Substantial Effect: Part I
The "Enterprise Concept" and "Substantial Involvement" rationales from 1937 to 1971
In Commerce Clause Jurisprudence, the case of Perez v. United States, 402 U.S. 146 (1971) is often pointed to as establishing the modern framework for Commerce Clause Jurisprudence as follows:
The Commerce Clause reaches, in the main, three categories of problems. First, the use of channels of interstate or foreign commerce[.] Second, protection of the instrumentalities of interstate commerce, […] or persons or things in commerce[.] Third, those activities affecting commerce.
Here, I would like to make two observations:
First, this three part categorization did not originate with Perez.
Second, the Court’s analysis of the “affecting commerce” category in Perez and prior cases was fairly nuanced. Cases generally centered around a firm being substantially involved in interstate commerce.
Old man Justice Douglas, as he appeared in the 1970s.
Origin of the Three Categories
I am unsure of when exactly the categories emerged, but at a minimum Congress was aware of such categorization by legislation by 1935, when it passed the National Labor Relations Act (also known as the Wagner Act).
The Wagner Act itself begins with section titled “Findings and Policy”
The denial by employers of the right of employees to organize and the refusal by employers to accept the procedure of collective bargaining lead to strikes and other forms of industrial strife or unrest, which have the intent or the necessary effect of burdening or obstructing interstate and foreign commerce by (a) impairing the efficiency, safety, or operation of the instrumentalities of commerce; (b) occurring in the current of commerce; (c) materially affecting, restraining, or controlling the flow of raw materials or manufactured or processed goods from or into the channels of commerce, or the prices of such materials or goods in commerce.
The Wagner Act proceeds to define “affecting commerce” as
in commerce, or burdening or obstructing commerce or the free flow of commerce, or having led or tending to lead to a labor dispute burdening or obstructing commerce or the free flow of commerce.
This definition of affecting commerce was drawn in response to the Court’s decision in A.L.A. Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935).
In Jones & Laughlin Steel, the Court upheld the Wagner Act against a constitutional challenge. It cited Schecter Poultry for the following proposition:
Although activities may be intrastate in character when separately considered, if they have such a close and substantial relation to interstate commerce that their control is essential or appropriate to protect that commerce from burdens and obstructions, Congress cannot be denied the power to exercise that control. [] Undoubtedly the scope of this power must be considered in the light of our dual system of government and may not be extended so as to embrace effects upon interstate commerce so indirect and remote that to embrace them, in view of our complex society, would effectually obliterate the distinction between what is national and what is local and create a completely centralized government.
It seems straightforward that by 1937, Congress and the Supreme Court were in synch on the scope of Congress’s power under the Commerce Clause. In Perez v. United States, Justice William O. Douglas - one of two remaining Justices old enough to remember the New Deal - was just restating the New Deal understanding of the law.
Meanwhile “affecting commerce” appears to have been interchangeable with “substantially affecting” or “materially affecting” commerce.
The Jones & Laughlin Understanding of Substantial Effect
Returning to the Wagner Act’s declaration of policy and definition of “affecting commerce” mentioned above, I think one could define a “substantial effect” on interstate commerce in two ways:
Things which materially or substantially burden, obstruct, restrain, or control the free flow of raw materials and manufactured goods in the marketplace.
Things which materially or substantially affect the price of such raw materials or goods in the marketplace.
What constitutes a material or substantial effect upon prices is something which is likely worth a WestLaw deep dive in and of itself, but the above description tells you enough.
The Court itself makes clear that the the power to regulate things which have a substantial effect upon interstate commerce is about “[t]he congressional authority to protect interstate commerce from burdens and obstructions." It breaks down the cases into those pertaining to the channels and instrumentalities of interstate commerce and those involving obstructions to the stream of interstate commerce. The Court had long applied a substantial effects-like test in the first category of cases, but refused to do so in the second category. Jones & Laughlin would break that mold and make the law consistent.
The subtle distinction the Court in Jones & Laughlin between the majority and the dissent over the “Stream of Commerce’ cases was as follows.
According to the dissenting Justices, Congress’s authority over activities in the “Stream of Commerce” pertains only to direct obstructions which prevent interstate transactions from taking place. The rationale was that Congress only had authority over the stream of interstate commerce itself, and those things which were inseparable from it. This mainly meant conspiracies in restraint of trade which prevented interstate transactions from taking which are subject to the antitrust laws.
According to the majority, Congress’s authority over activities in the “Stream of Commerce” goes further. If there are “certain recurring practices” which “though not really part of interstate commerce, likely to obstruct, restrain or burden” the stream of interstate commerce,” Congress “has the power to subject [those recurring practices to] national supervision and restraint.”
The distinction played out in Jones & Laughlin Steel as follows. Jones & Laughlin Steel employed tens of thousands of people in its Pennsylvania Steel Plant. It was undoubtedly a vast, national, and completely integrated enterprise with warehouses, plants, mines, instrumentalities, warehouses, subsidiaries, and sales offices in at least eight states according to the facts of the case.1 Furthermore, there was a recognized history of labor strife and unrest shutting down production at large firms in the United States. The question was whether this was the sort of obstruction that Congress could regulate.
The dissent said no, because manufacturing wasn’t the “current of commerce” itself, and that was that. The goods that were used to make finished products frequently sat in warehouses for months, and so the dissenting Justices thought it was silly to say that there was a single current of commerce from where the raw materials were sourced and the final point where manufactured. What mattered to the dissenting Justices was whether the goods were in the stream of commerce.
The majority said yes. They said that even though manufacturing was not itself interstate commerce, labor conditions shutting down manufacturing at Jones & Laughlin’s Steel plant had enough of an effect on interstate commerce to be regulated. When production shut down, there was an obstruction upon the flow of goods and had a significant impact upon the price of those goods themselves, substitutes for those goods, and on the prices of of the instrumentalities which used those goods. What mattered was whether the business enterprise itself was substantially engaged in interstate commerce and/or had a substantial effect on interstate commerce.
You could easily finesse the majority’s opinion into a two-step test: (1) is this an integrated enterprise that has a substantial effect upon interstate commerce in terms of prices or movement of goods, (2) is this a firm with a large amount of participation in interstate commerce, and (3) does the law target ‘a constantly recurring burden and obstruction’ on that enterprise? If so, then the firm has a substantial effect.
The Enterprise Concept Between Jones & Laughlin and Darby Lumber Co.
The Court later refined this “enterprise concept” in various cases before the Revolution of 1937 was displaced by a different Revolution in 1941.
In Santa Cruz Fruit Packing Co. v. N.L.R.B., 303 U.S. 453 (1938), the Court extended Jones & Laughlin to from firms in the middle of the stream of commerce to firms which produce goods for shipment elsewhere. During the peak season, Santa Cruz Packing Co. employed 1,200 to 1,500 persons. They packed and shipped off 1,699,270 cases in 1935, of which 37% were shipped out of state. This was deemed to be enough participation in interstate commerce to fall into federal jurisdiction, and the Court left the issues of line-drawing for another day.
But the Court was sure to remind readers of Schechter Poultry.
It is also clear that where federal control is sought to be exercised over activities which separately considered are intrastate, it must appear that there is a close and substantial relation to interstate commerce in order to justify the federal intervention for its protection. However difficult in application, this principle is essential to the maintenance of our constitutional system. The subject of federal power is still ‘commerce,’ and not all commerce but commerce with foreign nations and among the several states. The expansion of enterprise has vastly increased the interests of interstate commerce, but the constitutional differentiation still obtains. Schechter Poultry Corporation v. United States, 295 U.S. 495, 546, 55 S.Ct. 837, 850, 79 L.Ed. 1570, 97 A.L.R. 947. ‘Activities local in their immediacy do not become interstate and national because of distant repercussions.’ Id., 295 U.S. 495, at page 554, 55 S.Ct. 837, 853, 79 L.Ed. 1570, 97 A.L.R. 947.
Here, you see all three criteria present. (1) The firm has a large amount of goods moving across state lines as an absolute matter, (2) the firm has a sufficiently large percentage of its goods leaving the state, and (3) the recurring issue of labor strife was present.
But there are still open questions. The Court did not just leave line drawing for another day - it said that any pursuit of “mathematical or rigid formulas” was a fool’s errand, because “it is inevitable that we should define their applications in the gradual process of inclusion and exclusion.” Whether “upon particular facts” something has “such a close and substantial relation to the freedom of interstate commerce from injurious restraint” would ultimately depend on what the problem was that Congress was targeting. Hughes proceeded to give the following example of where “[t]he question of degree is … met in other relations.”
Price Regulation: “It is met whenever the Interstate Commerce Commission is required to find whether an intrastate rate or practice of an interstate carrier causes an undue and unreasonable discrimination against interstate or foreign commerce”
Employer Liability: “It is met under the Federal Employers' Liability Act, where the question is whether the employee's occupation at the time of his injury is ‘in interstate transportation, or in work so closely related to such transportation as to be practically a part of it.”
Antitrust: “It is met in the enforcement of the Clayton Act in determining whether the effect of the described provisions in contracts for the sale of commodities is ‘to substantially lessen competition.”
He concluded this explanation by insisting that “[s]uch questions cannot be escaped by the adoption of any artificial rule.” He isn’t wrong that you can adopt any one rule to resolve all of these questions, but it’s a headscratcher to think that you cannot at least adopt bright-line rules depending on the sort of regulatory scheme you’re engaging with. The fact that the the Substantial Effect test is apparently tied to the existence of particular sorts of “constantly recurring burden[s] and obstruction[s]” just screams of a need to at least have some sort of line-drawing premised upon the problem being addressed.
And we have other open questions too even if we’re only focusing on labor regulation. Does a firm have to have a large amount of interstate activity and a substantially large percentage of its transactions be interstate ones? Does how large a percentage it need be vary based upon how large the firm in question is? Given the retention of Schechter Poultry, does how large the firm is depend on the firm’s position in the supply chain? Does the fact that the goods have “come to rest” in a state mean everything after is jurisdictionally off limits? It looks like we need another case for thee answers.
In National Labor Relations Board v. Fainblatt, 306 U.S. 601 (1938), the Court tidied things up nicely. The plaintiffs tried to argue that the National Labor Relations Act didn’t apply to them because, unlike Jones & Laughlin Steel, they were small fry.
The Court made clear that the bigness of Jones & Laughlin Steel was besides the point. If a firm is in the stream of interstate commerce - constantly bringing in materials from out of state to manufacture products and shipping such products out of state - then it is acting in interstate commerce. Here, the ‘constantly recurring burden and obstruction’ was the prospect of labor strife.
In U.S. v. Darby, 312 U.S. 100 (1941), the Court made clear that so long as a sufficiently large portion of goods made by a firm are bound for in interstate commerce, Congress could regulate the production practices of the entire enterprise. Sort of. The statute doesn’t actually prohibit child labor, it prohibited the interstate shipment of goods made with child labor.
The Darby Lumber Company tried to argue that the law could only be applied against workers who made wood destined for out of state, not workers who prepped the wood for in state. The Court said this was irrelevant, and that when interstate and intrastate commercial activities are “so comingled” as to be practically impossible to regulate separately, Congress could treat them all as one and the same when “a substantial part” of the product being produced or handled was bound for interstate or foreign commerce.
At this point, a simple rule could be put forward: If a substantially large portion of a firm’s transactions, importations, and/or shipments are made in or bound for interstate or foreign commerce, the firm's labor, production, employment, and compensation practices can be regulated as a unit. How large the firm itself was would be irrelevant going forward: what mattered was that it was a substantial participant.
But was the Darby Lumber Co., a substantial participant? Neither the opinion, the lower court opinion, nor the briefs submitted by the parties provided for any dollar figure. Though Santa Cruz Packers said 37% was sufficient, Darby simply says that “a large part” of the lumber produced was bound for out of state. Neither the lower court opinion, the government’s brief, nor Darby Lumber Co.’s brief list any numbers either.
The closest thing to providing figure is the government’s contention that lumber markets are special. Its brief notes that “over 57 percent of the lumber produced enters into interstate or foreign commerce from 45 of the states.” It continues to list a variety of facts: “[l]umber is produced in every state but North Dakota, and shipped in interstate commerce from every state but three,” “Washington and Oregon, ship lumber to each of the forty-seven other states, and Alabama … ships to thirty-six other states.” It continued to note that “[t]he interstate character of the competition in the lumber markets” was further demonstrated “by the number of producing states from which each state obtains the lumber it consumes.” Major consumers included “New York [which] receives lumber from thirty-eight other states, Ohio from thirty-six, [and] Illinois from thirty-four.”
Shifting to the facts of the case at hand, the government emphasized the following: “ Even the producing states receive substantial quantities of lumber from without their borders, Georgia, for example, receiving over seventeen percent of the lumber it consumes from seventeen other states. The appellee's own operations are shown by the indictment to extend as far afield as New York, Ohio, South Carolina, and Florida.”
So I think the answer here is that certain commodities - like lumber - are
inherently interstate and so comingled such that any and all participation by a firm in the given industry is sufficient to establish a jurisdictional hook for purposes of quality control and price regulation. The Court’s decisions regarding other fungible commodities in the immediate period tend to conform to such a rationale.2
Furthermore, the Court made clear that the role of the firm itself on interstate commerce no longer needed to be substantial. So long as the big picture problem was one that had a substantial effect on interstate commerce, Congress could regulate any little firm within its jurisdiction to resolve it. Here, the big picture problem was substandard conditions in some states undermining competitiveness in other states.
Congress, to attain its objective in the suppression of nationwide competition in interstate commerce by goods produced under substandard labor conditions, has made no distinction as to the volume or amount of shipments in the commerce or of production for commerce by any particular shipper or producer. It recognized that in present day industry, competition by a small part may affect the whole and that the total effect of the competition of many small producers may be great.
The Darby case thus involves subtle doctrinal shifts from what was going on in Jones & Laughlin, Santa Cruz Fruit Packing Co., and Fainblatt. This is likely why Chief Justice Hughes nearly dissented in the case according to this great paper and this different paper.
As a final point on Darby, the case was left Schechter Poultry in place. The Government’s brief in Darby treated Schechter as good precedent even as it called for other cases to be overturned. And those other cases were overturned in Darby, but the Court continued to treat Schechter Poultry as valid law in later cases like United States v. Wrightwood Dairy Co., 315 U.S. 110 (1942). The simplest distinction which could be relied upon to preserve Schechter is that the current of interstate commerce had come to rest in that case: the Schechter brothers purchased their materials from an in-state distributor. Some Fair Labor Standards Act cases refer to Schechter’s continuing validity as the “come to rest” doctrine, because the goods had exited interstate commerce and “come to rest” in the state of New York prior to the Schechter brothers purchasing them.
The general rule of Darby is thus the following: if you are are a firm which either (1) is substantially involved in interstate commerce or (2) produces and sells an inherently interstate commodity, the Feds can regulate your activities as a unit.
Five Cases Between Darby and Perez
In U.S. v. Yellow Cab Co., 332 U.S. 218 (1947) the court said that taxicab drivers who drive people from their homes, offices, and hotels to railroad stations or airports are neither engaged in interstate commerce nor in an activity which substantially affects interstate commerce. This was the case even if the trip at the airport or train station was to be an interstate one, or if a taxi driver drove an individual from one train station to another as part of a continuous interstate journey on the passenger’s part. Unless the taxicab driver had some sort of formal arrangement with the airlines or railroads to deliver these passengers, the antitrust laws couldn’t touch them. This was true even if a taxi cartel allegedly controlled 86% of of a given locale’s taxi licenses. The Cartel itself was neither engaged in interstate commerce nor did the prospect of a taxi cartel substantially affect it.
A portion of the opinion was later overturned, but the Commerce Clause provision remained good law. Yellow Cab Co. had held that collaboration between a parent company and a subsidiary was not immune for antitrust enforcement. The Court later acknowledged that this was silly, since they’re an integrated enterprise. As a logical matter, one cannot collude with oneself - it takes two to tango. I count this as a mark in favor of the Enterprise Concept.
In United States v. Oregon State Med. Soc'y, 343 U.S. 326 (1952), the Court affirmed that the practice of medicine is not interstate commerce. Furthermore, the provision of insurance did not constitute interstate commerce if the sales were primarily intrastate. Even if there were some payments to medical providers in other states, the insurance provider was not engaged in interstate commerce if they plans were sold were intrastate and the later out of state payments were few and sporadic.
In the Public Accommodations Cases Heart of Atlanta Motel, Inc. v. United States, 379 U.S. 241 (1964) and Katzenbach v. McClung, 379 U.S. 294 (1964), the Court upheld the Civil Rights Act as applied to a small restaurant which sourced much of its goods from interstate commerce and a sizable motel which primarily catered to interstate travelers.
To be frank, these cases are deserving of a dedicated post of their own, and they will receive them. For now, it is important to emphasize that these were not normal cases, they were principally targeted towards the effect of discrimination upon the free movement of interstate travel, and the opinions seem in part premised upon Congress have relied upon the Commerce Clause, Necessary & Proper Clause, and Fourteenth Amendment Equal Protection Clause in combination. Essentially, Congress can go further to protect the interstate movement of goods, services, and people from obstructions caused by racial discrimination.
In Maryland v. Wirtz, 392 U.S. 183 (1968), the Court upheld the Fair Labor Standards Act to all employees within a firm - and not just those directly engaged in commerce - on the grounds that it is enterprises as a whole which are regulated. Ultimately what mattered was that a firm had to have over $500,000 in direct interstate transactions in a given year. The $500,000 figure was inserted in 1961, meaning that is about ~$5,100,000 as of June 2023. Congress has never updated this figure, and as far as I’m aware nobody has ever made an as-applied challenge on those grounds. Here, the Court said that the “Enterprise Concept” could be upheld on either the “obstruction” rationale of Jones & Laughlin or “competition” rationale of Darby.
Whether the "enterprise concept" is defended on the "competition" theory or on the "labor dispute" theory, it is true that labor conditions in businesses having only a few employees engaged in commerce or production may not affect commerce very much or very often. Appellants therefore contend that defining covered enterprises in terms of their employees is sometimes to permit "the tail to wag the dog." However, while Congress has in some instances left to the courts or to administrative agencies the task of determining whether commerce is affected in a particular instance, Darby itself recognized the power of Congress instead to declare that an entire class of activities affects commerce. The only question for the courts is then whether the class is "within the reach of the federal power."
The only question for the courts is then whether the class is "within the reach of the federal power." The contention that, in Commerce Clause cases, the courts have power to excise, as trivial, individual instances falling within a rationally defined class of activities has been put entirely to rest. [] The class of employers subject to the Act was not enlarged by the addition of the enterprise concept. The definition of that class is as rational now as it was when Darby was decided.
Justice Harlan pointed to the following portion from Darby to justify the above rule:
[T]his Court had many times held that the power of Congress to regulate interstate commerce extends to the regulation through legislative action of activities intrastate which have a substantial effect on the commerce or the exercise of the Congressional power over it.
In such legislation, Congress has sometimes left it to the courts to determine whether the intrastate activities have the prohibited effect on the commerce, as in the Sherman Act. It has sometimes left it to an administrative board or agency to determine whether the activities sought to be regulated or prohibited have such effect, as in the case of the Interstate Commerce Act and the National Labor Relations Act, or whether they come within the statutory definition of the prohibited Act, as in the Federal Trade Commission Act. And sometimes Congress itself has said that a particular activity affects the commerce, as it did in the present Act [The Fair Labor Standards Act of 1938], the Safety Appliance Act, and the Railway Labor Act. In passing on the validity of legislation of the class last mentioned, the only function of courts is to determine whether the particular activity regulated or prohibited is within the reach of the federal power.
Harlan also said the following:
We uphold the enterprise concept on the explicit premise that an "enterprise" is a set of operations whose activities in commerce would all be expected to be affected by the wages and hours of any group of employees, which is what Congress obviously intended.
Justice Douglas dissented, joined by Potter Stewart. For the most part, there’s not much to learn from the dissent - but he does put considerable emphasis on the significance of an enterprise as well.
The Court's opinion skillfully brings employees of state-owned enterprises within the reach of the Commerce Clause, and, as an exercise in semantics, it is unexceptionable if congressional federalism is the standard. But what is done here is nonetheless such a serious invasion of state sovereignty protected by the Tenth Amendment that it is, in my view, not consistent with our constitutional federalism.
He continues further on:
The immense scope of this constitutional power is demonstrated by the Court's approval in this case of regulation on the basis of the "enterprise concept" -- which is entirely proper when the regulated "businesses" are not essential functions being carried on by the States.
Yet state government itself is an "enterprise" with a very substantial effect on interstate commerce, for the States spend billions of dollars each year on programs that purchase goods from interstate commerce, hire employees whose labor strife could disrupt interstate commerce, and act on such commerce in countless subtle ways.
Additionally, Douglas emphasizes that the Public Accommodations cases were specially centered on the freedom of interstate travel.
From these cases, I think a few conclusions can be drawn:
A firm’s substantial participation in interstate commerce is the definitive question. This can be defined by
The firm itself being a large interstate conglomerate (Jones & Laughlin, Yellow Cab Co.)
The firm itself buying and selling a large enough percentage of its goods in interstate commerce (Santa Cruz Packers & Fainblatt)
The firm producing “inherently interstate” products (Darby).
There is no de minimis exception for little guys (Fainblatt & Darby)
There are still economic activities outside of interstate commerce which Congress cannot touch. (Schechter Poultry, Yellow Cab Co., & Oregon Medical Society)
Policing the pernicious effect of discrimination as an obstruction is special and Congress’s powers are broader in that respect.
Perez and Integrated Enterprises
With this background in mind, let’s get to Perez. As mentioned above, Douglas listed off the three categories of commerce regulation. Here, he made clear that this was about substantial effects upon interstate commerce.
Mr. Perez was a local loan-shark, and generally unpleasant individual. He lent a guy money, extorted him, threatened him, and was arrested after the guy he extorted went to the police. Perez was charged and convicted under Title II of the Consumer Credit Protection Act, which contains the following Congressional findings:
‘(1) Organized crime is interstate and international in character. Its activities involve many billions of dollars each year. It is directly responsible for murders, willful injuries to person and property, corruption of officials, and terrorization of countless citizens. A substantial part of the income of organized crime is generated by extortionate credit transactions.
[…]
‘(3) Extortionate credit transactions are carried on to a substantial extent in interstate and foreign commerce and through the means and instrumentalities of such commerce. Even where extortionate credit transactions are purely intrastate in character, they nevertheless directly affect interstate and foreign commerce.’
Justice Douglas’s opinion is pretty firmly premised upon an enterprise rationale. The mob is interstate conglomerate - akin to the Jones & Laughlin Steel Corporation. It is moving substantial sums of money across state lines through its local actors. And so the Perez Court - speaking through Justice William O. Douglas - thought it was silly to call Mr. Perez a purely local loan-shark: he was clearly just the most local tendril of a bigger national whole.
Douglas even makes that point by analogizing to an old pre-New Deal Case:
Extortionate credit transactions, though purely intrastate, may in the judgment of Congress affect interstate commerce. In an analogous situation, Mr. Justice Holmes, speaking for a unanimous Court, said: ‘(W)hen it is necessary in order to prevent an evil to make the law embrace more than the precise thing to be prevented it may do so.’ Westfall v. United States, 274 U.S. 256, 259, 47 S.Ct. 629, 71 L.Ed. 1036, 1037. In that case an officer of a state bank which was a member of the Federal Reserve System issued a fraudulent certificate of deposit and paid it from the funds of the state bank. It was argued that there was no loss to the Reserve Bank. Mr. Justice Holmes replied, ‘But every fraud like the one before us weakens the member bank and therefore weakens the System.’ Id., at 259, 47 S.Ct., at 629. In the setting of the present case there is a tie-in between local loan sharks and interstate crime.
In other words, Congress was able to police and criminalize the activities of individual bank employees purely because the state bank was a member of the Federal Reserve system. The ability to police loan-sharking thus may be upheld on similar and analogous grounds.
Douglas proceeds to point to Congressional findings to explain the role of loansharking in a national enterprise.
The findings by Congress are quite adequate on that ground. [A report from] submitted to the House on August 29, 1967, which revealed that ‘organized crime takes over $350 million a year from America's poor through loan-sharking alone. […] A Report by the President's Commission on Law Enforcement and Administration of Justice [] stated that loan sharking was ‘the second largest source of revenue for organized crime,’ [] and is one way by which the underworld obtains control of legitimate businesses.
The Congress also knew about New York's Report, An Investigation of the Loan Shark Racket (1965). []. That report shows the loan shark racket is controlled by organized criminal syndicates, either directly or in partnership with independent operators; that in most instances the racket is organized into three echelons, with the top underworld ‘bosses' providing the money to their principal ‘lieutenants,’ who in turn distribute the money to the ‘operators' who make the actual individual loans; that loan sharks serve as a source of funds to bookmakers, narcotics dealers, and other racketeers; that victims of the racket include all classes, rich and poor, businessmen and laborers; that the victims are often coerced into the commission of criminal acts in order to repay their loans; that through loan sharking the organized underworld has obtained control of legitimate businesses, including securities brokerages and banks which are then exploited; and that '(e)ven where extortionate credit transactions are purely intrastate in character, they nevertheless directly affect interstate and foreign commerce.'
Douglas later explains clearly that he does not think this is a ‘purely local’ activity.
We relate the history of the Act in detail to answer the impassioned plea of petitioner that all that is involved in loan sharking is a traditionally local activity. It appears, instead, that loan sharking in its national setting is one way organized interstate crime holds its guns to the heads of the poor and the rich alike and syphons funds from numerous localities to finance its national operations.
In other words: mob organizations are large interstate actors and loansharks and are but local representatives of integrated interstate enterprises which extract a very large degree of money each year from the practice and move it across state lines. This activity may be ‘purely local’ in the individual instance, but Congress could police it because mafia organizations were organized interstate entities.
The same theme kept on popping up at oral argument. The Justices were of the impression that loansharks needed to be local agents of an interstate or international criminal organization. Solicitor General Erwin Griswold thus said to the Court that “[w]hen the conduct of an enterprise affects commerce among the states is a matter of practical judgment not to be determined by abstract notions. He also reemphasized the Congressional findings mentioned above.
And at oral argument, it was generally made clear that this law could only be applied against Perez if he actually was a loanshark tied to the mob. In context, Perez and Darby involved facial challenges to the statute, not whether it could be lawfully applied to the individuals in question. Mr. Perez challenged the indictment, not the conviction. If he truly was a purely local loan shark with no connection to the mob, proving that at trial should ostensibly have gotten him off.
The role of Congressional findings as establishing presumptions in criminal cases like Darby and Perez is itself worthy of a dedicated post and will eventually get one. But the point of this post was to focus on the role of the “enterprise concept” as the part and parcel core of the Substantial Effects test from Darby to around the time of Perez.
And as a final point - Douglas’s Perez opinion largely treats the public accommodations cases as I have. Douglas characterized them as uniquely centered on protecting the free movement of people across state lines.
Conclusion
Long story short - from the New Deal to around 1975, the Enterprise Concept and Substantial Involvement were the center of the bulk of the Court’s substantial effects analysis.
In the next few posts on the subject of the Commerce Clause, I’ll be dealing with [II] Fungible Commodities caselaw, [III] the Public Accommodations Cases, [IV] the story of federal power the post-New Deal Justices often told, [V] the Court’s eventual break from New Deal Concepts under the Burger Court, [VI] the fluctuations of the Rehnquist and Roberts Courts, and [VII] the unique problem of Federal Criminal Law.
The facts as to the nature and scope of the business of the Jones & Laughlin Steel Corporation have been found by the Labor Board, and, so far as they are essential to the determination of this controversy, they are not in dispute. The Labor Board has found: The corporation is organized under the laws of Pennsylvania and has its principal office at Pittsburgh. It is engaged in the business of manufacturing iron and steel in plants situated in Pittsburgh and nearby Aliquippa, Pa. It manufactures and distributes a widely diversified line of steel and pig iron, being the fourth largest producer of steel in the United States. With its subsidiaries—nineteen in number—it is a completely integrated enterprise, owning and operating ore, coal and limestone properties, lake and river transportation facilities and terminal railroads located at its manufacturing plants. It owns or controls mines in Michigan and Minnesota. It operates four ore steamships on the Great Lakes, used in the transportation of ore to its factories. It owns coal mines in Pennsylvania. It operates towboats and steam barges used in carrying coal to its factories. It owns limestone properties in various places in Pennsylvania and West Virginia. It owns the Monongahela connecting railroad which connects the plants of the Pittsburgh works and forms an interconnection with the Pennsylvania, New York Central and Baltimore & Ohio Railroad systems. It owns the Aliquippa & Southern Railroad Company, which connects the Aliquippa works with the Pittsburgh & Lake Erie, part of the New York Central system. Much of its product is shipped to its warehouses in Chicago, Detroit, Cincinnati and Memphis,—to the last two places by means of its own barges and transportation equipment. In Long Island City, New York, and in New Orleans it operates structural steel fabricating shops in connection with the warehousing of semifinished materials sent from its works. Through one of its wholly-owned subsidiaries it owns, leases, and operates stores, warehouses, and yards for the distribution of equipment and supplies for drilling and operating oil and gas wells and for pipe lines, refineries and pumping stations. It has sales offices in twenty cities in the United States and a wholly-owned subsidiary which is devoted exclusively to distributing its product in Canada. Approximately 75 per cent. of its product is shipped out of Pennsylvania.
This is worth a dedicated post of its own, and will get one soon. But immediate examples of this phenomenon include Currin v. Wallace, 306 U.S. 1 (1939) (tobacco), Mulford v. Smith, 307 U.S. 38 (1939) (tobacco), United States v. Rock Royal Cooperative, Inc., 307 U.S. 533 (1939) (dairy), United States v. Wrightwood Dairy Co., 315 U.S. 110 (1942) (dairy again), and Wickard v. Filburn, 317 U.S. 111 (1942) (wheat). All are oriented towards fungible market commodities.