Brief Fact Summary.
Reeves is an out-of-state contractor that relied on a cement factory in South Dakota for its cement. When a cement shortage hit South Dakota, the legislature ordered that the cement plant must first supply all of South Dakota’s customers before honoring out-of-state contracts or commitments. Reeves brought suit in district court, alleging that this violated the Dormant Commerce Clause.
Synopsis of Rule of Law.
When a state acts as a market participant, and not as a market regulator, it may favor in-state residents over out-of-state interests.
Whatever limits might exist on a State's ability to invoke the Alexandria Scrap exemption to hoard resources which by happenstance are found there, those limits do not apply here.View Full Point of Law
The State of South Dakota built a cement plant in response to cement shortages within the state. The Commission concluded that all of the cement produced would be needed inside the state. Nevertheless, the plant’s output exceeded South Dakota customers’ needs for many years, and the plant was able to supply cement to both in-state and out-of-state contractors. Later, a boom in the construction industry coincided with internal difficulties at the plant. As a result, the plant was unable to fill all of its cement orders. To combat this problem, the Commission reaffirmed that the plant should preferentially supply cement to South Dakota contractors first before filling orders with out-of-state contractors. Reeves, Inc. (Reeves) was an out-of-state contractor who suffered serious financial harm when the plant stopped filling its orders. Reeves sued in district court, challenging the state’s cement sales policy. Reeves argued that the policy unconstitutionally discriminated against interstate commerce in violation of the Dormant Commerce Clause.
Does South Dakota’s preferential treatment of South Dakota residents in its sale of state-produced cement violate the Dormant Commerce Clause?
No, South Dakota’s preferential treatment of South Dakota residents in its sale of state-produced cement was not a violation of the Dormant Commerce Clause because South Dakota was acting as a market participant.
Unlike in Alexandria Scrap, the policy of the Commission has cut off interstate trade. The State can raise such a bar when it enters the market to supply its own needs. In order to ensure an adequate supply of cement for public uses, the State can withhold from interstate commerce the cement needed for public projects. The State, however, has no parallel justification for favoring private, in-state customers over out-of-state customers. South Dakota has shut off its cement sales to customers beyond its borders – that discrimination is a direct barrier to trade of the type forbidden by the Commerce Clause.
Per Hughes v. Alexandria Scrap Corp. (1976), the Commerce Clause is not concerned with the state when it is acting as a market participant. A market participant may freely exercise their own independent discretion as to parties with whom they will deal. Here, South Dakota is a market participant because it built the plant and sold the cement using the State’s money. It is important to note that the Commerce Clause responds principally to state taxes and regulatory measures impeding free private trade in the national market. The Commerce Clause does not, however, limit the ability of the States themselves to operate freely in the free market.