Chapter 2: Business and the Constitution PDF

**CHAPTER 2** **Business and the Constitution** The U.S. Constitution is the oldest national charter in continuous use in the world. Officially ratified on June 21, 1788, its longevity may be due to its brevity, flexibility, and relative simplicity: The U.S. Constitution is one of the shortest con...

**CHAPTER 2** **Business and the Constitution** The U.S. Constitution is the oldest national charter in continuous use in the world. Officially ratified on June 21, 1788, its longevity may be due to its brevity, flexibility, and relative simplicity: The U.S. Constitution is one of the shortest constitutions in the world. Because the Constitution establishes the basic structure of the federal government and sets forth fundamental rights and protections, business owners and business managers should be aware of how the Constitution works and how it has been interpreted by the courts. In this chapter students will learn - The structure of the U.S. Constitution and its role in the American legal system. - The specific powers granted to the three branches of the federal government under the Constitution. - The main constitutional rights and protections afforded to individuals and business entities in the Bill of Rights and the Fourteenth Amendment. STRUCTURE OF THE CONSTITUTION: FEDERAL POWERS ============================================= **LO 2-1** Describe the purpose and structure of the Constitution. The United States is a [**federal system**](javascript:void(0)) in which a national government in Washington, D.C., coexists with state governments in each state. A key concept underlying the federal system is that the Constitution grants limited powers to the federal government: The powers of the federal government must be *specifically* granted by the U.S. Constitution. For example, Congress has the power to regulate interstate commerce because the Constitution specifically grants Congress the explicit power to regulate interstate and foreign commerce. The states, by contrast, retain the inherent power to protect the health, safety, and general welfare of their citizenry.[^1^](javascript:void(0)) The Constitution begins with a general preamble stating the Constitution's main objectives, including things such as justice, liberty, tranquility, and the common defense. The articles then set out the structure, powers, and procedures of the federal government. From a business perspective, it is important to note that Congress's powers to directly and exclusively regulate *bankruptcy, patents,* and *copyrights* are set out in Article I. [Table 2.1](clbr://internal.sandbox/book/text/XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX), in the next section, provides a brief synopsis of the main provisions in each article of the Constitution. Overall, the Constitution serves three general functions: - It establishes a *structure* for the federal government; that is, it creates three coequal branches: the legislative branch, the executive branch, and the judicial branch. - It delegates enumerated and limited *powers* to each coequal branch of the federal government. - It provides *procedural protections* to citizens, persons, and business firms. Structure of the Constitution ----------------------------- The U.S. Constitution is composed of a [**preamble**](javascript:void(0)), seven **[articles](javascript:void(0)),** and 27 [**amendments**](javascript:void(0)). The first three articles establish a system of government with three coequal branches: the [**legislative branch**](javascript:void(0)), the [**executive branch**](javascript:void(0)), and the [**judicial branch**](javascript:void(0)). Notice how the structure of the federal government is divided into three coequal branches and how each branch is assigned a specific set of powers. The underlying rationale for this structure is that each branch may exercise its respective powers to ensure that the other branches do not exceed their authority under the Constitution. This method of dividing power among three coequal branches is commonly called the system of *checks and balances.* As famously explained by James Madison in Federalist Paper: Amendments ---------- The Constitution has been *amended* (added to or changed) on several occasions since its ratification in 1788. The first 10 amendments to the Constitution, called the [**Bill of Rights**](javascript:void(0)), were ratified in 1791. In summary, the Bill of Rights recognizes the rights "of the people" regarding freedom of speech, religion, and assembly and establishes protections against random searches and seizures and other matters. (Including the first 10 amendments of the Bill of Rights, the Constitution has been amended 27 times!) Among the most important of these amendments, especially for business firms, are the First, Fourth, Fifth, and Fourteenth Amendments. The terms and scope of these amendments are discussed in detail later in this chapter. OVERVIEW OF FEDERAL POWERS ========================== **LO 2-2** List the major provisions of the first three articles of the Constitution. The powers granted to the three branches of the federal government in the Constitution are known as [**enumerated powers**](javascript:void(0)). The powers of the federal government are supposed to be *limited in scope,* and each act of the federal government must be authorized by one of the specific enumerated powers listed in the articles of the Constitution. [Table 2.1](clbr://internal.sandbox/book/text/XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX) provides a brief overview of the articles in the Constitution. **TABLE 2.1 Overview of Articles in the U.S. Constitution** ------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- **Article I** Establishes the legislative branch (a bicameral Congress composed of the House of Representatives and the Senate); sets qualifications for members of Congress; grants congressional powers (lawmaking). **Article II** Establishes the executive branch (president); sets qualifications for the presidency; grants executive powers (enforcement of laws). **Article III** Establishes the judicial branch, including a Supreme Court; grants certain judicial powers. **Article IV** Establishes the relationship between the states and the federal government; describes the power of Congress over territories and the admission of new states into the Union. **Article V** Describes the process for amending the Constitution in the future. **Article VI** Establishes the Constitution and federal law as the supreme law of the land; authorizes the national debt (Congress may borrow money); requires public officials to take an oath to support the Constitution. **Article VII** Lists the requirements for ratification of the Constitution. Article I---Congressional Powers -------------------------------- The primary authorization of constitutional powers is given to Congress in [**Article I, Section 8**](javascript:void(0)) of the Constitution. Among the powers of Congress that generally impact business are (1) the power to *regulate commerce* ([**Commerce Clause**](javascript:void(0))); (2) the power to tax and the power to spend government funds (*tax and spend provisions*); and (3) the power to regulate *bankruptcy, patents, and copyrights.* In addition, Congress has a *general implied power* to make all laws necessary for carrying out its enumerated powers ([**Necessary and Proper Clause**](javascript:void(0))). #### KEY POINT Although the Constitution grants explicit power to the federal government in certain matters, Congress may delegate various powers to state governments. For example, state governments have the right to define exempt-property standards in bankruptcy matters. Article II---Executive Powers ----------------------------- The president is the chief executive of the United States and the commander-in-chief of the armed forces. Presidential powers that affect business include (1) the power to carry out laws made by Congress; (2) the power to enter into treaties (subject to Senate approval) and carry out foreign policy; and (3) the power to appoint federal officers and judges (also subject to Senate approval). #### KEY POINT The president not only appoints federal officers (with Senate approval) but has the power, in many cases, to unilaterally dismiss those same federal officers. [**Executive orders**](javascript:void(0)) have the force of law and are typically issued by the president as a method to carry out executive functions of government. Although there is no constitutional provision that explicitly permits executive orders, Congress may delegate some degree of discretionary power to the president to carry out a federal statute. In cases where there is no congressional delegation, courts have upheld the president's power to issue executive orders based on the general grant of constitutional power to the executive branch for carrying out federal laws. Executive orders may have an impact on business, especially if they concern areas such as employment law or immigration law. One example is President Obama's 2014 executive order on "Deferred Action for Parents of Americans and Lawful Permanent Residents" (DAPA), which deferred the deportation of certain persons living illegally in the United States. A [**presidential proclamation**](javascript:void(0)), by contrast, is a statement issued by the president on a ceremonial occasion or to elaborate an issue of public or foreign policy. Presidential proclamations thus fall into two broad categories: 1. *Ceremonial* proclamations that designate special observances or celebrate national holidays and 1. *Substantive* proclamations, which usually involve the conduct of foreign affairs and other sworn executive duties, such as matters of international trade, the execution of set export controls, the establishment of tariffs, or the enforcement of federal immigration laws. Article III---Judicial Powers ----------------------------- **LO 2-3** Explain the role of judicial review in interpreting the Constitution. The federal judiciary adjudicates (decides) cases and controversies that fall within its authority. In addition to providing for the creation of federal courts, the Constitution also establishes the boundaries of [**jurisdiction**](javascript:void(0)) of federal courts. Jurisdiction is the legal authority of a court to decide a case. Both the U.S. Constitution and individual state constitutions contain language that establishes jurisdiction for certain matters to be heard by certain courts. The concept of jurisdiction is discussed in detail in [Chapter 3](javascript:void(0)), "The American Judicial System, Jurisdiction, and Venue." One of the central concepts in federal constitutional law is [judicial review](javascript:void(0)), the notion that federal courts have the power to invalidate state or federal laws that are inconsistent with the U.S. Constitution in some way. This authority, possibly the most important judicial power, is not enumerated in the Constitution. It was established by the Supreme Court in the landmark case of *Marbury v. Madison* in 1803. In *Marbury,* the Court ruled that (1) the Constitution is superior to federal and state statutes and (2) when there is a conflict between the page 44Constitution and a state or federal law, the Court has the authority to declare the challenged law as unconstitutional.[^2^](javascript:void(0)) Although *Marbury* was decided over 200 years ago, it is still considered good precedent, and federal and state courts regularly cite the case as a source of authority for the power to invalidate a law or governmental action that is in conflict with the Constitution. Over the better part of two centuries, the Supreme Court has further defined its self-declared power of judicial review, including the power of federal courts to review state court decisions to the extent that such decisions involve federal law or federal constitutional issues. Separation of Powers -------------------- The Constitution's creation of three coequal branches and its enumeration of government powers are part of an overall framework that is designed to ensure that no one branch exceeds its constitutional authority. This elaborate system of checks and balances is based on a [**separation of powers**](javascript:void(0)), ensuring that no one branch becomes overly dominant over the other branches. #### KEY POINT Federal legislation or regulation must be authorized by a specific, enumerated power in the Constitution. [Table 2.2](clbr://internal.sandbox/book/text/XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX) lists some of the various powers that each branch has that act as a check on the other branches. **TABLE 2.2 Example of Constitutional Checks and Balances** ------------------------------------------------------------- ------- -------------------------------------- ------- ------------------------------------------------------------------------------ **Branch** ** ** **Power** ** ** **Power Checked** Executive   Veto   Congress's lawmaking authority Legislative   Override veto with supermajority   President's veto authority Legislative   Impeachment and removal   Presidential misconduct and federal judicial power Judicial   Invalidate a law as unconstitutional   Congress's authority to make laws; the president's authority to enforce laws Applying the Constitution: Standards of Judicial Review ------------------------------------------------------- **LO 2-4** Recognize the three standards of constitutional review and their application. The U.S. Supreme Court has established three standards of judicial review in constitutional cases. In summary, when reviewing a government action for constitutional soundness (such as the passage or enforcement of a federal or state law), the Court classifies its action into one of three categories of scrutiny: (1) [**rational basis**](javascript:void(0)) review, (2) [**intermediate-level scrutiny**](javascript:void(0)), or (3) [**strict scrutiny**](javascript:void(0)). **Rational Basis Review** Government actions in this category are subject to the lowest level or *least* amount of judicial review. In order for the court to uphold the action, the government need only show that (1) its action advanced a *legitimate* government objective (such as public welfare, health, or safety) and (2) the action was somehow related to the government's objective. Government actions that fall into this category include almost every economic regulation and tax-related law. For example, suppose that Congress passes a law requiring all Internet service providers (ISPs) to be directly regulated by a new federal administrative agency. Further suppose that the law imposes a tax on the ISPs to fund the agency. MegaSearch is an ISP subject to the law and files suit contending the law is an unconstitutional exercise of congressional powers. Because the regulation is purely economic, a court will likely rule against MegaSearch and uphold the law as constitutional using the rational basis category so long as the government provides evidence that the law advances some legitimate government objective (such as consumer protection). If a state raises its toll fees for a state highway and cites rising maintenance costs, a similar presumption of legality applies. **Intermediate-Level Scrutiny** Some actions are categorized as subject to intermediate-level scrutiny. Courts will uphold government actions as constitutional so long as the government can prove that (1) its action advances an important government objective (a higher level than the "legitimate" criterion used in the rational basis test) and (2) the action is *substantially related* to the government's objective. A relatively small number of cases fall into this category. For example, courts have used this category in cases involving government action related to regulating the time, place, and manner of a political demonstration that is protected under the First Amendment. Suppose in the MegaSearch example discussed earlier that the management at MegaSearch organizes a protest against the law and applies for local permits to stage demonstrations opposing the law in several cities across the country. One city, Silicon Village, rejects the permit application because MegaSearch's proposed demonstration would block a high-volume traffic area and endanger both pedestrians and drivers. The village also points out that a public park located in the village would be a more appropriate venue. If MegaSearch sues the village for denying the company its First Amendment right to protest, a court would likely find the village's actions permissible under the intermediate-level scrutiny standard because the government's denial of the permit is substantially related to an important government objective (protection of drivers and pedestrians). **Strict Scrutiny** When a government action impairs a fundamental constitutional right or is based on a "suspect" classification (i.e., race, national origin, or alienage), courts apply a *strict scrutiny* standard when deciding whether to uphold the government action. Courts will uphold the law only if (1) the government's objective is *compelling,* (2) the means chosen by the government to advance that objective are necessary to achieve that compelling end, and (3) no *less-restrictive alternatives* exist. In the strict scrutiny category of judicial review, the government has the burden of persuasion. As a practical matter, when courts classify government actions as belonging in the strict scrutiny category, they are signaling that the government action is likely to be ruled unconstitutional. For example, continuing with the MegaSearch example, suppose the government passes a law that imposes a higher level of tax on ISPs that cater to Latino users by basing the tax assessment on the number of searches conducted using words and phrases in Spanish. Such a law would be a clear example of the government's use of a suspect classification (national origin) and, as such, it would be struck down under a strict scrutiny analysis. In [Case 2.2](javascript:void(0)), the U.S. Supreme Court examines the constitutionality of a California statute regarding a limitation of First Amendment freedom of speech and applies the strict scrutiny standard. The Supremacy Clause and Preemption ----------------------------------- Because our federal system of government contemplates the coexistence of federal law with the various laws of the states, there are often conflicts between federal law and state law. Article VI of the U.S. Constitution provides that federal laws are always *supreme* to any page 48conflicting state law. This is known as the [**Supremacy Clause**](javascript:void(0)), and it invalidates any state law that is in direct conflict with federal law. The power granted by the supremacy clause to override a state law is called [**preemption**](javascript:void(0)). In order for preemption to occur, the federal law must be directly in conflict with the state law to the point where the two laws cannot coexist. For example, in *Geier v. American Honda Motor Company,*[^3^](javascript:void(0)) the U.S. Supreme Court held that a federal regulation giving auto manufacturers the choice between airbags or alternative methods of passenger safety restraints preempted a claim by an injured party against an auto manufacturer under a state common law doctrine based on failing to install airbags. The Court ruled that, because the injured party's case depended upon a claim that auto manufacturers had a legal duty to install airbags and the violation of that duty resulted in the injury, the state common law could not coexist with federal law that specifically allowed auto manufacturers who opted not to install airbags in favor of another type of restraint system. COMMERCE POWERS =============== **LO 2-5** Understand the scope of Congress's powers under the Commerce Clause. The source of Congress's broadest power is the Commerce Clause in Article I, Section 8 of the Constitution, whereby Congress is granted the express power to "regulate Commerce... among the several States." Because almost every activity potentially affects commerce in some way, Congress has very broad powers to enact legislation under the Commerce Clause. Application of Commerce Powers ------------------------------ Although Congress has exercised its commerce powers in various ways, the broad textual power to regulate all persons and products in the flow of interstate commerce is the fundamental source of Congress's commerce power. **Interstate versus Intrastate Commercial Activity** Congress has the express authority to regulate (1) the channels of interstate commerce such as railways and highways; (2) the instrumentalities of interstate commerce, such as vehicles used in shipping products; and (3) articles moving in interstate commerce. Furthermore, even if an activity is a purely *intrastate* or local one (i.e., taking place within a single state's borders), Congress still has the power to regulate such local activity if the activity in the aggregate produces a *substantial economic effect* on interstate commerce. For example, the U.S. Supreme Court has deferred to congressional regulation of a product that is cultivated for noncommercial purposes solely in one state, determining that such activity is sufficiently related to *interstate* commerce. In [Case 2.3](javascript:void(0)), the Court considers whether a state law legalizing purely local cultivation, processing, and use of marijuana affects interstate commerce. **The Commerce Clause and Civil Rights** An unorthodox use of the federal commerce power has been in the area of civil rights. Indeed, the Supreme Court's level of deference for use of congressional commerce powers reached its peak during the civil rights era. In the 1964 Civil Rights Act, for example, Congress used its commerce power to ban discrimination in places of public accommodation, such as privately owned restaurants and hotels, and in two important civil rights cases decided by the U.S. Supreme Court during this era, the Court ruled that the Civil Rights Act was a permissible application of Congress's commerce powers. In *Heart of Atlanta Motel v. United States,*[^4^](javascript:void(0)) the Court made clear that a federal ban on racial discrimination in privately owned hotel and motel accommodations was a constitutionally permitted use of the commerce power. Specifically, the Court ruled that discrimination in private accommodations discouraged interstate travel. Moreover, in a companion case,[^5^](javascript:void(0)) *Katzenbach v. McClung,*[^6^](javascript:void(0)) the Court ruled that a privately owned local restaurant that was located far from any interstate highway and that had no appreciable business from interstate travelers was nevertheless subject to the reach of the federal statute because the restaurant page 51purchased *some* food and paper supplies from out-of-state vendors. Because these purchases were of items that had moved in commerce, the Court ruled that Congress could properly exercise its power to regulate a restaurant whose business interests were primarily local. #### KEY POINT Congress's broadest powers are derived from the Commerce Clause. Courts are highly deferential to congressional action in areas that affect interstate commerce. Noncommercial Activity More recently, the U.S. Supreme Court has signaled some limits on Congress's commerce power. In cases where the activity is purely *noncommercial* (such as when Congress passes a criminal statute that is unrelated to commerce), the Court has used increased levels of scrutiny to be sure that the activity that Congress seeks to regulate has a sufficient nexus (connection) to some legitimate economic interest. In *United States v. Lopez,*[^7^](javascript:void(0)) for example, the Court invalidated a federal statute on the basis that it was beyond the commerce powers of Congress. In *Lopez,* the Court struck down the Gun-Free School Zones Act of 1990, which made it a federal crime to possess a gun within a certain distance from a school. The Court concluded that the banning of firearms in local schools was a state police power and, therefore, more appropriately handled by state governments. The significance of this decision, however, remains to be seen. After the Court struck down the law in *Lopez,* Congress simply turned around and reenacted the same law, adding a finding of fact that gun possession in schools affected economic productivity by making it more difficult for students to obtain an education. Five years after the *Lopez* case was decided, the U.S. Supreme Court invalidated another statute in *United States v. Morrison*[^8^](javascript:void(0)) on the same grounds. In that case, the Court struck down the Violence Against Women Act (VAWA), which gave victims of gender-motivated violence the right to sue their abusers for money damages in federal court. Again, however, Congress brushed aside the Court's ruling and simply reauthorized the law, making exhaustive findings of fact that detailed the cumulative economic effect of gender-motivated crimes. The Dormant Commerce Clause --------------------------- **LO 2-6** Describe constitutional restrictions on state regulation of commerce in the business environment. May states regulate commerce that crosses into their state borders? Yes and no. The U.S. Supreme Court has inferred from the Commerce Clause significant restrictions on the police power of the states. Specifically, the Supreme Court has ruled that the mere existence of congressional commerce powers prohibits the states from *discriminating* against or *unduly burdening* interstate commerce. As a general rule, a state is free to regulate commerce so long as (1) the state does not discriminate against or impose an undue burden on out-of-state businesses and (2) the state law promotes a *legitimate* objective, such as health, safety, or welfare. It is important to note that economic protectionism---state laws that promote the economic interest of its own citizens at the expense of out-of-state citizens---is not a legitimate state objective. Suppose, for example, that in order to protect its local beef industry, the Texas state legislature imposes an inspection requirement and fee on all non-Texas-bred beef sold within Texas. The state legislature justifies this inspection and fee on the basis that the law is protecting the health of it citizens. A court would likely strike down the law because it discriminates against out-of-state ranchers. Moreover, the inspection fee and the inspection process could be viewed as imposing unreasonable burdens on interstate commerce. #### LEGAL/ETHICAL REFLECTION AND DISCUSSION In *Gonzalez v. Raich,* Justice Stevens, in the majority decision, wrote, "\[O\]ur cases have taught us that there are some unscrupulous physicians who overprescribe when it is sufficiently profitable to do so." He also wrote, "The likelihood that all such production (of marijuana) will promptly terminate when patients recover or will precisely match the patients' medical needs during their convalescence seems remote." Should such judicial speculation ever be part of a court's decision-making process? TAX AND SPEND POWERS ==================== **LO 2-7** Explain why Congress's tax and spend powers are an independent source of federal power. Article I, Section 8, Clause 1 of the Constitution states: Congress thus has the textual power to impose taxes and to spend federal tax revenues in any way that promotes the common defense and general welfare of the United States. Further, the U.S. Supreme Court has, for the most part, been highly deferential to Congress in terms of what constitutes "general welfare" and under what circumstances Congress may exercise its taxing power and its decision-making power in allocating government spending. Most importantly, because the power to tax is an enumerated power of Congress (i.e., because this power is granted to Congress in the text of the Constitution), it is an independent source of federal authority. As a result, the U.S. Supreme Court has ruled on several occasions that Congress may tax activities or property that it might not otherwise be authorized to regulate directly under any of its enumerated legislative powers. By way of example, in perhaps the most far-reaching taxing power case ever decided, the U.S. Supreme Court ruled in *National Federation of Independent Business v. Sebelius,*[^9^](javascript:void(0)) that the *individual mandate* contained in the Affordable Care Act (a requirement that individuals purchase health insurance) could be sustained as a tax, even though this requirement itself was outside of Congress's power to regulate commerce. Writing for five members of the Court, Chief Justice Roberts upheld the individual mandate under the general Article I power of Congress to impose taxes. Specifically, the Court held that even though proponents of the Act consistently characterized the individual mandate as a penalty and not a tax, the penalty still operated as a tax. The Court reasoned that failure to purchase health insurance required a payment to the IRS and that individuals thus had the choice under the Act of paying a tax to the IRS instead of purchasing insurance. The Court also reaffirmed that Congress may seek to achieve regulatory goals through its taxing power that it might not be able to achieve under its other Article I powers. For their part, Justices Kennedy, Alito, Scalia, and Thomas dissented, arguing that the taxing power could not sustain the individual mandate because Congress lacked the power to impose the mandate in the first place. Necessary and Proper Clause --------------------------- Congress may also place *conditions* on the use of federal money by the states in order to achieve some national public policy objective. Congress generally cites the Necessary and Proper Clause as authorization to set conditions on federal spending. This ability to set page 53conditions on the use of federal money has been a controversial method of congressional regulation because it falls outside the areas of *traditional* regulation. Also, state legislatures have objected to this type of regulation as a backdoor method for imposing laws on states that are outside Congress's enumerated powers. The U.S. Supreme Court, however, has generally upheld federal spending conditions that are tied to individual states' passing of certain laws that carry out congressionally established goals. In *South Dakota v. Dole,*[^10^](javascript:void(0)) for example, the Court deferred to Congress's ability to attach spending conditions on federal highway funds distributed to the states for repairing and building highways. Specifically, Congress had conditioned its transportation spending to a state's legal drinking age.[^11^](javascript:void(0)) Unless a state passed a law to raise the legal drinking age to 21 by a certain date, it would lose 5 percent of its allotted highway funding from the federal government. South Dakota and other states challenged the law as an unconstitutional intrusion by Congress into state affairs. The Court, however, sided with Congress, ruling that the drinking-age condition is constitutionally permissible under Congress's spending authority so long as the condition itself is not a violation of individual constitutional rights. In upholding the federal law, the Court announced a four-part test for evaluating the constitutionality of conditions attached to federal spending programs: (1) the spending power must be exercised in pursuit of the general welfare, (2) grant conditions must be clearly stated, (3) the conditions must be related to a federal interest in the national program or project, and (4) the spending power cannot be used to induce states to do things that would themselves be unconstitutional. This case signaled an important victory for Congress, which now regularly uses spending conditions as a form of regulation for individuals and businesses CONSTITUTIONAL PROTECTIONS ========================== **LO 2-8** Describe the main protections in the First Amendment and explain how they apply in the business environment. In addition to creating the structure of the federal government and granting each branch of the federal government certain enumerated and limited powers, the Constitution also confers on persons and businesses many constitutional rights. Most of these rights are contained in the first 10 amendments to the Constitution (the Bill of Rights). From a business perspective, however, it is important to note that corporations and other business entities do *not* always receive the same level of constitutional protection as individuals. The Bill of Rights and Business ------------------------------- The Bill of Rights contains many of the rights common in the American vernacular. Among these rights are freedom of speech, the press, religion, and expression (First Amendment); the right to keep and bear arms (Second Amendment); freedom from unreasonable government-conducted searches and seizures (Fourth Amendment); rights against self-incrimination and to a speedy jury trial by our peers (Fifth and Sixth Amendments); right to a jury trial in civil cases (Seventh Amendment); and freedom from cruel and unusual punishment (Eighth Amendment). Although all of these rights are important, the coverage in this textbook will focus on the Bill of Rights provisions that relate directly to business issues. The First Amendment ------------------- The First Amendment begins with the words "Congress shall make no law" and then articulates several specific protections against government encroachment in the areas of religion, press, speech, assembly, and petition of grievances. The introductory phrase demonstrates that the framers originally intended the Constitution to function as a *limit* on the federal government. It was not until the passage of the Fourteenth Amendment in 1868 that these limitations were extended to state governments as well. In addition, in controversial cases like *Citizens United* and *Masterpiece Cakeshop* (the gay wedding cake case), the U.S. Supreme Court has broadened First Amendment protections for business owners in the area of free speech. We shall examine these leading cases below. **Limits on Free Speech** Although the U.S. Supreme Court has given broad protections to speech that involves political expression, the First Amendment is by no means absolute. Justice Oliver Wendell Holmes famously wrote that the First Amendment does not protect someone who falsely yells "Fire!" in a crowded theater. Courts have ruled that the government may place reasonable restrictions on the time, place, and manner of political expression in cases, for example, where public safety may be threatened. Likewise, the tort of defamation, a restriction on speech discussed in [Chapter 9](javascript:void(0)), "Torts and Products Liability," is another limitation on freedom of speech relevant to business. Also, what happens when the speech and religion rights of business owners conflict with other compelling constitutional rights, such as the principle of equal protection of law? In [Case 2.4](javascript:void(0)), the gay wedding cake case, the Supreme Court tries to strike a balance between the speech rights of a small business owner and the rights of gays and lesbians to purchase goods and services free of discrimination. Commercial Speech The most common form of commercial speech---ways in which business entities communicate with the public---is *advertising* through print, television, radio, and the Internet. Traditionally, advertising has received little or no First Amendment protection, but the Supreme Court has gradually increased the constitutional protections for advertising. In *Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council,*[^12^](javascript:void(0)) the U.S. Supreme Court held that purely commercial speech (speech with no political implications whatsoever) was entitled to partial First Amendment protection so long as the speech was truthful and concerned a lawful activity. In the *Virginia* case, the Court struck down a state law that prohibited pharmacists from advertising prices for prescription drugs. The Court rejected the state's contention that it had a substantial interest in ensuring that cut-rate prices that may be created by competition among pharmacies would not result in substandard service. Given that the information banned by the statute was limiting the free flow of information to consumers, the Court held that such regulation violated the First Amendment. Four years after the *Virginia* case, the Court expanded its analytical framework for deciding when regulations of commercial speech are constitutional. Specifically, in *Central Hudson Gas v. Public Service Commission,*[^13^](javascript:void(0)) the Court created a four-part test that subjects government restrictions on commercial speech to a form of intermediate-level scrutiny: - *Part One:* So long as the commercial speech concerns lawful activities and is not misleading, the speech qualifies for protection under the First Amendment. If the speech is entitled to protection, then the government's regulation must pass the final three parts of the *Central Hudson* test in order for the restriction to be lawful. - *Part Two:* The government must show that it has a *substantial government interest* in regulating the speech. - *Part Three:* The government must demonstrate that the restriction *directly advances* the government's interest. - *Part Four:* The government's restriction must be *not more extensive* than necessary (not too broad) to achieve the government's asserted interest. **Advertising and Obscenity Regulation** Sometimes commercial speech runs afoul of governmental attempts to ban or regulate materials it deems obscene. However, obscenity regulation of commercial speech is subject to the same scrutiny as any other government regulation of commercial speech. For example, a federal appellate court ruled that a state agency's decision to effectively prohibit a corporation's use of a certain label on its beer products, which the agency deemed offensive, violated the business owner's commercial speech rights. In that case, *Bad Frog Brewery, Inc. v. N.Y. State Liquor Authority,*[^14^](javascript:void(0)) the U.S. Court of Appeals for the Second Circuit held that the labels on the brewery's beer page 58bottles, which depicted a cartoon frog making a vulgar gesture, were protected commercial speech under the First Amendment. In particular, the court ruled that the New York State Liquor Authority failed to demonstrate the agency's asserted interest of protecting children from vulgarity when it denied Bad Frog's application to use the labels in New York on the basis that the labels were offensive. Because the labels were not misleading and did not concern an unlawful activity, the labels were a protected form of commercial speech and any government regulation must conform with the requirements set out in the four-part *Central Hudson* case. Ruling in favor of Bad Frog, the court remarked that a state must demonstrate that its commercial speech limitation is part of a substantial effort to advance a valid state interest, "not merely the removal of a few grains of offensive sand from the beach of vulgarity. #### Legal Speak \>)) **Ballot Proposition** A question put to the voters during a state election to decide issues such as whether the state should impose a new income tax or whether the state should allow marijuana to be used for medicinal purposes. In some states, this is known as a *ballot initiative* or a *referendum.* **Political Speech by Corporations** Another form of commercial speech occurs when corporations and other business entities fund political speech or engage in corporate advocacy of a particular candidate or political issue. May the government regulate such commercial speech under the same standards as the *Central Hudson* case? Generally, political speech by corporations is fully protected by the First Amendment. In *First National Bank of Boston v. Bellotti,*[^15^](javascript:void(0)) the U.S. Supreme Court created a new level of First Amendment protection for corporations engaged in *political* speech. Specifically, the Supreme Court struck down a Massachusetts state statute that prohibited corporations from using corporate assets to fund expenditures related to "influencing or affecting the vote on any question submitted to the voters" (known as a *ballot proposition*).[^16^](javascript:void(0)) Although the Court recognized that some constitutional rights are not afforded to corporations, the Court ruled that freedom of corporate political speech is fully protected and that any attempt to regulate political speech by corporations would be subject to *strict scrutiny.* The Court also held that a corporation's freedom of speech is not limited to matters materially affecting its business. Rather, a business has a constitutionally protected right to communicate about any political matter consistent with the goal of the First Amendment: the free flow of information and debate. For the first time, the Court recognized that speech that is within the protection of the First Amendment does not lose its protection simply because the speaker is a corporation. #### KEY POINT Commercial speech in the form of advertising has partial First Amendment protection (i.e., is subject to intermediate-level scrutiny)*.* Corporate *political* speech, however, has full First Amendment protection (i.e., is subject to strict scrutiny) under *Bellotti* and *Citizens United* The Fourth Amendment -------------------- **LO 2-9** Describe the main protections in the Fourth Amendment and explain how they apply in the business environment. The [**Fourth Amendment**](javascript:void(0)) of the U.S. Constitution states: Generally speaking, a search or seizure conducted by the government is illegal without a warrant from a judge or magistrate. Although the warrant requirement is most often thought of in the context of law enforcement, the Fourth Amendment covers all government agents. To obtain a warrant, the government must first demonstrate [**probable cause**](javascript:void(0)) to a judge or a magistrate that the proposed search or seizure is justified under the law. The judge or magistrate must then consider the *totality of circumstances* and determine whether to issue the warrant. The Fourth Amendment is generally enforced by courts under the Exclusionary Rule. Under the Exclusionary Rule, any evidence obtained in violation of the Fourth Amendment may be excluded from evidence in a criminal prosecution. **Exceptions** Courts, however, have created many exceptions to the warrant requirement. The government, for example, does not need a warrant if there are "exigent circumstances" and if it is acting with probable cause and obtaining a warrant is impractical. Other well-established exceptions to the warrant requirement include consensual searches, searches incident to a valid arrest, seizures of items in plain view, and brief investigatory stops. Investigatory stops must be temporary and the questioning during the stop must be for a limited purpose and conducted in a manner necessary to fulfill the purpose. Moreover, not every search or seizure raises a Fourth Amendment issue. The Fourth Amendment only protects against searches and seizures *conducted by the government* or pursuant to governmental direction. Surveillance and investigatory actions taken by private persons, such as private investigators, suspicious spouses, or nosy neighbors, are not governed by the Fourth Amendment. Also, the Fourth Amendment does not apply against governmental action unless the target of the search can show that he or she has a reasonable expectation of privacy in the place to be searched or the thing to be seized. The U.S. Supreme Court has explained that what "a person knowingly exposes to the public, even in his own home or office, is not a subject of Fourth Amendment protection...." But what one seeks to preserve as private, even in an area accessible to the public, may be constitutionally protected. Applying this principle, the Court has ruled that individuals generally maintain a reasonable expectation of privacy in their bodies, clothing, and personal belongings. Likewise, homeowners possess a privacy interest that extends inside their homes and in the curtilage immediately surrounding the outside of their homes, but not in the "open fields" and "wooded areas" extending beyond the curtilage. Automobile owners have a reasonable expectation of privacy in the cars they own and drive, though the expectation of privacy is less than a homeowner's privacy interest in his or her home. A business owner's expectation of privacy in commercial property is less than the privacy interest afforded to a private homeowner and is particularly attenuated in commercial property used in "closely regulated" industries, such as airports, railroads, restaurants, and liquor establishments, where business premises may be subject to regular administrative searches by state or federal agencies for the purpose of checking compliance with health, safety, or security regulations. Public records, published phone numbers, and other matters readily accessible to the general public enjoy no expectation of privacy. Similarly, the Court has said that individuals do not possess an expectation of privacy in their personal characteristics. Thus, the police may require individuals to give handwriting samples and voice exemplars---as well as hair, blood, DNA, and fingerprint samples---without complying with the Fourth Amendment's warrant requirement. **Reasonableness Requirement** With or without a warrant, searches and seizures conducted by the government must be reasonable. Generally speaking, a search or seizure conducted with a warrant is presumed reasonable, while warrantless searches and seizures are presumed unreasonable. In cases of warrantless searches and seizures, courts will try to balance the degree of intrusion on the individual's privacy with the need to promote governmental interests. Courts will examine the *totality of the circumstances* to determine if such a warrantless search or seizure was reasonable or justified Searches and Seizures The courts must determine what constitutes a *search* or a *seizure* under the Fourth Amendment. *Physical Searches* A search occurs when a governmental employee or an agent of the government violates an individual's reasonable expectation of privacy. A dog-sniff inspection, for example, is invalid if the inspection violates one's reasonable expectation of privacy. Electronic surveillance is also considered a search under the Fourth Amendment. *Physical Seizures of Persons* A seizure of a person, within the meaning of the Fourth Amendment, occurs when a person is not free to ignore the police and leave at will. Specifically, two elements must be present to constitute a seizure of a person. First, there must be a show of authority by the police officer or government agent. The presence of handcuffs or weapons, the use of forceful language, and physical contact are each a strong indicator of such authority. Second, the person being seized must submit to the authority. Thus, an individual who ignores an officer's request and walks away has not been seized for Fourth Amendment purposes. *Physical Seizures of Property* A seizure of private property, within the meaning of the Fourth Amendment, occurs when there is some meaningful interference with an individual's possessory interests in the property, but in some circumstances, warrantless seizures of objects in plain view may not constitute seizures. Also, when executing a search warrant, an officer might be able to seize an item observed in plain view even if it is not specified in the warrant. *Electronic Searches and Seizures* In recent years, the applicability of the Fourth Amendment to electronic searches and seizures has generated a significant amount of litigation and has received much attention from the courts. (See [Case 2.7](javascript:void(0)), *United States v. Jones.*) Many electronic search cases involve determining whether law enforcement can search a company-owned computer that an employee uses to conduct business. Although the case law is split, the majority of courts have held that employees do not have a legitimate expectation of privacy to information stored on a company-owned computer. In a recent case, for example, the U.S. Supreme Court did not find a reasonable expectation to privacy for personal text messages sent and received on an employer-owned pager. **Postscript: The USA PATRIOT Act** Following the September 11, 2001, terrorist attacks on the World Trade Center and the Pentagon, Congress enacted the "Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act" (called the *USA PATRIOT Act*). In brief, this legislation increases the ability of law enforcement agencies to search e-mail and telephonic communications as well as medical, financial, and library records. One provision of the USA PATRIOT Act permits law enforcement to obtain access to stored voicemails by obtaining a basic search warrant rather than a surveillance warrant. Obtaining a search warrant requires a much lower evidentiary showing. In addition, a highly controversial provision of the USA PATRIOT Act includes permission for law enforcement to use so-called *sneak-and-peak* warrants. A sneak-and-peak warrant is a special warrant in which law enforcement can delay notifying the property owner about the warrant's issuance until after the search or seizure is conducted. Section 505 of the USA PATRIOT Act also expanded the controversial use of National Security Letters. In brief, a National Security Letter is a secret administrative subpoena that requires certain persons, groups, organizations, or companies to provide documents or records about certain persons. These documents typically involve private telephone, e-mail, and financial records. A National Security Letter also imposes a *gag order,* meaning that the person or persons who receive the secret letter/subpoena may not disclose the existence of the National Security Letter. Under the USA PATRIOT Act, law enforcement can use National Security Letters to investigate U.S. citizens, even when law enforcement does not think the individual under page 64investigation has committed a crime. The Department of Homeland Security (DHS) and the Federal Bureau of Investigation (FBI ) have used National Security Letters frequently. By issuing a National Security Letter, DHS, the FBI, and other governmental agencies are not required to first obtain a warrant or court order before conducting searches of records of persons under investigation. DUE PROCESS PROTECTIONS ======================= **LO 2-10** Identify limits imposed on government power by the Due Process and Equal Protection clauses of the Constitution. Due Process ----------- Due process of law is a constitutional guarantee that is designed to protect both individuals and business firms from arbitrary decision making by the government. The concept of due process traces its origins to the Magna Carta, or "Great Charter," of 1215 A.D., which obligated the King of England to act in accordance with "the law of the land." Today, this fundamental protection appears twice in the U.S. Constitution: in the [**Due Process Clause**](javascript:void(0)) of the Fifth and Fourteenth Amendments, which prohibits the government from depriving persons of their life, liberty, or property in an arbitrary way. (The Fifth Amendment applies to the federal government, while the Fourteenth Amendment, which was enacted after the Civil War, applies to state governments.) In brief, [**due process of law**](javascript:void(0)) has two dimensions: one is procedural; the other is substantive. Procedural due process imposes certain *procedural* requirements on federal and state governments when they impair life, liberty, or property. At a minimum, procedural due process requires the government to give adequate notice, a fair and neutral hearing, and an opportunity to present evidence before any official action is taken that would deprive the life, liberty, or property of an individual or a business firm. Substantive due process, by contrast, limits the *substantive* police power of the states to restrict individual liberty. These substantive due process rights require that laws enacted by the government be published for public inspection and be specific enough that a reasonable person would understand how the law applies. As a result, laws that are too vague or overly broad are unconstitutional under the substantive due process doctrine. Many famous Supreme Court cases often have a due process aspect to them. By way of example, notice how the Supreme Court's narrow decision in [Case 2.4](javascript:void(0)), *Masterpiece Cakeshop, Ltd. v. Colorado Civil Rights Commission,* can be viewed in light of procedural due process. In addition, notice too the direct connection between due process and minors' free speech rights in [Case 2.2](javascript:void(0)), *Brown v. Entertainment Merchants Association.* Both cases are discussed earlier in this chapter. Equal Protection ---------------- The Equal Protection Clause is part of the Fourteenth Amendment and prohibits state governments from denying their citizens equal protection of the laws.[^17^](javascript:void(0)) Fundamentally, equal protection requires the government to treat people who are similarly situated equally. This requirement, however, does not mean that everyone must be page 65treated exactly the same. The government may create constitutionally permissive *categories* and may treat each category differently, but persons within each category must be treated the same. For example, suppose that you attend a state college or university. Do all of the students pay the same tuition? Most likely the answer is no. In-state residents generally pay less tuition than out-of-state students because this difference can be justified by the fact that in-state students (or their parents) pay taxes that help support the school while out-of-state students' tax revenues stay in their home states. Accordingly, this classification between in-state and out-of-state students is permissible. A state college or university cannot, however, decide to charge different rates based on the students' different home states (one rate for Delaware, a second for California, a third for Iowa, etc.). Also, charging different rates based on race, religion, or national origin would not be constitutionally valid regardless of a student's state of residence. Recall from our discussion earlier in this chapter that courts use a variety of levels of judicial review in constitutional cases: strict scrutiny, intermediate-level scrutiny, and rational basis review. When a government action (such as enacting a statute or enforcing a law or regulation) is based on a suspect classification, or if the action impairs a fundamental right protected in the Constitution, courts will apply the *strict scrutiny* standard of judicial review. For example, courts have held that any government action based on race or national origin is automatically considered a *suspect* classification, thus triggering strict scrutiny. Courts have also held that government actions restricting the right to vote, access to the courts, or the right to travel from state to state are subject to the strict scrutiny standard as well. *Semi-suspect* (also called *quasi-suspect*) classifications, by contrast, trigger so-called intermediate-level scrutiny. Courts have used this intermediate standard of review when government actions are based on gender or birth status (e.g., children born to unwed mothers). Lastly, recall from earlier in this chapter that economic or tax regulations are judged under the rational basis standard. POSTSCRIPT: THE RIGHT TO PRIVACY ================================ Although not explicitly mentioned in the Constitution, the right to *privacy* plays a central role in constitutional law. The U.S. Supreme Court formally recognized a constitutional right to privacy in 1965 in the landmark case of *Griswold v. Connecticut.*[^18^](javascript:void(0)) This case involved a challenge to a state statute that criminalized (1) the use of contraceptives and (2) aiding or counseling others in their use. Dr. Griswold was convicted under this state statute for counseling married couples in the use of contraceptives at a local Planned Parenthood office. The U.S. Supreme Court, however, struck down the state statute as unconstitutional. The Court held that the First, Third, Fourth, Fifth, and Ninth Amendments created a constitutionally protected zone of privacy. The right of privacy recognized in *Griswold* was later extended to abortion rights in *Roe v. Wade,*[^19^](javascript:void(0)) one of the most controversial U.S. Supreme Court decisions in American history. The *Roe* Court struck down as unconstitutional a state statute that banned all abortions under any circumstances. The Court recognized that a woman's right to privacy is fundamental under the Fourteenth Amendment. Thus, the government has only a limited right to regulate abortions and cannot completely outlaw abortion procedures and providers. Although the existence of a constitutional right of privacy has generated intense and emotional debate, the holdings in *Griswold* and *Roe* have become settled law. Federal Statutes ---------------- In addition to the right of privacy afforded by the U.S. Supreme Court's interpretation of the Constitution, Congress has also legislated specific privacy rights, such as the Health Insurance Portability and Accountability Act (HIPAA), which regulates health care providers, health plans, and plan administrators in gathering, storing, and disclosing medical information about individuals. This federal law requires that specific policies and record-keeping practices be used in order to ensure the privacy of any medical information, such as diagnoses, tests, medications, and so forth. Congress has also sought to ensure certain privacy protections by mandating that government agencies allow only appropriate public and media access to agency records and reports under the Freedom of Information Act. Workplace Privacy ----------------- Most privacy rights afforded by the U.S. Constitution do not extend to the workplace because courts have held that there is generally no reasonable expectation of privacy in 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 in areas such as employee drug testing, searches of employee areas (such as lockers or desks) by employers, and electronic monitoring of e-mail and Internet usage. Statutes that regulate the workplace are covered in detail in [Chapter 11](javascript:void(0)), "Employment Relationships and Labor Law."  KEY TERMS [**Federal system**](javascript:void(0)) [p. 41](javascript:void(0)) System in which a national government coexists with state governments. [**Preamble**](javascript:void(0)) [p. 41](javascript:void(0)) The introductory part of the Constitution that states its broad objectives. [**Articles**](javascript:void(0)) [p. 41](javascript:void(0)) The main provisions of the Constitution that set out the government's structure, power, and procedures. [**Amendments**](javascript:void(0)) [p. 41](javascript:void(0)) Changes made to the Constitution since its ratification. [**Legislative branch**](javascript:void(0)) [p. 41](javascript:void(0)) Established under Article I of the Constitution; consists of the House of Representatives and the Senate. [**Executive branch**](javascript:void(0)) [p. 41](javascript:void(0)) Established under Article II of the Constitution; consists of the president and vice president. [**Judicial branch**](javascript:void(0)) [p. 41](javascript:void(0)) Established under Article III of the Constitution; consists of the Supreme Court and other federal courts. [**Bill of Rights**](javascript:void(0)) [p. 42](javascript:void(0)) The first 10 amendments to the Constitution that preserve the rights of the people from unlawful acts of government officials, establish and protect freedom of speech and religion, and so on. [**Enumerated powers**](javascript:void(0)) [p. 42](javascript:void(0)) Those powers that are explicitly granted to the three branches of government in the Constitution. [**Article I, Section 8**](javascript:void(0)) [p. 42](javascript:void(0)) The main provision of the Constitution that enumerates the limited powers of Congress. [**Commerce Clause**](javascript:void(0)) [p. 42](javascript:void(0)) The constitutional clause giving Congress the exclusive power to regulate foreign commerce, interstate commerce, and commerce with the Indian Tribes. [**Necessary and Proper Clause**](javascript:void(0)) [p. 42](javascript:void(0)) The constitutional clause giving Congress the general implied authority to make laws necessary to carry out its other enumerated powers. [**Executive order**](javascript:void(0)) [p. 43](javascript:void(0)) An order made by the president and which carries the full force of law; issued to enforce or interpret federal statutes and treaties. [**Presidential proclamation**](javascript:void(0)) [p. 43](javascript:void(0)) Statement issued by the president on a ceremonial occasion or to elaborate an issue of public or foreign policy. [**Jurisdiction**](javascript:void(0)) [p. 43](javascript:void(0)) The legal authority that a court must have before it can hear a case. [**Judicial review**](javascript:void(0)) [p. 43](javascript:void(0)) The power of the judiciary to declare a legislative or executive act unconstitutional. [**Separation of powers**](javascript:void(0)) [p. 45](javascript:void(0)) The system of checks and balances created by the Constitution whereby the three branches have unique powers that allow them to resolve conflicts among themselves, thus ensuring no one branch exceeds its constitutional authority. [**Rational basis**](javascript:void(0)) [p. 45](javascript:void(0)) The lowest level of scrutiny applied by courts deciding constitutional issues through judicial review; upheld if the government shows that the law has a reasonable connection to achieving a legitimate and constitutional objective. [**Intermediate-level scrutiny**](javascript:void(0)) [p. 45](javascript:void(0)) The middle level of scrutiny applied by courts deciding constitutional issues through judicial review; upheld if the government shows that a regulation involves an important government objective that is furthered by substantially related means. [**Strict scrutiny**](javascript:void(0)) [p. 45](javascript:void(0)) The most stringent standard of scrutiny applied by courts deciding constitutional issues through judicial review when the government action is related to a fundamental right or is based on a suspect classification; upheld if the government shows a compelling need that justifies the law being enacted and no less restrictive alternatives exist. [**Supremacy Clause**](javascript:void(0)) [p. 48](javascript:void(0)) The constitutional clause that makes clear that federal law is always supreme to any state law that is in direct conflict. [**Preemption**](javascript:void(0)) [p. 48](javascript:void(0)) The concept that primary sources of law are applied consistent with a hierarchy and that a law higher in the hierarchy will overrule and make void a conflicting law lower in the hierarchy. Federal law preempts conflicting state law. [**Fourth Amendment**](javascript:void(0)) [p. 60](javascript:void(0)) Protects individual citizens' rights to be secure in their "persons, houses, papers and effects." [**Probable cause**](javascript:void(0)) [p. 61](javascript:void(0)) A reasonable amount of suspicion supported by circumstances sufficiently strong to justify a belief that a person has committed a crime. [**Due Process Clause**](javascript:void(0)) [p. 64](javascript:void(0)) The constitutional clause protecting individuals from being deprived of "life, liberty, or property" without due process of law. [**Due process of law**](javascript:void(0)) [p. 64](javascript:void(0)) The constitutional principle that the government must respect the legal rights that are owed to a person according to the law.