The opinion
THE ATTORNEY GESERAL
OF T.EXMJ
hnuary 8. 1987
Bonorable Mike Drfscoll Opinion No. JM-616
Earrls County Attorney
1001 Preston, Suite 634 Re: Constitutionality of article
Houston, Texas 77002 6Olg. V.T.C.S., regarding out-of-
state bidders on public contracts,
and related questions
Dear Mr. Driscoll:
Your office has asked whether article 6Olg. V.T.C.S.. enacted in
1985 (Acts 1985. 69th Leg., ch. 83, at 449) is constitutional.
Subsections (b) and (c) of section 1 of the statute provide:
(b) The state or a governmental agency of the
state may not award a contract for general con-
struction, improvements, services, or public works
projects.or purchases of supplies, materials, or
equipment to a nonresident bidder unless the
nonresidsnt’s bid is lower than the lowest bid
submitted by a responsible Texas resident bidder
by the same amount that a Texas resident bidder
would be required to underbid a nonresident bidder
to obtain a comparable contract in the state in
which the nonresident’s principal place of
business is located.
(c) This section does not apply to a contract
involving federal funds.
A “nonresident bidder” and a “Texas resident bidder” are defined by
subsections (a)(2) and (a)(3) of section 1 to mean:
(2) ‘Nonresident bidder’ means a bidder whose
principal place of business is not in this state.
but excludes a contractor whose ultimate parent
company or majority owner has its principal place
of business in this state.
(3) ‘Texas resident bidder’ means a bidder
whose principal place of business is in this
state, and includes a contractor whose ultimate
parent company or majority owner has its principal
place of business in this state.
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Honorable Mike Driscoll - Page 2 (JM-616)
V.T.C.S. art. 601g, $1.
Although the clause qualifying the terms "nonresident bidder" and
"Texas resident bidder" is clumsy, we believe its meaning can be
fairly ascertained. In each definition, respectively, the clause
excludes or includes "a contractor whose ultimate parent company or
majority owner has its principal place of business in this state."
The statute looks to the reality of control, not to legal
fictions. Cf. Culcal Stylco, Inc. v. Vornado, Inc., 103 Cal. Rptr.
419 (Cal. AZ - (2nd Dist.] 1972). The phrase, "ultimate parent
company or majority owner," is awkward, but clearly has reference to
the person or entity ultimately having the power to control the
business activities of the contractor/bidder, either directly or
indirectly. The relationship of subsidiary and parent corporations is
discussed in Rimes v. Club Corporation of America, 542 S.W.2d 909
(Tex. Civ. App. - Dallas 1976, writ ref'd n.r.e.), and International
Order of Twelve Knights and Daughters of Tabor v. Fridia, 91 S.W.2d
404 (Tex. Civ. App. - Waco 1936, no writ). -See 15 Tex. Jur. 3d
Corporations 5113, 14 (1981).
Similarly, the term "principal place of business" as used in
article 6Olg does not necessarily refer to the place of incorporation
or organization of a company, or to the residence of its majority
owner. It means the place where the person, whether natural or
artificial, maintains offices and transacts business, i.e., where the
person's business affairs are conducted. See Nat=1 Truckers
Service, Inc. v. Aero Systems, Inc., 480 S.W.2d35 (Tex. Civ. App. -
Fort Worth 1972, writ ref'd n.r.e.). The "principal place of
business" can sometimes be different from the place of the person's
general offices, see Dryden v. Ranger Refining 6 Pipe Line Co., 280 F.
257 (5th Cir. 19%!j, but when a business operates in a number of
states and no one state is clearly the state-in which its activities
are principally conducted, the state from which centralized general
supervision is exercised may be considered the location of the
"principal place of business," particularly if a substantial part of
its operations are also conducted there. See Jackson v. Tennessee
Valley Authority, 462 F. Supp. 45 (D.C. TX. 1978). --Cf. In re
Commonwealth Oil Refining Co., Inc., 596 F.2d 1239 (5th Cir. 1979).
The effect of this statute is to give a preference to "Texas
resident bidders" if the home state of a "nonresident bidder" gives a
preference to its residents in similar situations. Cf. V.T.C.S. art.
601b, 53.28; art. 2367a. The Bill Analysis prepared prior to its
enactment by the Rouse Committee on Business and Commerce (H.B. No.
620, 69th Leg., (1985)) describes its purpose as one to
establish a reciprocity requirement in the award
of state contracts so that bidders from other
states would face the same underbid requirement in
Texas contracts that Texas bidders would
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Honorable Mike Driscoll - Page 3 (JM-616)
experience when bidding on comparable contracts in
those states.
The statute is purely retaliatory in naturp, intended to induce
other states to avoid penalizing Texas bidders. If the home state
of a nonresident bidder does not discriminate against Texas-based
bidders, the statute has no effect.
Paraphrased, the questions you pose are:
1. Is article 6Olg. V.T.C.S., constitutional?
If so, what is the definition of 'principal
p1.z; of business?'
3. Which states currently impose similar
penalties on bidders from Texas?
Attacks against local statutes preferring resident contractors
or workers over nonresidents on public works projects are usually
based on three federal constitutional grounds: (1) the Privileges
and Immunities Clause of article 4, section 2, of the United States
Constitution;' (2) the Equal Protection Clause of the Fourtzenth
Amendment;' and (3) the Commerce Clause of 'article 1, section 8. In
our opinion, the Texas statute is not vulnerable on such grounds.
1. Retaliatory statutes are not a recent invention. --See Board
of Insurance Commissioners v. Prudential Fire Insurance Co., 167
S.W.2d 578 (Tex. Civ. App. - Austin 1942, writ ref'd). Cf. 30 A.L.R.
4th 873, Construction, Application, and Operation of State "Retalia-
tory" Statutes Imposing Special Taxes or Fees on Foreign Insurers
Doing Business Within the State (1984).
2. "The Citizens of each State shall be entitled to all
Privileges and Immunities of Citizens in the several States."
3. "Nor shall any State . . . deny to any person within its
jurisdiction the equal protection of the laws."
4. "The Congress shall have Power . . . to regulate Commerce . . .
among the several States. . . ."
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Eonorable Mike Driscoll - Page 4 (JM-616)
When a state acts in a proprietary capacity as a market partici-
pant rather than as a "market regulator," it is not subject to the
limitations of the Commerce Clause. even if it uses Its uosition to
favor its own citizens over others.. White v. Massachusetts Council of
Construction Employers. Inc., 460 U.S. 204 (1983); Reeves, Inc. v.
State, 447 U.S. 429 (1980); Hughes v. Alexandria Scrap Corp., 426 U.S.
794 (1976); International Organization of Masters, Mates & Pilots v.
Andrews, 626 F.Supp. 1271 (D.C. Alaska 1986). Here, through the medium
of article 601g. the state of Texas acts in its prop3ietary capacity
as a market oarticioant and not as a market resulator. Thus. article
6Olg does no; violite the Commerce Clause. Cf, Jefferson County Phar-
maceutical Assn., Inc. v. Abbott Laboratories.460 U.S. 150 (1983).
With respect to the Equal Protection Clause, the statute is to
be considered valid so long as there is a rational basis to justify it
unless it burdens a fundamental right or concerus a suspect classi-
fication. If it does burden such a right or concern such a class, it
is subject to a stricter standard. - Cf. Martinez v. Byuum, 461 U.S.
321 (1983).
Bidders on state or local government contracts do not comprise a
suspect classification, and article 6Olg does not significantly impact
a fundamental right. It imposes no durational "residency" requirement
that might implicate the fundamental right to 'travel.' So far as the
statute is concerned, the length of time a locale has been the
"principal place of business' is unimportant. Cf. McCarthy v.
Philadelphia Civil Service Commission, 424 U.S. 645 (1976). Although
a right to pursue employment in a chosen profession may be considered
fundamental for some purposes, there is no fundamental right to
government employment for purposes of the Equal Protection Clause.
Massachusetts Board of Retirement v. Murgia, 427 U.S. 307 (1976).
A rational basis for the statute will suffice to sustain it
against an Equal Protection attack. As a means to accomplish the
legitimate, stated object of the legislation (to induce other states
to forego discriminatory penalties against Texas-based businesses In
similar circumstances), it is reasonable. Western'and Southern Life
Insurance Co. v. State Board of Equalization, 451 U.S. 648 (1981).
Cf. Metropolitan Life Insurance Co. v. Ward, 470 U.S. 869 (1985).
Article 6Olg does not violate the Equal Protection Clause.
5. The article 6Olg. section l(a)(l) definition of "governmental
agency of the state" includes local government units such as cities'
counties and school districts as well as statewide agencies and
departments of the state government. The inapplicability of the
Commerce Clause to the activities of a state as a market participant
applies not only to the use of its own funds, but to those it has the
authority to administer. White, supra. Inasmuch as the legislature
has the power to direct theexpenditures and procurement practices of
such local governmental units as well as statewide agencies, we
believe the state acts as a market participant when it does so. See
40 Tex. Jur. 2d Rev., part 1 Municipal Corporations 1420 (1976). -
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Eonorable Mike Driscoll - Page 5 (J-M-616)
In considering the Privileges and IrmaunitiesClause as it relates
to article 601g, the first observation is that corporations are not
"citizens" within the protection of that constitutional provision.
Western and Southern Life Insurance Co. v. State Board of Equaliza-
tion, supra. As to natural persons, analysis involves a two-step
process. United Building and Construction Trades Council v. Mayor and
Council of the City of Camden. 465 U.S. 208 (1984).
The first step is to determine whether the statute burdens a
privilege or Immunity protected by the clause, i.e., one fundamental
to the promotion of interstate harmony. Assuming does' the second
step Is to determine whether there is a substantial reason for the
difference in treatment. Discrimination against nonresidents does not
violate the Privileges and Immunities Clause where there is a
substantial reason for the difference and it bears a substantial
relationship to the state's objective. Supreme Court of New Hampshire
v. Piper, 470 U.S. 274.
In the City of Camden case, supra, the United States Supreme
Court considered an ordinance of the city that required at least forty
percent (40%) of the employees of contractors and subcontractors
working on city construction projects to be Camden residents. The
Court held that "the pursuit of a common calling" Is one of the most
fundamental of those privileges protected by the Privileges and
Immunities Clause and, though the ordinance was not violative of the
Commerce Clause because of the proprietary nature of the regulation,
perhaps It could offend the Privileges and Immunities Clause,
depending on unascertained facts. The cause was remanded to determine
those facts.
In the course of discussing the factors to be considered in
deciding whether a substantial reason for the statutory difference
existed in the City of Camden case , and whether it bore a substantial
relationship to the state's objective sufficient to avoid a Privileges
and I'meunltiesClause violation, the Court said:
The fact that Camden is expending its own funds or
funds it administers in accordance with the terms
of a grant is certainly a factor - perhaps the
crucial factor - to be considered in evaluating
whether the statute's discrimination violates the
Privileges and Immunities Clause.
465 U.S. at 221.
The Texas statute at issue here has a scope more restricted than
the Camden ordinance. It does not penalize bidders whose workforce
consists of out-of-state residents. Nonresident workers on state jobs
are not subjected to discrimination by the statute. It discriminates
only against bidders (including natural persons residing in Texas and
corporations organized here) with their principal places of business
p. 2776
Eonorable Mike Driscoll - Page 6 (JM-616)
in states that discriminate against Texas-based businesses in similar
situations. -Cf. Robisou v. Francis, 713 P.2d 259 (Alaska 1986).
For purposes of this opinion, we assume without deciding that the
opportunity of "nonresident" natural persons to bid on a public
contract In Texas is a privilege fundamental to the promotion of
interstate harmony and that a burden on that privilege is unconstitu-
tional unless there is a substantial reason for it and it bears a
substantial relationship to the state's objective. Cf. Powell v.
Daily, 712 P.2d 356 (Wyo. 1986); International Organization of
Masters. Mates & Pilots v. Andrews, E. In our opinion the burden
imposed by the Texas statute meets those tests.
The existence (or possible future existence) of statutes in other
states that discriminate against Texas-based businesses in the award
of public contracts is a substantial reason for the enactment of
article 6Olg. V.T.C.S.. and the burden the statute casts upon bidders
from states that do practice such discrimination against Texas-based
businesses clearly bears a substantial relationship to the state's
objective. Cf. Western and Southern Life Insurance Co. v. State Board
of EqualizatG, s. Article 6Olg restricts only the expenditure
of public funds, and, for Privilege and Immunities Clause purposes,
affects only nonresidents who can be said to constitute a peculiar
source of the evil at which the statute is aimed -- natural persons
for whose benefit the other states discriminate and who, politically,
are in a position to actively persuade the legislatures of the states
in which their principal places of business are located to desist from
discriminating in their favor against Texas-based businesses.
We advise that article 6Olg, V.T.C.S., is constitutional. We
have earlier addressed your "principal place of business" question.
Your final request asks us to identify those states currently imposing
similar penalties "on bidders from Texas."
We must decline to embark on an open-ended search through the
legislative annals of other states. If your research identifies
another state's statute about the effect of which you have doubt after
analyzing it. you may ask our help in resolving the doubt.
SUMMARY
Article 601g. V.T.C.S., a retaliatory bidding
statute, Is constit"tio"al. Within the scope of
the statute, "principal place of business" means
the place where the person' whether natural or
artificial, maintains offices and transacts
business, i.e.. where the person's business affairs
are conducted.
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Honorable Mike Driscoll - Page 7 (J&616)
JIM MATTOX
Attorney General of Texas
JACK EIGETOWER
First Assistant Attorney General
MARY XELLER
Executive Assistant Attorney General
RICK GILPIN
Chairman, Opinion Committee
Prepared by Bruce Youngblood
Assistant Attorney General
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