Thursday, December 6, 2012

Michigan Bottle Returns and the Dormant Commerce Clause

Recently the U.S. Court of Appeals for the Sixth Circuit decided a dormant commerce clause case involving Michigan's bottle law in American Beverage Association v. Snyder.  Michigan requires a 10 cent deposit on glass, plastic, or aluminum bottles containing one gallon or less of a soda drink, soda water, carbonated natural or mineral water, other nonalcoholic carbonated drinks, beer, ale, or other malt drinks with alcoholic content, mixed wine drinks or mixed spirit drinks.  MCL 445.571.  The deposit is refunded when the empty bottle is returned for recycling.  Retailers are only required to refund up to $25 per retailer per person each day. MCL 445.572(10).  75% of unclaimed deposits go to the state for environmental programs and 25% go to retailers.  According to the Michigan Department of the Treasury between 1990 and 2008 97.27% of the deposits were refunded ($7,708,600,000 in deposits were collected and $7,492,700,000 were refunded).  http://www.michigan.gov/documents/deq/dnre-whmd-sw-mibottledepositlawFAQ_318782_7.pdf

Only ten states have bottle deposit laws.  The others are Oregon, California, Iowa, New York, Vermont, Maine, Hawaii, Connecticut, and Massachusetts.  Most of these laws require a 5 cent deposit.  Guam also requires bottle deposits. 

Sometimes bottles are returned for refund in Michigan that were purchased in states where either a lesser deposit or no deposit was paid on the bottle.  This is illegal in Michigan with penalties ranging from a $100 civil fine (between 25 and 100 bottles returned) to up to 93 days in jail and a $1,000 fine (between 100 and 10,000 bottles returned) to up to 5 years imprisonment and a $5,000 fine (over 10,000 bottles returned).  MCL 445.574a.  Schemes of this type have been uncovered in the past and were even featured in a Seinfield episode.  One article from 2007 estimated that this fraudulent conduct costs Michigan $13 million per year.    Ethan Trex, "Why are Michigan's Bottle Deposits so High?," CNN.com, http://www.cnn.com/2011/LIVING/04/14/michigan.bottle.deposit.mf/index.html (April 14, 2011).
"Michigan Officials Bust Bottle-Deposit Fraud Ring", Foxnews.com  http://www.foxnews.com/story/0,2933,298433,00.html (Sept. 28, 2007).

Initially to combat this problem the bottle law required that "MI 10¢" appear on the bottle.  MCL 445.571(d).  In 2008 to further identify bottles sold in Michigan subject to the deposit the legislature required that bottlers meeting certain sales thresholds place an additional symbol or mark on the bottle to make it unique to the state.  MCL 445.572a(10). 

In February 2011 the American Beverage Association sued in the United States District Court for the Western District of Michigan claiming that this provision created a Michigan exclusive beverage market which would negate the efficiency benefits of large scale production, eliminate flexibility in the supply chain, and discriminate against out of state bottles and commerce.  http://www.mlive.com/news/index.ssf/2011/03/beverage_industry_sues_michiga.html  The association requested an injunction against the enforcement of this part of the law and a declaratory judgment that it is unconstitutional.  Both sides moved for summary judgment.

The commerce clause in Article I, Section 8 of the U.S. Constitution grants Congress the power to regulate commerce with foreign nations and between the states.  The commerce clause has a negative implication in that if Congress has the power to regulate commerce then the power of states to regulate commerce is restricted.  States may not unjustifiably discriminate against or overly burden interstate commerce.  This is the dormant commerce clause.  The dormant commerce clause is analyzed first by determining if the state statute directly discriminates against state commerce, favors in-state interests over out of state interests  or applies extraterritorially.  Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S. 573 (1986).  Extraterritoriality exists if a statute "directly controls commerce occurring wholly outside the boundaries of a State [and] exceeds the inherent limits of the enacting State's authority."  Healy v. Beer Inst. Inc., 491 U.S. 324, 336 (1989).  Extraterritoriality may be established by the consequences of the statute, how the statute would interact with regulation in other states, or what the effect would be if every state adopted a similar statute.  Id.   When a statute is extraterritorial it is unconstitutional without further inquiry.   If a statute is discriminatory then the burden of proof shifts to the defendant to show that the state statute "advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives."  Dept. of Revenue of Ky. v. Davis, 553 U.S. 328 (2008).  However, if a statute is not discriminatory or extraterritorial then the court applies the Pike balancing test where the statute is unconstitutional only if "the burden it imposes upon interstate commerce is 'clearly excessive in relation to the putative local benefits.'"  Pike v. Bruce Church Inc., 397 U.S. 137, 142 (1970).

U.S. District Judge Gordon Quist ruled that the law did not have an extraterritorial intent of harming businesses out of state and did not discriminate against interstate commerce by favoring in-state interests over out of state interests.  He granted summary judgment on those points for the defendants, but reserved for trial the question of whether the burden on interstate commerce was clearly excessive in relation to the state's benefits under Pike.  As this is not a final order the Plaintiffs sought and received certification and leave to appeal the discrimination and extraterritoriality issues on an interlocutory basis.

The United States Court of Appeals for the 6th Circuit ruled on November 30, 2012 that the bottle unique mark law had an impermissible extraterritorial effect as it did not consider less burdensome alternatives.   Judge Clay wrote the opinion which was unanimous with concurrences by Judge Sutton and Judge Rice.  The Sixth Circuit agreed that the law did not discriminate against interstate commerce facially, purposefully, or in its effect.  However the Court ruled that the law was extraterritorial because its practical effect was to control commerce beyond Michigan's boundaries.  The Court reasoned that the bottles could not be used outside of Michigan, that other states might follow suit with laws that conflict with each other, that the statute involved criminal penalties, that the state did not consider alternative approaches to dealing with the fraudulent redemption issue, and that other states had not imposed this kind of approach.  Mainly though, the Court found that the bottle law allows Michigan to force distributors to package a unique product for Michigan, but also allows Michigan to determine where the containers can be sold which would force other states to react or face legal issues.  The Court said, "Thus, Michigan is forcing states to comply with its legislation in order to conduct business within its state, which creates an impermissible extraterritorial effect and is in violation of the Supreme Court's precedent stated in Brown-Forman and Healy."  American Beverage Association v. Snyder, 11-2097 (6th Cir. 2012).  Michigan was essentially criminalizing the sale of bottles in Ohio that have the Michigan unique mark.  The law impliedly required manufacturers to use a different mark everywhere else.  As less burdensome alternatives existed and were not considered by Michigan, the Court found that the statute was unconstitutional under the dormant commerce clause. 

Judge Sutton wrote a concurrence noting that extraterritoriality is an obsolete concept in that states frequently regulate activities occurring within them, but which affect many states such as California's higher state emissions standards for automobiles.  He also cited Ohio's state specific milk labels, Vermont's light bulb warnings about mercury, and state taxes on businesses operating across state lines.  He argued that the extraterritoriality test should be removed from the dormant commerce clause doctrine.

Judge Rice wrote a brief concurrence clarifying and distinguishing a case cited by the district court and noting that there is no additional inquiry into alternatives after extraterritoriality is found as that is enough to invalidate the law.  The additional inquiry only occurs if the law is either 1) discriminatory or 2) not discriminatory nor extraterritorial.



http://www.ca6.uscourts.gov/opinions.pdf/12a0394p-06.pdf

http://www.michigan.gov/documents/deq/dnre-whmd-sw-mibottledepositlawFAQ_318782_7.pdf

http://www.legislature.mi.gov/(S(sbvr5w45d5i5azjhufli5o45))/mileg.aspx?page=getObject&objectName=mcl-Initiated-Law-1-of-1976

http://www.mlive.com/news/grand-rapids/index.ssf/2012/11/appeals_court_rejects_michigan.html

http://www.detroitnews.com/article/20121130/POLITICS02/211300384

s/ Kurt Koehler
308 1/2 S. State Street Suite 36
Ann Arbor, Michigan 48198
(Washtenaw County)

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