and Contractors, Inc., (Pelican Chapter), and three of its members,
the federal district court prospectively invalidated Rule One and
1
Rule One provides:
The Board of Commerce and Industry requires
manufactures [sic] and their contractors to
give preference and priority to Louisiana
manufactures [sic] and, in the absence of
Louisiana manufacturers, to Louisiana
suppliers, contractors and labor, except where
not reasonably possible to do so without added
expense or substantial inconvenience or
sacrifice in operating efficiency. In
considering applications for tax exemption,
special attention will be given to those
applicants agreeing to use, purchase and
contract for machinery, supplies and equipment
manufactured in Louisiana, or in the absence
of Louisiana manufacturers, sold by Louisiana
residents, and to the use of Louisiana
contractors and labor in the construction and
operation of the proposed tax exempt
facilities. It is a legal and moral
obligation of the manufacturers receiving
exemptions to favor Louisiana manufacturers,
suppliers, contractors and labor, all other
factors being equal.
2
enjoined the Chairman of the Board, the Governor, and the Secretary
of the state Department of Economic Development from using it as a
requirement of any future state ad valorem tax exemption.
The specific questions presented on appeal are (a) whether the
Pelican Chapter and its members had standing to bring this action;
and (b) whether the Board’s challenged Rule One constitutes an
unconstitutional burden on interstate commerce.
I.
Plaintiffs-appellees are Pelican Chapter, an association of
construction contractors, and three of its members, Harmony
Corporation, Cajun Contractors, Incorporated, and Austin
Industrial, Incorporated.2 The member contractors are engaged in
the business of constructing industrial plants in interstate
commerce. The defendants-appellants are the Chairman of the Board,
the Governor, and the Secretary of the state Department of Economic
Development.
Prior to trial, the parties entered the following stipulation
of established facts:
1. Rule One of the Louisiana Board of
Commerce and Industry (“the Board”) has long
required favoring employment of Louisiana
residents by contractors and subcontractors on
industrial construction and improvement
projects affected by the Industrial Tax
Exemption Program administered by the Board.
2
Pelican Chapter, Harmony Corporation, and Cajun Contractors,
Incorporated are Louisiana corporations. Austin Industrial,
Incorporated is a Texas corporation licensed to do business in
Louisiana.
3
2. In 1983, the Board, without adopting a
formal rule, implemented a [sic] 80% policy
relative to employment of Louisiana law
[sic][labor]. The 80% Policy has been used as
a benchmark or a “trigger” whereby if the
Board or the Department of Economic
Development conducted a background
investigation and there was 80% or more labor
from Louisiana, the Board would generally
assume that the company did the best job it
could in hiring Louisiana workers. If it was
below 80%, the Board asks the company to
explain what efforts were made to hire
Louisiana workers.
3. The Associated Builders and Contractors
and several of its members challenged Rule
One, particularly its residency hiring
restrictions in a rule making hearing and
later before the entire Board. The Board
refused to alter its policies regarding either
Rule One or any part of its residency hiring
restriction.
4. The 80% benchmark residency hiring
restrictions of Rule One was a policy adopted
by the Board in 1983. It has never been
formally adopted as a rule pursuant to
Louisiana Administrative Procedures Act and
the rule making powers of the Board or the
Department of Economic Development.
5. From the standpoint of the Board and the
Department of Economic Development, there is
no practical difference from the way it
applies a policy as opposed to a formal rule.
6. Rule One contains restrictions for the
hiring of Louisiana labor, as well as use of
Louisiana contractors and engineers and other
Louisiana resources as well. If Louisiana
resources are available at the best price, all
other factors being equal, then Rule One
requires that recipients of the tax exemption
use the Louisiana contractor, engineer, labor
or other resources and that the recipient
contractors do the same.
7. The residency hiring restrictions of Rule
One have been used in the past to limit or
restrict the industrial tax exemption
otherwise available.
4
8. Typically, complaints concerning Rule One
involving the failure to use Louisiana labor
are received and investigated after most of
the construction on the subject project has
concluded.
9. There has never been a study or analysis
of the benefits to the State of Louisiana of
the administration and enforcement of Rule One
or of its residency hiring restrictions.
10. There has never been a study or an
analysis which has shown that by having and
enforcing Rule One and its residency hiring
restrictions, there is less unemployment in
Louisiana.
11. There is no empirical data whatsoever to
show that the imposition, administration and
enforcement of Rule One and its residency
hiring restrictions have served to increase
employment and decrease unemployment in
Louisiana among Louisiana workers or Louisiana
contractors.
12. There exist [sic] no evidence or
empirical data to show that more Louisiana
workers are hired by the imposition or the
residency hiring restrictions of Rule One or
that the unemployment rate has in any way been
effected [sic] positively or negatively by the
administration and enforcement of the
residency hiring restrictions of Rule One.
13. Rule One has been applied by the
Department of Economic Development and the
Board in a manner so as to require applicants
to prefer or show preference to Louisiana
suppliers, Louisiana contractors and Louisiana
labor over non-residents [sic] suppliers,
contractors and laborers.
14. No where [sic] in the documentation
provided to any applicant for industrial tax
exemption is the applicant informed that there
is an 80% benchmark or trigger for residency
hiring. It is not until and unless an
investigation is commenced or inquiry is made
that an applicant would learn that it was its
obligation to ensure that at least 80% of the
labor working on its construction project were
[sic] from Louisiana.
5
15. In the investigations conducted by the
Louisiana Department of Economic Development
pursuant to Rule One and its residency hiring
restriction, investigators inquire as to
whether the recipient or their contractors are
making a reasonable effort to hire Louisiana
workers.
16. If the Board concludes that an applicant
for an industrial tax exemption has not made
a reasonable effort to retain Louisiana
contractors or that it or its contractors have
not made a reasonable effort to hire Louisiana
labor, then the Board will consider a
restriction or limitation of all or a portion
of the industrial tax exemption applied for.
17. It is the policy of the Department of
Economic Development and the Board that it is
the responsibility of the applicant seeking
the industrial tax exemption to abide by Rule
One and that such applicants should pass the
word down through their contractors and
through their subcontractors that the Board
and the Department of Economic Development
expects [sic] Louisiana resources to be given
an opportunity either to bid or to work.
18. According to the Board and the Department
of Economic Development, it is the
responsibility of the applicant seeking the
exemption to abide by Rule One and, in most
cases, the applicant advises contractors,
subcontractors, etc., to do likewise because
obviously, it could cost them money if they
don’t.
19. The Board and the Department of Economic
Development consider the residency hiring
restrictions of Rule One an obligation of the
contractor of the recipient and not just an
obligation of the recipient.
20. If a contractor of a recipient of an
industrial tax exemption is found to be in
violation of the residency hiring restrictions
of Rule One because that contractor is
perceived to have not made a reasonable effort
to use Louisiana labor, such would be
reflected in the exemption or the limitation
of exemption for the applicant.
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21. Because Rule One requires manufacturers
“and their contractors” to give preference to
Louisiana contractors and labor, it is the
policy of the Board that Rule One also applies
to contractors of the applicants. Thus, if a
contractor violates Rule One, then it is going
to reflect on the applicant’s status and
whether or not the applicant receives the full
tax exemption or has such limited.
22. The Board and the Department of Economic
Development have continued to investigate
complaints alleging violation of the residency
hiring restrictions of Rule One for the
purpose of reporting any perceived violations
to the Board.
At trial, Pelican Chapter and its members presented evidence
of the burdens and costs that compliance with Rule One imposes upon
them and other contractors in connection with industrial
construction in Louisiana. They introduced numerous exhibits, the
testimony of three representatives of construction contractors, and
the testimony of the Director of the Financial Division of the
Office of Commerce and Industry.
The representatives of the construction contractors testified
that, in order to avoid the drastic consequences of being found in
violation of Rule One by the Board, their firms will not hire a
person for a Louisiana project without absolute proof of his or her
Louisiana residency. They said this policy, common among
construction firms, causes the employer to avoid the use of
experienced, long-term non-resident employees and highly qualified
and efficient non-resident subcontractors. Also, additional
administrative costs result from the employer’s efforts to exhaust
all available Louisiana resources before using products or services
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of another state. More intensive recordkeeping is required in case
it becomes necessary to justify the use of a particular product or
employee. Consequently, they testified, projects located near
state borders involve even heavier burdens and expenses because the
local labor supply consists partly of non-residents. The
plaintiffs’ witnesses explained that Rule One’s lack of specificity
as to acceptable margins of error and the complexity of proof of
residency in many instances further aggravated compliance costs.
Exhibits illustrating and corroborating the witnesses’ testimony
regarding the additional administrative costs and recordkeeping
associated with Rule One compliance were also introduced by the
plaintiffs.
The defendants presented no evidence controverting the
testimony of the plaintiff’s witnesses or their exhibits. In
fact, the defendants presented very little evidence at trial.
Exhibits introduced by the defendants indicate that from 1936 to
1993 the Rule One related industrial tax program resulted in over
15,000 exemptions to various applicants in the amount of four
billion dollars on construction projects costing over 44 billion
dollars.
After the trial, the district court granted the requested
relief. At the outset, the district court held that the plaintiffs
had standing to challenge the Board’s Rule One because they
suffered injury due to its enforcement despite the fact that they
had no contractual relationship with the state. Because
manufacturers customarily require contractors to secure them
8
against loss due to any noncompliance with Rule One, the court
reasoned the contractors are burdened by the additional costs of
self insuring against the risk of noncompliance, investigation and
record keeping pertaining to residences of laborers and suppliers,
and loss of efficiency and flexibility in acquiring materials and
work force management.
Proceeding to the merits, the district court found that Rule
One is not neutral on its face and actually discriminates against
the use of out of state workers and suppliers in favor of their
local counterparts. Rule One discourages use of out of state
workers or suppliers by effectively assigning contractors the
potential burden of showing after the fact, often long after
project completion, that any such use was cheaper, more convenient
or more efficient than granting local preferences. The court
therefore held that Rule One unconstitutionally discriminated
against commerce and enjoined its application. See Pelican
Chapter, Associated Builders and Contractors, Inc. v. Edwards, 901
F. Supp. 1125 (M.D. La. 1995). This appeal followed.
II.
In this Court, the defendants-appellants renew their argument
contesting the standing of Pelican Chapter and its members to
prosecute this action. The irreducible minimum of standing
contains three elements. Lujan v. Defenders of Wildlife, 504 U.S.
555 (1992). “First, the plaintiff must have suffered an injury in
fact---an invasion of a legally protected interest which is
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[]concrete and particularized,” id., at 560; Allen v. Wright, 468
U.S. 737, 756 (1984); Warth v. Seldin, 422 U.S. 490, 508 (1975);
Sierra Club v. Morton, 405 U.S. 727, 740-741, n.16 (1972); and
‘actual or imminent, not “conjectural” or “hypothetical”’, Lujan,
504 U.S. at 560; Whitmore v. Arkansas, 495 U.S. 149, 155 (1990);
Los Angeles v. Lyons, 461 U.S. 95, 102 (1983). “Second, there must
be a causal connection between the injury and the conduct
complained of---the injury has to be fairly traceable to the
challenged action of the defendant, and not the result of the
independent action of some third party not before the court.”
Lujan, 504 U.S. at 560; Simon v. Eastern Ky. Welfare Rights Org’n.,
426 U.S. 26, 41-42 (1976). “Third, it must be likely, as opposed
to merely ‘speculative,’ that the injury will be ‘redressed by a
favorable decision.’” Lujan, 504 U.S. at 561; Simon, 426 U.S. at
38.
“The party invoking federal jurisdiction bears the burden of
establishing these elements.” Lujan, 504 U.S. at 561; FW/PBS, Inc.
v. Dallas, 493 U.S. 215, 231 (1990); Warth, 422 U.S. at 508.
“Since they are not mere pleading requirements but rather an
indispensable part of the plaintiff’s case, each element must be
supported in the same way as any other matter on which the
plaintiff bears the burden of proof, i.e., with the manner and
degree of evidence required at the successive stages of the
litigation.” Lujan, id.
We agree with the district court’s finding that the plaintiffs
satisfactorily proved the requisite elements of injury, causal
10
connection, and redressability. The plaintiffs established, with
little or no resistance by the defendants, that the existence of
Rule One presents them with a Hobson’s choice, viz., they must
either (a) forego bidding on tax exemption applicants’ projects,
which represent a substantial percentage of the market and their
own businesses, or (b) undertake the extra burdens and costs of
complying with Rule One, which tend to deprive them of the
competitive and economic advantages they otherwise would be able to
earn through more flexible, effective and efficient purchasing,
administrative, and employment techniques and methodology.
As the Supreme Court in Lujan, 504 U.S. at 561 observed:
When the suit is one challenging the
legality of government action or inaction, the
nature and extent of facts that must be . . .
proved . . . in order to establish standing
depends considerably upon whether the
plaintiff is himself an object of the action
(or foregone action) at issue. If he is,
there is ordinarily little question that the
action or inaction has caused him injury, and
that a judgment preventing or requiring the
action will redress it.
There is little or no question that the contractor plaintiffs
in this case, as are other contractors that engage in industrial
construction for tax exemption applicants, are the objects of the
State’s action through Rule One to prevent them from dealing freely
in interstate commerce for products and services of other states,
that the Board knowingly and effectively encourages tax exemption
11
applicants to require contractors to indemnify them against any
loss due to non-compliance with Rule One, that the increased costs
of doing business imposed on contractors by Rule One cause them
injury, and that the contractors’ injury would be redressed if Rule
One were to be declared invalid and its enforcement enjoined.3
III.
The Commerce Clause of the United States Constitution grants
Congress the power “[t]o regulate Commerce with foreign Nations,
and among the several States, and with the Indian Tribes.” Art I,
§ 8, cl. 3. “‘Although the Clause thus speaks in terms of powers
bestowed upon Congress, the Court long has recognized that it also
limits the power of the States to erect barriers against interstate
trade.’” Maine v. Taylor, 477 U.S. 131, 137 (1986) (quoting Lewis
v. BT Investment Managers, Inc., 447 U.S. 27, 35 (1980)). “The
bounds of these restraints appear nowhere in the words of the
Commerce Clause, but have emerged gradually in the decisions of
[the Supreme] Court giving effect to its basic purpose.”
Philadelphia v. New Jersey, 437 U.S. 617, 623 (1978). The basic
principle that our economic unit is the Nation, which alone has the
gamut of powers necessary to control the economy, “including the
vital power of erecting customs barriers against foreign
competition,” has as its corollary that the states are not
3
Pelican Chapter has standing under the principle of
“associational standing” as enunciated in Hunt v. Washington State
Apple Advertising Comm’n, 432 U.S. 333, 342 (1977) and Warth v.
Selding, 422 U.S. 490, 511 (1975).
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separable economic units. H.P.Hood & Sons, Inc. v. Du Mond, 336
U.S. 525, 537-538 (1949). “[W]hat is ultimate is the principle
that one state in its dealings with another may not place itself in
economic isolation.” Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511,
527 (1935).
The opinions of the Supreme Court reflect an “alertness to the
evils of ‘economic isolation’ and ‘protectionism,’ while at the
same time recognizing that incidental burdens on interstate
commerce may be unavoidable when a State legislates to safeguard
the health and safety of its people.” Philadelphia v. New Jersey,
437 U.S. at 623-624. “Thus, where simple economic protectionism is
effected by state legislation, a virtually per se rule of
invalidity has been erected.” Id. at 624 (citing H.P. Hood & Sons,
supra, Toomer v. Witsell, 334 U.S. 385, 403-406 (1948); Baldwin,
supra; Buck v. Kuykendall, 267 U.S. 307, 315-316 (1925)). As
Justice Cardozo stated, “Restrictions so contrived are an
unreasonable clog upon the nobility of commerce. They set up what
is equivalent to a rampart of customs duties designed to neutralize
advantages belonging to the place of origin.” Baldwin, 294 U.S. at
527.
Rule One, in effect, conditions the exemption of new or added
manufacturing establishments from state property taxes upon the
preferential use of Louisiana construction products and labor when
they are on parity with those produced by another state. Because
Rule One serves to further no end other than the economic welfare
of Louisiana and discriminates against articles and services in
13
interstate commerce solely because of they are produced by another
state, it is a simple measure of economic isolationism or
protectionism that the United States Constitution forbids.
A.
Although the Supreme Court has used a variety of formulations
for the Commerce Clause limitation upon the states, the Court has
“consistently distinguished between outright protectionism and more
indirect burdens on the free flow of trade.” Lewis v. BT
Investment Managers, Inc., 447 U.S. at 36. In recent years, a
comprehensive approach to determining when a state law violates the
Commerce Clause has evolved. A state law that affirmatively
discriminates, either facially or in practical effect, against
interstate commerce is constitutionally valid only if the state
shows that the law actually furthers a “legitimate local purpose”
and that this purpose could not be served as well by available
nondiscriminatory means. Oregon Waste Systems, Inc. v. Dept. of
Envtl. Quality, 511 U.S. 93, 99-101 (1994), Maine v. Taylor, 477
U.S. at 138, Hughes v. Oklahoma, 441 U.S. 322, 336 (1979). A state
law affirmatively discriminates against interstate commerce if it
disadvantages interstate commerce relative to intrastate commerce.
Oregon Waste Systems, Inc., 511 U.S. at 99. To be legitimate, the
local purpose must be unrelated to economic protectionism. Wyoming
v. Oklahoma, 502 U.S. 437, 454 (1992), New Energy Co. of Indiana v.
Limbach, 486 U.S. 269, 274 (1988).
In contrast, state laws that regulate evenhandedly with only
14
incidental effects on interstate commerce are invalid only if the
burden imposed on interstate commerce is “clearly excessive in
relation to the putative local benefits.” Oregon Waste Systems,
Inc., 511 U.S. at 99 (quoting Pike v. Bruce Church, Inc., 397 U.S.
137, 142 (1970)). A state law regulates evenhandedly when it is
both facially neutral and treats interstate and intrastate
interests equally. CTS Corp. v. Dynamics Corp. of America, 481 U.S.
69, 87 (1987), Hunt v. Washington State Apple Advertising Comm’n,
432 U.S. 333, 350-53 (1977).
B.
Applying these precepts to the present case, we conclude that
Rule One discriminates against interstate commerce both on its face
and in practical effect. It is facially discriminatory, as tax
exemption recipients and their contractors must give Louisiana
products and labor preferential treatment “all other factors being
equal.”4 The overall effect of Rule One is discriminatory as it
inhibits the ability of contractors to offer employment to out-of-
state workers and to utilize supplies and other resources produced
by other states. Furthermore, compliance with Rule One imposes
additional adminstrative and operating costs on contractors who
choose to take advantage of resources with out-of-state sources
relative to the costs incurred by contractors utilizing only local
labor, contractors, and supplies.
Because Rule One discriminates against interstate commerce,
4
Rule One, supra, note 1.
15
the burden is shifted to the defendants to show that Rule One
serves a legitimate local purpose which could not be served as well
by available nondiscriminatory means. This they have not done.
The asserted purpose of Rule One, reducing unemployment in
Louisiana, cannot save this rule. Reducing unemployment by
discouraging the use of out-of-state labor and products constitutes
the patent economic protectionism that the Commerce Clause forbids.
“Neither the power to tax nor the police power may be used by the
state of destination with the aim and effect of establishing an
economic barrier against competition with the products of another
state or the labor of its residents.” Baldwin, 294 U.S. at 527. In
addition, even if reducing unemployment in Louisiana were a
legitimate local purpose, the defendants-appellants have not
produced any evidence to demonstrate that Rule One has actually
served this purpose or that it could not be served as well by
available nondiscriminatory means.
C.
Finally, we are not persuaded by the defendants-appellants’
argument that Rule One’s discriminatory tax exemption requirement
falls within the narrow exception to the dormant Commerce Clause
for states in their role as “market participants.” “[The market
participant]‘doctrine differentiates between a State’s acting in
its distinctive governmental capacity, and a State’s acting in the
more general capacity of a market participant; only the former is
subject to the limitations of the negative Commerce Clause.’” Camps
16
Newfound/Owatonna v. Town of Harrison, 117 S. Ct. 1590, 1606
(1997)(quoting New Energy Co. of Indiana v. Limbach, 486 U.S. at
277 (1988)). See White v. Massachusetts Council of Constr.
Employers, Inc., 460 U.S. 204, 208 (1983)(Boston participated in
the construction industry by funding certain projects); Reeves,
Inc. v. Stake, 447 U.S. 429, 436-437 (1980)(South Dakota
participated in the market for cement as a seller of the output of
the cement plant that it owned and operated); Hughes v. Alexandria
Scrap Corp., 426 U.S. 794, 806 (1976)(Maryland, in effect, entered
the market for abandoned auto hulks as purchaser by providing
bounties for their removal from streets and junkyards). For
purposes of analysis under the dormant Commerce Clause, a state
acting in its proprietary capacity as a purchaser or seller may
“‘favor its own citizens over others.’” Camps Newfound/Owatonna v.
Harrison, 117 S. Ct. at 1606 (quoting Alexandria Scrap, 426 U.S. at
810).
Rule One’s tax exemption prerequisite cannot be characterized
as a proprietary activity falling within the market participant
exception. The tax program of which Rule One is a part has the
effect of subsidizing the initiation, relocation or expansion of
industry, as do many dispositions of the tax laws. See New Energy
Co., 486 U.S. at 277. “‘That,’” the Supreme Court has explained,
“‘does not transform it into a form of state participation in the
free market.’” Camps Newfound/Owatonna, 117 S. Ct. at 1607 (quoting
New Energy Co., 486 U.S. at 277). The function of Rule One and the
state tax program of which it is an element is neither the purchase
17
nor the sale of construction materials or services, but the
“‘assessment and computation of taxes--a primeval governmental
activity.’” Id. “A tax exemption is not the sort of direct state
involvement in the market that falls within the market-
participation doctrine.” Id.
Conclusion
As was true in Camps Newfound/Owatanna and Bacchus Imports,
Ltd. v. Dias, 468 U.S. 263 (1984), the facts of this particular
case, viewed in isolation do not appear to pose any threat to the
health of the national economy. Nevertheless, the history of
Commerce Clause jurisprudence has shown that even the smallest
scale discrimination can interfere with the project of our federal
union. As Justice Cardozo recognized, to countenance
discrimination of the sort that Rule One represents would invite
significant inroads on our “national solidarity”:
The Constitution was framed under the dominion
of a political philosophy less parochial in
range. It was framed upon the theory that the
peoples of the several states must sink or
swim together, and that in the long run
prosperity and salvation are in union and not
in division.
Baldwin, 294 U.S. at 523.
The judgment of the district court, insofar as it
prospectively invalidates and enjoins the enforcement of Rule One,
is AFFIRMED.
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