# Gelita USA, Inc. v. Hammond Water Works Department

> District Court, N.D. Illinois · June 24, 2019

URL: https://www.frixlaw.com/law-library/cases/10140877

## Case

- **Court:** District Court, N.D. Illinois
- **Decided:** June 24, 2019
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

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## Opinion text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10140877. Public record. Not legal advice.