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U.S. Supreme Court, Constitutional Law, Administrative/Regulatory, 9th U.S. Circuit Court of Appeals

Aug. 31, 2017

Saving fishers from California’s discrimination

The U.S. Supreme Court has a chance to set things right by granting certiorari in a case involving California’s commercial fishing licensing scheme.

0830 ldj herbers
(New York Times News Service)

Every U.S. citizen knows that the Constitution protects certain fundamental rights, including the freedom of speech, freedom of worship, and right to jury trial. Less well known, however equally important, are the economic freedoms that the Constitution ensures. The privileges and immunities clause, for example, requires each of the 50 states to provide residents of other states the same "privileges and immunities" as it provides to its own residents. This clause seeks to ensure a national economic union whereby citizens of all states are on equal footing. A primary privilege protected by the clause is the guarantee that residents of all states can equally do business regardless of their state of citizenship.

Despite this guarantee, the state of California, with help from the 9th U.S. Circuit Court of Appeals, is attempting to discriminate against nonresidents to shield in-state businesses from competition. In Marilley v. Bonham, 2016 DJDAR 12560, an en banc 9th Circuit upheld California's commercial fishing licensing scheme against challenge, even though it charges nonresident fishers upwards of four times that of residents. The U.S. Supreme Court has a chance to correct this mistake by granting the pending certiorari petition.

Like every state in the union, California regulates its commercial fishing industry by requiring commercial fishers to secure state fishing registrations, licenses and permits. California first began charging nonresidents an increased fee in 1986, and in subsequent years expanded the scope of that discrimination by adding to the list of regulatory hurdles that increase costs for nonresidents. In 2010, the year in which the 9th Circuit used to analyze the scheme, nonresident fishers paid 2-4 times more in fees than their in-state competitors. The plaintiffs, nonresident fishers tired of routinely starting the fishing season upwards of $4,000 behind their resident competitors, filed a complaint alleging California's licensing scheme violated, among other constitutional provisions, the privileges and immunities clause. Both the district court and a three-judge 9th Circuit panel agreed that California's scheme impermissibly discriminated against nonresidents. Nonetheless, the 9th Circuit granted en banc review and reversed.

Courts have applied a two-step inquiry when interpreting the privileges and immunities clause. First, a plaintiff must demonstrate that the challenged law "falls within the purview" of the clause. To meet this burden, "a plaintiff must show that the challenged law treats nonresidents differently from residents and impinges upon a fundamental privilege or immunity." Second, should a plaintiff meet this threshold, the state must show that the law is "closely related to the advancement of a substantial state interest." The Supreme Court has held that a substantial interest exists only if "there is something to indicate that non-citizens constitute a peculiar source of the evil at which the statute is aimed."

The Supreme Court has twice analyzed states' fishing licensing fees under the privileges and immunities clause. In both instances the court held that states' discrimination violated the clause's protections. In light of those decision, it was undisputed in the 9th Circuit that California's fishing license regime "falls within the purview" of the clause. The only point of contention, then, was whether California met its burden by demonstrating that the substantial interest it sought to advance closely related to its discriminatory licensing scheme.

California argued that because it costs significantly more to maintain and regulate the commercial fishing industry than the state assesses in fees, California taxpayers must subsidize the industry. It justified the discriminatory licensing regime as a means of ensuring that nonresidents pay their fair share of that subsidy. The state invoked Toomer v. Witsell, in which the Supreme Court ultimately found South Carolina's commercial-shrimp-fishing licensing regime violated the privileges and immunities clause because the extra fees placed on nonresident fishers effectively barred them from the industry altogether. But the court also stated that a state could charge discriminatory fees "[1] for any added enforcement burden [nonresidents] may impose or [2] for any conservation expenditures from taxes which only residents pay." California invoked the second Toomer rationale; it sought to justify its scheme based on the contention that residents unilaterally subsidize its commercial fishing management through their general tax burden, and fee differentials attempt to reimburse the state for these expenditures.

The 9th Circuit's en banc majority is the only court to accept California's application of Toomer. The majority argued that the state's differential fees were acceptable so long as California charged nonresident fishers for the benefits they received for which they would not otherwise pay because they do not pay state taxes. Using one fiscal year as an example, the majority calculated that California's commercial fishing industry benefited to the tune of $14,635,000 -- the money that the state spent from general tax fund to manage the industry. The majority assumed -- without evidentiary support -- that commercial fishers benefited in proportion to the fees they paid. Commercial fishers paid 37 percent of the total fees, but only 12 percent of commercial fishers were nonresidents. Therefore, nonresident fishers benefited from California's subsidy equal to 4.4 percent (12 percent of 37 percent) of the $14,635,000 California taxes payers spent on the industry. That 4.4 percent benefit ($641,000) was greater than the fee differentials nonresidents paid ($435,000).

But under Toomer, fee differentials are permissible only if California can prove that in the absence of a differential, residents would be required to pay the state's entire subsidy. Therefore, the majority sought to determine the named plaintiffs' income tax payments in California. Because the plaintiffs had submitted only a handful California tax returns, the majority assumed that the plaintiffs paid at most de minimis income tax in California, and thus did not contribute to the state's subsidy of the commercial fishing industry. Based on that assumption, the appellate court held that the fee differentials did not violate the privileges and immunities clause.

As the en banc dissent pointed out, however, the majority's opinion misapplied Toomer in several significant ways. First, the majority fixated on determining whether the nonresident fee differential roughly equaled their share of the state's subsidy instead of first determining whether nonresident fishers paid state taxes that went into the general fund from which the subsidy came. This is important because, under Toomer, California's differential fee regime is permissible only if nonresident fishers pay no part of the state's subsidy other than the difference in fees. The majority admitted that the named plaintiffs had submitted evidence of their California income tax burdens, but pushed those aside as insignificant. The majority never considered the California personal income taxes that other nonresident fishers paid (in the tens of millions of dollars of their earnings from the State) simply because they were not the named plaintiffs. This flies in the face of Toomer's instructions to view nonresidents "as a class." Even worse, the majority completely ignored the other types of taxes that the named plaintiffs paid, including sales and use taxes, which contribute to California's general fund. As the en banc dissent rightly pointed out, these taxes paid by nonresident fishers take California's differential fee regime outside of Toomer's exception.

In rejecting the plaintiffs' argument that they contributed to California's general tax fund, the majority flipped the evidentiary burden. Under the privileges and immunities clause, the state bears the burden of demonstrating that the regulation advances a substantial state interest. Because California invoked Toomer, it bore the onus of demonstrating that nonresident fishers did not contribute to the fishing industry's subsidy. Instead, the majority held that because the nonresident fishers had not proven that they paid California taxes, the regime satisfied the clause. But any lack of evidence must doom the state's case, not the plaintiffs, because California bears the burden of demonstrating that only its residents pay for the fishing subsidy. California could not show that nonresident fishers do not pay into the state's general tax fund. Therefore under Toomer, the state's licensing regime should have been invalidated.

Unfortunately, the 9th Circuit's decision could have the effect of emboldening other states' protectionist impulses. The purpose of the privileges and immunities clause is to ensure that all Americans are treated equally without regard to their residence. But according to the Marilley majority, states can now discriminate against nonresidents who pay less income tax than their in-state competitors. It is safe to assume, given the realities of geography, that this will encompass nearly every nonresident licensee. Marilley would thus grant states almost unfettered power to discriminate against nonresidents, effectively neutering the privileges and immunities clause. Thankfully, the Supreme Court still has a chance to intervene by granting pending certiorari petition. The court should act to save the clause before states like California render it useless.

#343027

Ben Armistead

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