Constitutional Authority to Regulate Business What this Chapter Is About

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Chapter 4

Constitutional Authority

to Regulate Business

What this Chapter Is About
This chapter emphasizes that the Constitution is the supreme law in this coun­try and discusses some of the constitutional limits on the law. Neither Congress nor any state may pass a law that conflicts with the Constitution. To sustain a federal law or action, a specific fed­eral power must be found in the Constitution. A state has inherent power to enact laws that have a reasonable relationship to the welfare of its citi­zens.
Chapter Outline
I. The Constitutional Powers of Government
A. Federal Form of Government

In a fed­eral form of government (the United States), the states form a union and sovereign power is di­vided between a central authority and the states.

1. Relation between State and Federal Powers

Neither the national government nor a state government is superior to the other except within areas of exclusive authority granted under the Constitution. The courts determine the nature and scope of state and federal powers.

2. Relations among the States
a. The Privileges and Immunities Clauses

The Constitution (Article IV, Section 2) requires each state to provide the citizens of other states the same privileges and immunities it provides its own citizens. A state cannot treat nonresi­dents engaged in basic, essential activities differ­ently without substantial justifica­tion. The Fourteenth Amendment prohibits a state from infringing on the privileges or im­munities (such as the right to travel) of U.S. citizens.

b. The Full Faith and Credit Clause

The Constitution (Article IV, Section 1) requires that property and contract rights estab­lished by the law in one state be honored by other states.

B. The Separation of Powers

Under the Constitution, the legislative branch makes the laws, the executive branch enforces the laws, and the judicial branch interprets the laws. Each branch has some power to limit the actions of the other two.

C. The Commerce Clause

The Constitution (Article I, Section 8) gives Congress the power to regulate commerce among the states.

1. The Commerce Power Today

The national government can regulate every commercial enterprise in the United States. The United States Supreme Court has held, however, that this does not justify regulation of areas that have “nothing to do with commerce.”

2. The Regulatory Powers of the States

States possess police powers (the right to regulate private activities to protect or promote the pub­lic order, health, safety, morals, and general welfare). Statutes covering almost every aspect of life have been en­acted under the police powers.

3. The “Dormant” Commerce Clause

When state laws impinge on interstate commerce, courts balance the state’s interest in regulating a certain matter against the burden on interstate commerce. State laws that substan­tially interfere with interstate commerce violate the commerce clause.

D. The Supremacy Clause and Federal Preemption

The Constitution (Article IV) provides that the Constitution, laws, and treaties of the United States are the supreme law of the land. When federal and state laws are in direct conflict, the state law is rendered invalid. If Congress chooses to act exclusively in an area in which states have concurrent power, the federal law takes precedence over a state law on the same subject. It can be difficult to pre­dict how a court will interpret congressional intent, however.

E. The Taxing and Spending Powers
1. The Taxing Power

The Constitution (Article I, Section 8) gives Congress the power to levy taxes, but Congress may not tax some states and exempt others. Any tax that is a valid revenue-raising measure will be upheld.

2. The Spending Power

The Constitution (Article I, Section 8) gives Congress the power to spend the money it raises with its taxing power. This involves policy choices, with which taxpayers may disagree. Congress can spend funds to promote any objective, so long as it does not violate the Bill of Rights.

II. Business and the Bill of Rights

The first ten amendments to the Constitution protect individuals and businesses against some interference by the federal government. Under the due process clause of the Fourteenth Amendment, many rights also apply to the states.

A. Freedom of Speech

The First Amendment guaranty of freedom of speech applies to the federal and state governments.

1. Protected Speech

Includes symbolic speech—nonverbal expressions, such as gestures, arti­cles of clothing, some acts and so on. Governments can regulate the time, place, and manner of speech.

2. Speech with Limited Protection
a. Commercial Speech

A state restriction on commercial speech, such as advertising, is valid as long as it (1) seeks to implement a substantial government interest, (2) directly advances that interest, and (3) goes no further than nec­essary to accomplish its objective.

b. Corporate Political Speech

States can prohibit corporations from using corporate funds for in­dependent expressions of opin­ion about political candidates.

3. Unprotected Speech
a. Defamatory Speech

Speech that harms the good reputation of another. Such speech can take the form of libel (if it is in writing) or slander (if it is oral).

b. Lewd and Obscene Speech

States can ban child pornography. One court has banned lewd speech and pornographic pinups in the workplace.

c. “Fighting Words”

Words that are likely to incite others to violence.

d. Online Obscenity

Attempts to regulate obscene materials on the Internet have been challenged, and some have been struck, as unconstitutional.

B. Freedom of Religion

Under the First Amendment, the government may not establish a religion (the establishment clause) nor prohibit the exercise of religion (the free exercise clause).

1. The Establishment Clause

The government cannot show a preference for one religion over another, but must accommodate all religions. Sunday “closing laws” (restrictions on commercial acts on Sunday) have been upheld on the ground it is a legitimate government function to provide a day of rest.

2. The Free Exercise Clause

A law that infringes on the free exercise of religion in public places must be justified by a compel­ling state interest. Employers must reasonably accom­modate the religious practices of their employees.

C. Searches and Seizures

Under the Fourth Amendment, law enforcement and other government officers cannot conduct unreason­able searches or seizures.

1. Search Warrant

An officer must obtain a search warrant before search­ing or seizing private property. It must de­scribe what is to be searched or seized.

a. Probable Cause

To obtain a warrant, the officer must convince a judge that there is probable cause (evidence that would convince a reasonable person a search or seizure is justified).

b. General and Neutral Enforcement Plan

To obtain a warrant to inspect business premises, government inspec­tors must have probable cause, but the standard is different: a general and neutral enforcement plan is enough.

2. No Search Warrant

No warrant is required for seizures of spoiled or contaminated food or searches of businesses in highly regulated industries. General manufac­turing is not considered a highly regulated industry.

D. Self-Incrimination

Under the Fifth Amendment, no person can be compelled to give testimony that might subject him or her to a criminal prosecution.

1. Sole Proprietors

Individuals who own their own businesses and have not incorporated cannot be compelled to pro­duce their business records.

2. Partnerships and Corporations

Partnerships and corporations can be compelled to produce their busi­ness records, even if the records incriminate the persons who constitute the business entity.

III. Due Process and Equal Protection
A. Due Process

Both the Fifth and the Fourteenth Amendments provide that no person shall be deprived “of life, lib­erty, or property, without due process of law.”

1. Procedural Due Process

Any government decision to take away the life, liberty, or property of an individual must include procedural safeguards to ensure fairness.

2. Substantive Due Process

Substantive due process focuses on the content (substance) of legislation.

a. Compelling Interest Test

A statute can restrict an individual’s fundamental right (such as all First Amendment rights) only if the statute promotes a compelling or overriding governmental interest.

b. Rational Basis Test

Restrictions on business activities must relate rationally to a legitimate government purpose. Most business regulations qualify.

B. Equal Protection

The Fourteenth Amendment prohibits a state from denying any person “the equal protection of the laws.” The due process clause of the Fifth Amendment applies the equal protection clause to the fed­eral government.

1. What Equal Protection Means

Equal protection means that the government must treat similarly situ­ated individuals in a similar manner. If a law distinguishes among individuals, the basis for the distinction (classifica­tion) is examined.
a. Strict Scrutiny

A law that inhibits some persons’ exercise of a fundamental right or a classification based on a suspect trait must be necessary to promote a compelling state interest.

b. Intermediate Scrutiny

Laws using classifications based on gender or legitimacy must be substantially related to impor­tant government objectives.

c. The “Rational Basis” Test

In matters of economic or social welfare, the classification will be considered valid if there is any conceivable rational basis on which it might relate to any legitimate government interest.

2. The Difference between Substantive Due Process and Equal Protection

A law that limits the liberty of all persons to do something may vio­late substantive due process. A law that limits the liberty of only some persons may violate equal protection.

C. Privacy Rights

There is no specific guarantee of this right, but it is de­rived from guarantees in the First, Third, Fourth, Fifth, and Ninth Amendments. There are a number of federal statutes that protect privacy in certain areas.

True-False Questions

(Answers at the Back of the Book)

___ 1. A federal form of government is one in which a central authority holds all power.
___ 2. The president can hold acts of Congress and of the courts unconstitutional.
___ 3. Congress can regulate any activity that substantially affects commerce.
___ 4. A state law that substan­tially impinges on interstate commerce is unconstitutional.
___ 5. When there is a direct conflict between a federal law and a state law, the federal law is invalid.
___ 6. If a tax is reasonable, it is within the federal taxing power.
___ 7. The Bill of Rights protects individuals against various types of interference by the federal government only.
___ 8. Any restriction on commercial speech is unconstitutional.
___ 9. Due process and equal protection are different terms for the same thing.
___ 10. A right to privacy is not specifically guaranteed in the U.S. Constitution.
Fill-in Questions

(Answers at the Back of the Book)

Police power is possessed by the _______________________________ (federal government/states). Police power refers to the right of the _____________________ (federal government/states) to regulate private activi­ties to protect or promote the public order, health, safety, morals, and general welfare. Building codes, licensing requirements, and many other __________________ (federal/state) statutes have been enacted under the police power.
Multiple-Choice Questions

(Answers at the Back of the Book)

___ 1. Of the three branches of the federal government provided by the Constitution, the branch that makes the laws is
a. the administrative branch.

b. the executive branch.

c. the judicial branch.

d. the legislative branch.

___ 2. Under the commerce clause, Congress can regulate
a. any commercial activity in the United States.

b. any noncommercial activity in the United States.

c. both a and b.

d. none of the above.

___ 3. A business challenges a state law in court, claiming that it unlawfully interferes with interstate com­merce. The court will consider
a. only the state’s interest in regulating the matter.

b. only the burden that the law places on interstate commerce.

c. the state’s interest in regulating the matter and the burden that the law places on interstate commerce.

d. none of the above.

___ 4. A state statute that bans corporations from making political contributions individuals can make is likely unconstitutional under
a. the commerce clause.

b. the First Amendment.

c. the supremacy clause.

d. none of the above.

___ 5. A state statute that bans certain advertising practices to prevent consumers from being misled is likely unconstitutional under
a. the commerce clause.

b. the First Amendment.

c. the supremacy clause.

d. none of the above.

___ 6. Procedures that are used to decide whether to take life, liberty, or property are the focus of constitu­tional provisions covering
a. equal protection.

b. procedural due process.

c. substantive due process.

d. the right to privacy.

___ 7. A law that limits the liberty of all persons to engage in a certain activity may violate constitutional provisions covering
a. equal protection.

b. procedural due process.

c. substantive due process.

d. the right to privacy.

___ 8. A law that restricts most vendors from doing business in a heavily trafficked area might be upheld un­der constitutional provisions covering
a. equal protection.

b. procedural due process.

c. substantive due process.

d. the right to privacy.

___ 9. Congress enacts a law covering airports. If a state enacts a law that directly conflicts with this federal law
a. both laws are valid.

b. neither law is valid.

c. the federal law takes precedence.

d. the state law takes precedence.

___ 10. Under the First Amendment, protected speech includes
a. dissemination of obscene materials.

b. “fighting words.”

c. speech that harms the good reputation of another.

d. none of the above.

Short Essay Questions
1. What is the effect of the supremacy clause?
2. What is the significance of the commerce clause?
Issue Spotters

(Answers at the Back of the Book)

1. Can a state, in the interest of energy conservation, ban all adver­tising by power utilities if conservation could be accomplished by less restrictive means? Why or why not?
2. Would a state law imposing a fifteen-year term of imprisonment without allowing a trial on all businessper­sons who appear in their own television commercials be a violation of substantive due process? Would it violate procedural due process?
3. Would it be a violation of equal protection for a state to impose a higher tax on out-of-state companies doing business in the state than it imposes on in-state companies if the only reason for the tax is to protect the local firms from out-of-state competition?
Special Information for CPA Candidates
In the past, most of the information covered in this chapter has not been included in the CPA examination. Those who sit for the exam are expected to know, however, that states base their regulation of professional licens­ing on their police powers. Test-takers will also be expected to know that the Securities Exchange Commission bases its regula­tion of securities on the Constitution’s commerce clause.
When confronted with a multiple-choice question on the exam that covers these areas of the law, it is impor­tant to attempt to answer the question, even if it is not clear what the answer is. This is because in grading the mul­tiple-choice portion of the exam, there is no deduction for wrong answers. Scores are based only on the total number of correct answers.
Cumulative Hypothetical Problem

for Unit One—Including Chapters 1–4

(Answers at the Back of the Book)

Computer Data, Inc. (CDI), incorporated and based in California, signs a contract with Eagle Manufacturing Corporation, incorporated and based in Arizona, to make and sell customized software to Eagle for resale to consumers. CDI ships defective software to Eagle, which causes losses estimated at $100,000.
___ 1. Eagle and CDI enter into mediation. In mediation, the parties
a. may come to an agreement by mutual consent.

b. must accept a winner-take-all result.

c. settle their dispute without the assistance of a third party.

d. submit their dispute to a mediator for a legally binding decision.

___ 2. Eagle could file a suit against CDI in
a. Arizona only.

b. California only.

c. a federal court only.

d. Arizona, California, or a federal court.

___ 3. Eagle files a suit against CDI, seeking the amount of its losses as damages. Damages is a remedy
a. at law.

b. in equity.

c. at law or in equity, depending on how the plaintiff phrases its complaint.

d. at law or in equity, depending on whether there was any actual “damage.”

___ 4. Federal authorities file charges against CDI, alleging that the shipment of defective software vio­lated a federal statute. CDI asks the court to exercise its power of judicial review. This means that the court can review
a. the actions of the federal authorities and declare them excessive.

b. the charges against CDI and declare them unfounded.

c. the statute and declare it unconstitutional.

d. the totality of the situation and declare it unethical.

___ 5. Arizona enacts a statute that restricts certain kinds of advertising by Eagle and other businesses to pro­tect consumers from being misled. A court would most likely hold this statute to be
a. an unconstitutional restriction of speech.

b. constitutional under the First Amendment.

c. justified by the need to protect individual rights.

d. necessary to protect state interests.

Questions on the Focus on Legal Reasoning for Unit One—

Kasky v. Nike, Inc.

(Answers at the Back of the Book)

___ 1. In Kasky v. Nike, Inc., in the majority’s opinion, commercial speech is distinguished from other speech in part by
a. its capacity to inform the public.

b. its contribution to the marketplace of ideas.

c. its inherent worth.

d. the identity of the speaker.

___ 2. In the dissent’s opinion, commercial speech should be distinguished from other speech by
a. its capacity to inform the public.

b. its content.

c. its inherent worth in the marketplace of ideas.

d. the identity of the speaker.

___ 3. According to the majority, its holding regarding the defendant would have a chilling effect on
a. commercial speech only.

b. public debate only.

c. commercial speech and public debate.

d. none of the above.

Questions on the Focus on Ethics for Unit One—

Ethics and the Legal Environment of Business

(Answers at the Back of the Book)

___ 1. The managers of Standard Products Company (SPC) evaluate its sale of possibly defective goods in terms of its ethical obligations, if any. In other words, the managers are considering SPC’s
a. legal liability.

b. maximum profitability.

c. optimum profitability.

d. right or wrong behavior.

___ 2. Obstacles to ethical business behavior by SPC’s managers include
a. co-workers’ dissent to unethical decisions.

b. legislative determinations as to what is in society’s best interest.

c. the accountability of SPC to society for the firm’s actions.

d. the collectivity of corporate decision making.

___ 3. If SPC conducts its operations ethically, there will be a likely increase in its
a. future profits, goodwill, and reputation.

b. future profits only.

c. good will only.

d. reputation only.

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