Chapter 5

Constitutional law for

Business and E-Commerce

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 Chapter objectives
After studying this chapter, you should be able to:
1. Describe the concept of federalism and the doctrine
of separation of powers.
2. Define and apply the Supremacy Clause of the US
Constitution.
3. Explain the federal government’s authority to
regulate foreign commerce and interstate
commerce.
4. Explain how speech is protected by the First
Amendment.
5. Explain the doctrines of equal protection and due
process.
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 Chapter Contents
• Introduction
• Constitution of the United States of America
• Supremacy Clause
• Commerce Clause
• Bill of Rights
– Freedom of Speech
– Freedom of Religion
– Equal Protection Clause
– Due Process Clause
– Privileges and Immunities Clause
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 Introduction
• Independence of the United States of America
declared in 1776.
• The chapter examines the major provisions of the
U.S. Constitution and its amendments.
• Of particular importance, this chapter discusses how
these provisions affect the operations of business.
• The Constitution, with amendments, is set forth as
appendix A of the textbook.

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 Constitution of the USA
Preamble

“We the People of the United States, in Order

to form a more perfect Union, establish Justice,
insure domestic Tranquility, provide for the
common defense, promote the general
Welfare, and secure the Blessings of Liberty to
ourselves and our Posterity, do ordain and
establish this Constitution for the United States
of America.”

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 Constitution of the USA
• The Constitutional Convention was convened in Philadelphia
in May 1787.
• The US Constitution was ratified by the states in 1788.
• Many amendments, including the Bill of Rights, have been
added to the Constitution since that time.
• The US Constitution serves 2 major functions:
1. It creates the three branches of government (executive,
legislative, and judicial) and allocates powers to these
branches.
2. It protects individual rights by limiting the government’s
ability to restrict those rights.

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Basic Constitutional Concepts

Federalism and
Delegated Powers

Separation of Powers

Checks and Balances

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Federalism and Delegated Powers (1/2)

• Federalism is the U.S. form of

government: The federal government
and the 50 state governments share
powers (dual sovereignty).
• When the states ratified the Constitution,
they delegated certain powers to the
federal government. They are called
enumerated powers.
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Federalism and Delegated Powers (2/2)
• The federal government is authorized to deal with
national and international affairs.
• Examples: Interstate commerce and foreign affairs.
• Powers that are not specifically delegated to the
federal government by the Constitution are reserved
to the states.
• State governments are empowered to deal with
local affairs.
• Example: States enact laws that provide for the
regulation of partnerships and corporations.

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Doctrine of Separation of Powers (1/4)

The federal government is divided into 3

branches:
• The legislative branch makes the laws
• The executive branch enforces the laws
• The judiciary branch interprets the laws

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 Doctrine of Separation of Powers (2/4)
The legislative branch
• Article I of the Constitution establishes the legislative
branch of government, which is the US Congress.
– This branch is bicameral.
– It consists of:
 the Senate (each state elects 2 senators; there
are 100 senators);
 the House of Representatives (their number is
determined according to the population of each
state; currently there are 435 representatives).
• The legislative branch is responsible for making federal
law.

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 Doctrine of Separation of Powers (3/4)

• Article II of the Constitution establishes the

executive branch of the federal government.
• It consists of the US President and Vice President
• They are elected by an electoral college whose
representatives are appointed by state delegations.
• The executive branch is responsible for enforcing
federal law.

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 Doctrine of Separation of Powers (4/4)

• Article III of the Constitution establishes the

judicial branch of the government.
• It consists of:
– The Supreme Court; and
– other federal courts that may be created by
the Congress
• The judicial branch is responsible for
interpreting the U.S. Constitution and federal
law.
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 Checks and balances (1/3)

are built into the constitution to

ensure that no one branch of the
federal government becomes too
powerful.

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 Checks and balances (2/3)
Examples

• The judicial branch has authority to examine the acts of

the other two branches of government and determine
whether these acts are constitutional.
• The executive branch can enter into treaties with
foreign governments only with the advice and consent
of the Senate.
• The legislative branch is authorized to create federal
courts and determine their jurisdiction and to enact
statutes that change judicially made law.
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 Checks and balances (3/3)
Examples

• The president has veto power over bills passed by

Congress; but the Congress can override the president’s
veto by a vote of two-thirds of each of its houses.
• The House of Representatives has the power to
impeach the president for certain activities, such as
treason, bribery, and other crimes.
• The Senate has the power to try an impeachment case
of the US President. A two-thirds vote of the Senate is
required to impeach the president.

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 Supremacy Clause 1/2
• Supremacy Clause – establishes that the federal
Constitution, treaties, federal laws, and federal
regulations are the supreme law of the land.
• State and local laws that conflict with valid federal law
are unconstitutional.
• The concept of federal law taking precedence over state
or local law is commonly called the preemption
doctrine.
• Congress may expressly provide that a particular federal
statute exclusively regulates a specific area or activity.

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 Supremacy Clause 2/2
• No state or local law regulating the area or activity is
valid if there is such a statute.
• But often federal statutes do not expressly provide for
exclusive jurisdiction.
• In these instances, state and local governments have
concurrent jurisdiction to regulate the area or activity.
• However, any state or local law that “directly and
substantially” conflicts with valid federal law is
preempted under the Supremacy Clause.
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 Commerce Clause (1/10)
• A clause of the U.S. Constitution that grants
Congress the power to regulate commerce:
– With foreign nations;
– among the several states; and
– with Indian tribes.
• This clause has a greater impact on business than
any other provision in the Constitution.
• This clause is intended to foster the development
of a national market and free trade among
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 Commerce Clause (2/10)
Commerce with Native Americans

• The United States consider Native Americans “domestic

dependent” nations with limited sovereignty.
• Under the Commerce Clause, the federal government entered
into treaties with many Native American tribes (eventually broke
many of them).
• Most Native American tribes forced to sell their lands to the
federal government and relocated to other pieces of land called
“reservations”.
• The Indian Gaming Regulatory Act (late 1980s) authorized Native
American tribes to operate gaming facilities.
• Today, profits from these casinos have become an important
source of income for members of certain tribes.
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 Commerce Clause (3/10)
Foreign Commerce 1/2

• The Commerce Clause of the U.S. Constitution gives the

federal government the exclusive power to regulate
commerce with foreign nations.
• This is called the Foreign Commerce Clause.

• Example: The federal government could enact a law that

forbids another country from doing business in the
United States if that country engages in activities that
are not condoned by the United States.

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 Commerce Clause (4/10)
Foreign Commerce 2/2

• Direct and indirect regulation of foreign

commerce by state or local governments that
discriminates against foreign commerce violates
the Foreign Commerce Clause.
• It is therefore unconstitutional.
• Example: Michigan state legislature enacts a law
that imposes a 100% tax on foreign cars.

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 Commerce Clause (5/10)
Interstate Commerce

• The Commerce Clause gives the federal

government the authority to regulate:
– Interstate commerce that crosses state
borders.
– Intrastate commerce that affects interstate
commerce.
• Landmark U.S. Supreme Court/ Case interstate
commerce: Heart of Atlanta Motel v. United
States (page 135 of e-textbook).
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 Commerce Clause (6/10)
Heart of Atlanta Motel v. United States 1/2

The Heart of Atlanta Motel, located in the state of Georgia

refused to rent rooms to Blacks.
Congress enacted the Civil Rights Act of 1964, which made
it illegal for motels, hotels, and other public
accommodations to discriminate against guests based on
their race.
The owner-operator of the motel brought a declaratory
relief action in U.S. district court to have the Civil Rights
Act of 1964 declared unconstitutional, arguing that
Congress had exceeded its powers to regulate interstate
commerce.
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 Commerce Clause (7/10)
Heart of Atlanta Motel v. United States 2/2

The U.S. Supreme Court held that the provisions of

the Civil Rights Act of 1964 properly regulated
interstate commerce.
The Court stated that the power of Congress is not
confined to the regulation of commerce among
the states; it extends to those activities intrastate
which affect interstate commerce.

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 Commerce Clause (8/10)
States’ Police Power
• The states retained the power to regulate intrastate
and much interstate business that occurs within their
borders (this in commonly referred as the states’
Police Power).
• States (and, by delegation, local governments) can
enact laws that protect or promote the public health,
safety, morals, and general welfare.
• This includes the authority to enact laws that
regulate the conduct of business.
• Example: State real property laws, personal property
laws, and state environmental laws are enacted
under state police power.
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 Commerce Clause (9/10)
E-Commerce and the Constitution
• The advent of the Internet has caused a
revolution in how commerce is conducted.
• Some businesses that conduct e-commerce over
the Internet do not have any physical location.
• Because e-commerce is commerce, it is subject
to the Commerce Clause.

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 Commerce Clause (10/10)
Digital Law (pp. 136-137 of e-textbook)
Michigan law permits in-state wineries to sell wine directly to
consumers, including by mail, Internet, and other means of sale.
Michigan law prohibits out-of-state wineries from selling wine
directly to Michigan consumers, including over the Internet, and
requires them to sell their wine to Michigan wholesalers.
Several out-of-state wineries sued Michigan state.
The U.S. District Court ruled in favor of Michigan, but the U.S.
Court of Appeals ruled in favor of the out-of-state wineries. The
state of Michigan appealed to the U.S. Supreme Court.
The U.S. Supreme Court held that the Michigan state law caused
an undue burden on interstate e-commerce, in violation of the
Commerce Clause of the U.S. Constitution.
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 Bill of Rights and other Amendments to
the US Constitution (1/2)
• The U.S. Constitution provides that it may be
amended (currently, there are 27 amendments to
the U.S. Constitution).
• In 1791, the 10 amendments that are commonly
referred as the Bill of Rights were approved by the
states and became part of the U.S. Constitution.
• The Bill of Rights provides certain fundamental
freedoms and protections to natural persons
(individuals) and artificial persons (corporations).
• Fundamental rights guaranteed in the First
Amendment include freedom of speech, freedom to
assemble, freedom of the press, and freedom of
religion.
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 Bill of Rights and other Amendments to
the US Constitution (2/2)
• In addition, 17 other amendments have been added
to the Constitution (abolish slavery, prohibit
discrimination, authorize a federal income tax, give
women the right to vote, recognize that persons 18
years of age and older have the right to vote).
• The Due Process Clause of the Fourteen
Amendment (added to the Constitution in 1868)
limited intrusive actions by state and local
governments.
• Incorporation doctrine: Applied by the US Supreme
court; held that most guarantees contained in the
Bill of Rights are applicable to state and local
government action.
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 Bill of Rights
Amendments most applicable to business
• Freedom of speech;
• Freedom of religion;
• Equal protection clause;
• Due process clause; and
• Privileges and immunities clauses.

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 Freedom of Speech (1/5)
• One of the most honored freedoms guaranteed by
the Bill of Rights is the freedom of speech of the First
Amendment.
• Freedom of speech is the right to engage in oral,
written, and symbolic speech.
• The US Supreme Court places speech into 3
categories:
1. Fully protected speech
2. Limited protected speech
3. Unprotected speech
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 Fully Protected Speech (1/2)
• It’s speech that the government cannot prohibit or
regulate.
• Political speech is an example of fully protected
speech: The government could not enact a law that
forbids citizens from criticizing the current president.
• The First Amendment protects oral, written, and
symbolic speech.
• Example: Burning the American flag in protest of a
federal government military action is protected symbolic
speech.
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 Fully Protected Speech (2/2)
Case 2 - Brown, Governor of
California v. Entertainment Merchants Association
• The state of California enacted a statute that prohibits the sale or
rental of “violent video games” to minors.
• The act covers games “in which the range of options available to a
player includes killing, maiming, dismembering, or sexually
assaulting an image of a human being”.
• Members of the video game and software industries challenged
the enforcement of the act.
• The U.S. district court concluded that the act violated the First
Amendment to the U.S. Constitution.
• The U.S. court of appeals and the U.S. Supreme Court confirmed
this decision.
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 Limited Protected Speech (1/2)
• The Supreme Court has held that certain types of speech have
only limited protection under the First Amendment.
• The government cannot forbid this type of speech, but it can
subject this speech to time, place, and manner of restrictions.
• Its major forms are: Offensive speech and commercial speech.
1. Offensive speech:
– Speech that offends many members of society.
– For example, the Federal Communications Commission (FCC)
has regulated the use of offensive language on television by
limiting such language to time periods when children would be
unlikely to be watching (e.g., late at night).

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 Limited Protected Speech (2/2)
2.Commercial speech:
– Speech used by businesses, such as advertising, is
protected by the First Amendment.
– However, its content is subject to time, place, and
manner restrictions.
– Example: In Virginia State Board of Pharmacy v.
Virginia Citizens Consumer Council, the U.S. Supreme
Court held that a state statute that prohibited a
pharmacist from advertising the price of prescription
drugs was unconstitutional because it violated the
Freedom of Speech Clause.
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 Unprotected Speech 1/2
• Speech that is not protected by the First Amendment
and may be totally forbidden by the government.
• Includes the following types of speech:
1. Dangerous speech
– Example: Yelling “fire” in a crowded theater when
there is no fire.
2. Fighting words that are likely to provoke a hostile or
violent response from an average person
– Example: Walking up to a person and intentionally
calling that person names because of race or
ethnicity.
3. Speech that incites to the violent or revolutionary
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 Unprotected Speech 2/2
4. Defamatory language
– Example: Writing or telling untrue statements about
another person or a company’s products or services; the
injured party may bring a civil lawsuit to recover
damages.
5. Child pornography
– Example: Selling material depicting children engaged in
sexual activity.
6. Obscene speech
– Example: Movies, videos, music, and other forms of
speech that are obscene.
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 Freedom of Religion (1/2)
• The U.S. Constitution requires federal, state, and
local governments to be neutral toward religion.
• The First Amendment contains 2 separate religion
clauses:
1. The Establishment Clause
– Prohibits the government from either establishing a
state religion or promoting one religion over
another.
– Example: The U.S. Supreme Court ruled that an Alabama
statute that authorized a one-minute period of silence in
school for “meditation or voluntary prayer” was invalid. Court
held that the statute endorsed religion.

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 Freedom of Religion (2/2)
2. The Free Exercise Clause
– Prohibits the government from interfering with the
free exercise of religion.
– Examples: Federal, state, or local governments
cannot enact a law that prohibits all religions. The
government cannot enact a law that prohibits
churches, synagogues, mosques, or temples. It
cannot prohibit religious practitioners from
celebrating their major holidays and high holy days.

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 Equal Protection
• The Equal Protection Clause of the Fourteenth
Amendment provides that a state cannot “deny to
any person within its jurisdiction the equal
protection of the laws.”
• The clause prohibits state, local, and federal
governments from enacting laws that classify and
treat “similarly situated” persons differently.
• Artificial persons, such as corporations, are also
protected.

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 Due Process Clause 1/3
• The Fifth and Fourteenth Amendments both
contain a Due Process Clause.
• These clauses provide that no person shall be
deprived of “life, liberty, or property” without
due process of the law.
• Fifth Amendment Due Process Clause applies to
federal government action.
• Fourteenth Amendment Due Process Clause
applies to state and local government action.

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 Due Process Clause 2/3
• There are two categories of due process:
1. Substantive due process
– Requires that government statutes, ordinances,
regulations, and other laws be clear on their face and
not overly broad in scope.
– Example: A city ordinance making it illegal for
persons to wear “clothes of the opposite sex” would
be held unconstitutional as void for vagueness
because a reasonable person could not clearly
determine whether his or her conduct violates the
law.
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 Due Process Clause 3/3
2. Procedural due process
– Requires that the government give a person proper
notice and hearing of legal action before that person
is deprived of his or her life, liberty, or property.
– Example: If the federal government or a state
government brings a criminal lawsuit against a
defendant for the alleged commission of a crime, the
government must notify the person of its intent (by
charging the defendant with a crime) and provide
the defendant with a proper hearing (a trial).
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 Privileges and Immunities Clauses 1/2

• Both Article IV of the Constitution and the

Fourteenth Amendment contain Privileges and
Immunities Clauses that prohibit states from
enacting laws that unduly discriminate in favor of
their residents.
• For example, a state cannot enact a law that prevents
residents of other states from owning property or
business in the state.
• Privileges and Immunities Clauses apply only to
citizens; they don’t protect corporations.

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 Privileges and Immunities Clauses 2/2

• Courts have held that certain types of

discrimination that favor state residents over
nonresident are lawful.
• Examples:
 State universities are permitted to charge
out-of-state residents higher tuition than in-
state residents.
 States are also permitted to charge higher
fees to nonresidents for hunting and fishing
licenses.
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