Gelita USA, Inc. v. Hammond Water Works Department

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

GELITA USA, INC., )

)

Plaintiff, )

)

vs. ) Case No. 18 C 3268

)

HAMMOND WATER WORKS )

DEPARTMENT, )

)

Defendant. )

MEMORANDUM OPINION AND ORDER

MATTHEW F. KENNELLY, District Judge:

Gelita USA, Inc. has sued the Hammond Water Works Department, arguing that

the Department's refusal to provide water for Gelita's Illinois manufacturing plant at a

reasonable rate violates Indiana law and the Commerce Clause of the United States

Constitution. The Department has moved for judgment on the pleadings. For the

reasons set forth below, the Court grants the motion.

Background

The following facts are drawn from Gelita's allegations in its amended complaint,

which the Court accepts as true for the purposes of the Department's motion for

judgment on the pleadings. See Bishop v. Air Line Pilots Ass'n, Int'l, 900 F.3d 388, 400

(7th Cir. 2018).

The Hammond Water Works Department is a municipally owned utility that

operates a water filtration plant in northwest Indiana. The Department's sole customer

outside the state of Indiana is Gelita, which operates a gelatin manufacturing facility in

Illinois near the Indiana border. The Department has supplied water to Gelita (or

predecessor businesses on the same site) for over one hundred years.

The Indiana Utility Regulatory Commission authorizes the rates that the

Department may charge for its services. Since 1985, Gelita has paid a graduated rate

of about 38 cents per thousand gallons, which accords with the current schedule of

charges previously approved by the regulatory commission. By statute, the Department

is required to charge rates that are "nondiscriminatory, reasonable, and just." Ind. Code

§ 8-1.5-3-8(b).

Since 2012, the Department has sought to significantly raise the rate it charges

Gelita. Gelita has refused, and the parties have been unable to negotiate a mutually

agreeable rate. In 2018, Gelita filed the present lawsuit, alleging that the Department's

efforts to charge a rate higher than the one approved by the regulatory commission

violate the United States Constitution and Indiana state law. The Department has

moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c).

Discussion

"The standard for entering judgment on the pleadings is the same as that for

dismissing a complaint for failure to state a claim: the complaint must state a claim that

is plausible on its face." Armada (Singapore) PTE Ltd. v. Amcol Int'l Corp., 885 F.3d

1090, 1092 (7th Cir. 2018) (internal quotation marks omitted). The Court considers only

"the matters presented in the pleadings" and "must consider those pleadings in the light

most favorable" to the non-moving party. Unite Here Local 1 v. Hyatt Corp., 862 F.3d

588, 595 (7th Cir. 2017).

In its response brief, Gelita has voluntarily withdrawn its claim in count 2 for

violations of the Privileges and Immunities Clause of Article IV of the Constitution. The

Court therefore dismisses count 2.

A. Dormant Commerce Clause claim

In count 1, Gelita alleges that the Department's effort to charge a higher rate to

an out-of-state customer violates the dormant Commerce Clause, which "precludes

states from discriminat[ing] between transactions on the basis of some interstate

element." Comptroller of Treasury of Md. v. Wynne, 135 S. Ct. 1787, 1794 (2015)

(alteration in original) (internal quotation marks omitted).

1. Market participant doctrine

The Department argues that Gelita cannot prevail on its dormant Commerce

Clause claim because the Department is acting as a market participant. "[W]hen a state

or local government enters the market as a participant it is not subject to the restraints

of the Commerce Clause." White v. Mass. Council of Constr. Emp'rs, Inc., 460 U.S.

204, 208 (1983). The market participant doctrine "reflects a basic distinction . . .

between States as market participants and States as market regulators, [t]here [being]

no indication of a constitutional plan to limit the ability of the States themselves to

operate freely in the free market." Dep't of Revenue of Ky. v. Davis, 553 U.S. 328, 339

(2008) (alternations in original) (internal quotation marks omitted) (citation omitted).

The Seventh Circuit has noted the difficulty of drawing a principled distinction

between "that which is considered a government function or regulatory activity and that

which is considered proprietary activity." Endsley v. City of Chicago, 230 F.3d 276, 285

(7th Cir. 2000). In Endsley, the court explained that unlike proprietary activities,

regulatory activities "have a substantial regulatory effect outside of" the particular

market in which the state participates. Id. (quoting South-Central Timber Dev., Inc. v.

Wunnicke, 467 U.S. 82, 97 (1984)). The court also favorably cited the Fifth Circuit's

decision in New Orleans Steamship Ass'n v. Plaquemines Port, Harbor & Terminal

District, 874 F.2d 1018 (5th Cir. 1989), for the proposition that a "fee-for-service

approach is not a regulation." Id. at 1021.

None of the allegations in Gelita's amended complaint supports a reasonable

inference that the Department is acting as a regulator rather than a market participant.

The Department charges fees in exchange for providing services to its customers—

precisely the sort of "fee-for-service approach" that constitutes paradigmatic market

participation. Id. The fact that the state of Indiana limits the fees the Department may

charge does not suggest that the Department acts a regulator; at most, it implies that

the Department is a regulated market participant.

Gelita makes three counterarguments, none of which is persuasive. First, it cites

the Supreme Court's decision in Sporhase v. Nebraska ex rel. Douglas, 458 U.S. 941

(1982), to argue that the Department cannot be a market participant because a state

cannot have a proprietary interest in water. This argument depends on an untenable

interpretation of Sporhase, in which the Supreme Court addressed whether

groundwater is an article of commerce. In noting the demise of "public ownership

theory," id. at 951, the Court rejected only the expansive notion that a state is free to

override the ownership interests of its citizens who capture animals or other natural

resources within the state. Contrary to Gelita's argument, Sporhase does not imply that

a state may not have a proprietary interest in a natural resource like water when the

state itself captures that resource.

Second, Gelita contends that the Department cannot participate in the market for

water because Indiana law prevents the state or municipal governments from having a

proprietary interest in water collected from natural lakes. It cites Indiana Code § 14-25-

1-2, which provides that water in a "natural lake . . . in Indiana that may be applied to a

useful and beneficial purpose is declared to be: (1) a natural resource and public water

of Indiana; and (2) subject to control and regulation for the public welfare as determined

by the general assembly." Gelita contends that this statute requires Indiana to hold

water in the public trust and thus that the Department's role in providing water is

necessarily regulatory. But Gelita cites no authority suggesting that the applicability of

the market participant doctrine hinges on the precise nature of the state's control over a

resource. That is, there is no apparent reason that the Department cannot hold the

water in the public trust and participate in the market for water, just as a private trustee

who invests trust assets in an index fund participates in the stock market.

Third, Gelita contends that the market participant doctrine exempts only the state

itself, not municipal entities within the state. It cites W.C.M. Window Co. v. Bernardi,

730 F.2d 486 (7th Cir. 1984), in which the Seventh Circuit considered a dormant

Commerce Clause challenge to an Illinois law that required local governments financing

public works projects to hire contractors that employed Illinois laborers. Id. at 489. The

court cautioned that the question of regulation versus market participation could differ

between the state government and the municipalities. It concluded that although local

governments were acting as market participants by entering directly into public works

contracts, the state had acted as a regulator by dictating the terms of those contracts.

Id. at 495–96.

Bernardi does not support Gelita's argument. Gelita challenges only the actions

of the Hammond Water Works Department—a municipally owned utility—not those of

the state as a whole. The fact that Indiana regulates water rates does not show that the

Department is itself engaged in regulatory activity. To the contrary, Bernardi stands for

the proposition that the applicability of the market participant doctrine depends on which

entity's conduct is at issue. Because Gelita has not alleged facts that support a

reasonable inference that the Department is acting in a regulatory capacity rather than

as a market participant, its actions fall within the market participant exception to the

dormant Commerce Clause.

2. Exception for natural resources

Alternatively, Gelita argues that even if the market participant doctrine generally

applies to the Department's activities, the Court should recognize an exception to the

doctrine when a state or municipal government participates in a market for natural

resources. Gelita relies on the Supreme Court's decision in Reeves, Inc. v. Stake, 447

U.S. 429 (1980), in which the Court considered whether it should craft such an

exception. It noted that although the risks that a state might hoard its natural resources

implicated "the core purpose of the Commerce Clause"—namely, to ensure the free

flow of commodities and resources between the states—the proposed exception did

"not fit the present facts" because the resource at issue was cement. Id. at 443.

Because cement "is the end product of a complex process whereby a costly physical

plant and human labor act on raw materials," the Court reasoned that it is not a natural

resource in the relevant sense. Id. at 444. The Court added that the petitioner had not

alleged that South Dakota possessed "unique access to the materials needed to

produce cement." Id. Moreover, it noted that the state's policy did not altogether

prevent out-of-state buyers from purchasing cement but only charged a premium to

those buyers, a result the court called "not wholly unjust." Id. at 444 n.17.

Gelita argues that these remarks in Reeves impose a limitation on the market

participant doctrine when a state or local government participates in the market for

natural resources, though it cites no cases in which a court has applied such a

limitation. The Court declines to do so now. In considering a similar argument, the

Third Circuit has noted that it would be "inconsistent with the [market participant]

doctrine's theoretical foundation" to exempt natural resources from its reach. Swin Res.

Sys., Inc. v. Lycoming County, 883 F.2d 245, 252 (3d Cir. 1989). Even if it that

apparent inconsistency did not counsel against recognizing the exception, however, this

case does not present an appropriate set of facts in which to apply the Reeves dicta.

For example, the Department and the state of Indiana do not have "unique access" to

the waters of Lake Michigan. Reeves, 447 U.S. at 444. And, as in Reeves, the

Department seeks to charge a premium on its out-of-state sales but not to altogether

prevent Gelita from obtaining the resource. See id. at 444 n.17. This case therefore

falls outside any exception for natural resources that might be appropriately derived

from Reeves.

Because the Hammond Water Works Department is acting as a market

participant and the Court declines to limit the market participant doctrine in the context

of the case, Gelita has not stated a claim for relief that is plausible on its face. The

Department is thus entitled to judgment on the pleadings with respect to count 1.

B. State law claims

Gelita's two remaining claims allege that the Department violated Indiana law by

seeking to increase its rates without the state regulator's approval, see Ind. Code § 8-

1.5-3-8(f)(2), and imposing unjust or discriminatory prices, see id. § 8-1.5-3-8(b).

The Department argues that it is entitled to judgment on the pleadings because

these statutes do not govern its agreement to provide water to Gelita. It points out that

the dormant Commerce Clause prohibits Indiana from directly regulating interstate

transactions. See, e.g., Legato Vapors, LLC v. Cook, 847 F.3d 825, 830 (7th Cir. 2017)

("Generally, courts will strike down a statute that 'directly regulates or discriminates

against interstate commerce. . . .'" (quoting Brown-Forman Distillers Corp. v. N.Y. State

Liquor Auth., 476 U.S. 573, 579 (1986)). The Court must avoid construing the Indiana

statutes to impose regulations that would risk running afoul of the Commerce Clause.

See Markadonatos v. Village of Woodridge, 760 F.3d 545, 548 (7th Cir. 2014) ("We are

adjured by countless Supreme Court decisions to avoid statutory interpretations that

raise serious constitutional issues. . . ."). These principles counsel against interpreting

the Indiana statutes on which Gelita relies to govern the Department's sales of water to

out-of-state purchasers.

Gelita's arguments to the contrary lack merit. First, it contends that the

Department's service area is not necessarily limited to the municipal boundaries but can

also include all of the "territory served." Ind. Code § 8-1.5-4-3(2). Gelita argues that if

its facility falls within the Department's service area, as it alleges, then the Department

is required to follow the regulations that govern the provision of water within the service

area. But this statute merely defines the Department's jurisdiction as a matter of state

law; it does not authorize Indiana to circumvent the constitutional restriction on

regulation of interstate commerce by state governments.

Second, Gelita alleges that in 1985 the Department obtained approval from the

state regulatory authority to increase the rate it charged Gelita. Gelita contends that this

allegation permits a reasonable inference that the Department's provision of water to an

out-of-state buyer is indeed subject to Indiana's regulations. The most one can

reasonably infer from this allegation, however, is that the Department and the state of

Indiana may have believed that Gelita was subject to Indiana's regulations—not that

their belief was correct in light of the constitutional limitation on interstate regulation by

state governments. The previous terms of Gelita's agreement with the Department are

therefore immaterial to whether Gelita has adequately alleged violations of Indiana law.

Because Gelita has not plausibly alleged that the Hammond Water Works

Department violated state law in seeking to charge a higher rate to an out-of-state

buyer, judgment on the pleadings is appropriate on counts 3 and 4.

Conclusion

For the foregoing reasons, the Court grants the defendant's motion for judgment

on the pleadings [dkt. no. 42] and directs the Clerk to enter judgment in favor of

defendant Hammond Water Works Department and against plaintiff Gelita USA, Inc.

United States District Judge

Date: June 24, 2019