Foresight Coal Sales, LLC. v. Kent Chandler ( 2023 )

RECOMMENDED FOR PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 23a0018p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
┐
FORESIGHT COAL SALES, LLC.,
│
Plaintiff-Appellant, │
> No. 21-6069
│
v. │
│
KENT CHANDLER, in his official capacity as Chairman │
and Commissioner of Kentucky Public Service │
Commission, et al., │
Defendants-Appellees. │
┘
Appeal from the United States District Court for the Eastern District of Kentucky at Frankfort.
No. 3:21-cv-00016—Gregory F. Van Tatenhove, District Judge.
Argued: June 7, 2022
Decided and Filed: February 3, 2023
Before: BATCHELDER, CLAY, and LARSEN, Circuit Judges.
_________________
COUNSEL
ARGUED: Joshua I. Hammack, BAILEY & GLASSER, LLP, Washington, D.C., for
Appellant. Matthew F. Kuhn, OFFICE OF THE KENTUCKY ATTORNEY GENERAL,
Frankfort, Kentucky, for Appellee. ON BRIEF: Joshua I. Hammack, Nicholas S. Johnson,
BAILEY & GLASSER, LLP, Washington, D.C., Christopher D. Smith, BAILEY & GLASSER,
LLP, Charleston, West Virginia, for Appellant. Matthew F. Kuhn, Brett R. Nolan, OFFICE OF
THE KENTUCKY ATTORNEY GENERAL, Frankfort, Kentucky, for Appellee.
LARSEN, J., delivered the opinion of the court in which CLAY, J., joined in full.
BATCHELDER, J. (pg. 19), delivered a separate opinion concurring in the judgment.
No. 21-6069 Foresight Coal Sales, LLC. v. Chandler, et al. Page 2
_________________
OPINION
_________________
LARSEN, Circuit Judge. Kentucky imposes a severance tax on coal extracted within its
borders. At the same time, Kentucky directs its utilities to buy the most competitive coal, with
cost being one of the most important factors. Predictably, this combination of measures, along
with the fact that many coal-producing states don’t impose a severance tax, makes Kentucky
utilities less likely to buy Kentucky coal. Recognizing the problem, the Kentucky legislature
decided to have its cake and eat it, too. The legislature directed the agency that regulates
Kentucky utilities to evaluate the reasonableness of coal prices after subtracting any severance
tax paid from the actual bid price. In practice, the policy makes coal from states with severance
taxes, like Kentucky, cheaper for the utilities by the amount of the severance tax.
A coal producer from Illinois, where there is no severance tax, challenged the policy as a
violation of the Commerce Clause. The Commission responded that it wasn’t discriminating
against interstate commerce because it was only leveling the playing field tilted against
Kentucky coal by its own severance tax. Twice the district court bought this argument. We do
not.
I.
The Public Service Commission, a state agency, regulates utilities in Kentucky.
The Commission is tasked with ensuring that energy rates remain “reasonable” for consumers.
Ky. Rev. Stat. Ann. § 278.030; see id. § 278.040. One of the Commission’s regulations, the fuel
adjustment clause, allows utilities to adjust the base rates they charge customers to account for
fluctuating fuel costs. See 807 Ky. Admin. Regs. § 5:056(1)(1). If the rate charged to customers
is unreasonable, the charges are disallowed, the utility eats the cost, and the utility may be
suspended from using the fuel adjustment clause. Id. § 5:056(3)(1). To determine what charges
are reasonable, the Commission conducts six-month and two-year reviews of each utility. Id.
§ 5:056(3)(3)–(4). And one of the most substantial factors during review is the price the utility
No. 21-6069 Foresight Coal Sales, LLC. v. Chandler, et al. Page 3
paid for raw materials, like coal. Basically, Kentucky utilities are encouraged to buy cheaper
coal.
This setup is a problem for Kentucky coal producers, who must pay a severance tax equal
to 4.5% of the gross value of the coal upon extraction. Ky. Rev. Stat. Ann. § 143.020.
Compared to states with no severance tax, Kentucky coal is relatively expensive. So, because of
the fuel adjustment clause and its reasonableness requirement, Kentucky utilities are
discouraged, on the margin, from buying Kentucky coal.
Kentucky has tried several times to solve this problem. In 2019, the Kentucky House of
Representatives adopted House Resolution 144, which encouraged the Commission “to amend
its administrative regulations to consider all costs, including fossil fuel-related economic impacts
within Kentucky, when analyzing coal purchases under the fuel adjustment clause.” H.R. 144,
2019 Reg. Sess. (Ky. 2019). Weeks later, the Commission issued a draft regulation stating that,
in determining the reasonableness of fuel costs, the Commission would consider the cost of the
fuel less the Kentucky severance tax. Simply put, the Commission would artificially discount
the price of Kentucky coal by 4.5%. However, the Commission never adopted the drafted
language out of concern that the regulation might violate the dormant Commerce Clause.
Instead, the final regulation stated that the Commission would artificially discount a utility’s fuel
costs by the amount of the severance tax paid to any jurisdiction.
In late 2019, Foresight Coal Sales, LLC, an Illinois coal producer, sent a letter to the
Commission arguing that the amended regulation was still unconstitutional under the Commerce
Clause. In response, the Commission briefly suspended enforcement. But the Kentucky
Attorney General issued an opinion saying that the regulation was legal because, while it might
benefit Kentucky coal relative to producers in some states, it might hurt Kentucky coal relative to
others. So the Commission resumed its enforcement.
Foresight Coal sued in the Eastern District of Kentucky and sought a preliminary
injunction. The district court denied the motion, and Foresight Coal appealed to this court. The
parties fully briefed the appeal, and oral argument was scheduled for December 4, 2020. Then,
No. 21-6069 Foresight Coal Sales, LLC. v. Chandler, et al. Page 4
right before argument, the Commission agreed to rescind the regulation, and Foresight Coal
dropped the case.
Kentucky wasn’t done, though. On March 25, 2021, the Kentucky Governor signed
Senate Bill 257 into law. The new law requires the Commission to “evaluate the reasonableness
of fuel costs in contracts and competing bids based on the cost of the fuel less any coal severance
tax imposed by any jurisdiction.” Ky. Rev. Stat. Ann. § 278.277(1). In form and function, the
new law is the same as the old regulation. The new law went into effect on July 1, 2021.
Foresight Coal again sued the Commission members in their official capacities and,
again, sought a preliminary injunction. With “a distinct sense of déjà vu,” the district court again
denied the preliminary injunction. Foresight Coal Sales, LLC v. Chandler, No. 3:21-cv-00016-
GFVT, 2021 WL 5139491, at *1 (E.D. Ky. Nov. 3, 2021). Foresight Coal appeals.
II.
A court must balance four factors when considering a preliminary
injunction: “(1) whether the movant has a strong likelihood of success on the merits; (2) whether
the movant would suffer irreparable injury without the injunction; (3) whether issuance of the
injunction would cause substantial harm to others; and (4) whether the public interest would be
served by issuance of the injunction.” Union Home Mortg. Corp. v. Cromer, 31 F.4th 356, 365–
66 (6th Cir. 2022) (quoting City of Pontiac Retired Emps. Ass’n v. Schimmel, 751 F.3d 427, 430
(6th Cir. 2014) (en banc) (per curiam)). We review the district court’s ultimate determination of
whether these factors favor an injunction for an abuse of discretion. Id. at 366. But the
likelihood of success on the merits is often the determinative factor. Dahl v. Bd. of Trs. of W.
Mich. Univ., 15 F.4th 728, 735 (6th Cir. 2021) (per curiam). And that factor we review de novo.
Union Home Mortg. Corp., 31 F.4th at 366.
Congress has the power “[t]o regulate Commerce . . . among the several States.” U.S.
Const. art. I, § 8, cl. 3. “[T]he Commerce Clause is written as an affirmative grant of authority to
Congress.” South Dakota v. Wayfair, Inc., 138 S. Ct. 2080, 2089 (2018). And some have argued
that, under the plain text of the Constitution, its reach ends there. E.g., Camps
Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 610 (1997) (Thomas, J.,
No. 21-6069 Foresight Coal Sales, LLC. v. Chandler, et al. Page 5
dissenting). Nonetheless, the Supreme Court has long held that the Commerce Clause goes
further and imposes limitations on the states even when Congress hasn’t acted. Wayfair, 138
S. Ct. at 2089. This negative, or dormant, Commerce Clause requires courts to preserve the “free
flow of interstate commerce,” S. Pac. Co. v. Arizona ex rel. Sullivan, 325 U.S. 761, 770 (1945),
with the aim of preventing the “economic Balkanization” that plagued the early colonies,
Wayfair, 138 S. Ct. at 2089 (quoting Hughes v. Oklahoma, 441 U.S. 322, 325 (1979)).
The Supreme Court has articulated two principles for applying the dormant Commerce
Clause. “First, state regulations may not discriminate against interstate commerce.” Id. at 2091.
Once a regulation is found to be discriminatory, it is “virtually per se” invalid. Granholm v.
Heald, 544 U.S. 460, 476 (2005) (quoting City of Philadelphia v. New Jersey, 437 U.S. 617, 624
(1978)). Second, if the regulation isn’t discriminatory, the doctrine still asks whether the state
has imposed an “undue burden[] on interstate commerce.” Wayfair, 138 S. Ct. at 2091.
Specifically, state policies effectuating “a legitimate local public interest . . . will be upheld
unless the burden imposed on [interstate] commerce is clearly excessive in relation to the
putative local benefits.” Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970). A theme
throughout is that courts should inquire whether the policy “is basically a protectionist measure.”
City of Philadelphia, 437 U.S. at 624; see also Am. Beverage Ass’n v. Snyder, 735 F.3d 362, 378
(6th Cir. 2013) (Sutton, J., concurring) (“The key point of today’s dormant Commerce Clause
jurisprudence is to prevent States from discriminating against out-of-state entities in favor of in-
state ones.”); Donald H. Regan, The Supreme Court & State Protectionism: Making Sense of the
Dormant Commerce Clause, 84 Mich. L. Rev. 1091, 1092 (1986) (arguing that the Supreme
Court has been “concerned exclusively with preventing states from engaging in purposeful
economic protectionism”).
A.
Dormant Commerce Clause jurisprudence is famously complex. See Saikrishna Prakash,
Our Three Commerce Clauses & the Presumption of Intrasentence Uniformity, 55 Ark. L. Rev.
1149, 1169 (2003) (calling the doctrine “complicated and byzantine”). The Supreme Court itself
has recognized the doctrine’s “very considerable judicial oscillation.” Prudential Ins. Co. v.
Benjamin, 328 U.S. 408, 420 (1946); see also Am. Trucking Ass’ns, Inc. v. Smith, 496 U.S. 167,
No. 21-6069 Foresight Coal Sales, LLC. v. Chandler, et al. Page 6
203 (1990) (Scalia, J., concurring) (“The ‘negative’ Commerce Clause is inherently
unpredictable[.]”); Kassel v. Consol. Freightways Corp. of Del., 450 U.S. 662, 706 (1981)
(Rehnquist, J., dissenting) (calling the doctrine “hopelessly confused”). As a lower court, we
must chart a course through the doctrine’s “cloudy waters.” Wardair Can., Inc. v. Fla. Dep’t of
Revenue, 477 U.S. 1, 17 (1986) (Burger, C.J., concurring in part and concurring in the
judgment).
The parties agree that “discrimination” in the Commerce Clause context “means
differential treatment of in-state and out-of-state economic interests that benefits the former and
burdens the latter.” Or. Waste Sys., Inc. v. Dep’t of Env’t Quality of Or., 511 U.S. 93, 99 (1994).
They also agree that both laws that discriminate on their face and those that discriminate in effect
run afoul of the doctrine. They debate the role of purpose, however. Foresight Coal points to
statements from this court and the Supreme Court that could be read to suggest that a
discriminatory purpose, standing alone, can serve to invalidate a state’s regulation of commerce.
E. Ky. Res. v. Fiscal Ct. of Magoffin Cnty., 127 F.3d 532, 540 (6th Cir.1997) (“A [state
regulation] can discriminate against out-of-state interests in three different ways: (a) facially,
(b) purposefully, or (c) in practical effect.”); Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 270
(1984) (noting that a regulation may be unlawful because of a “discriminatory purpose or
discriminatory effect” (citation omitted)). The Commission responds with Comptroller of the
Treasury v. Wynne, which stated that “the Commerce Clause regulates effects, not motives, and it
does not require courts to inquire into voters’ or legislators’ reasons for enacting a law that has a
discriminatory effect.” 575 U.S. 542, 561 n.4 (2015) (emphasis added). The Commission reads
Wynne to say both that motive without effect can never be enough, and that a discriminatory
effect suffices to invalidate a law, even absent discriminatory purpose. Thoughtful scholarship
has offered a third approach, noting that in a string of cases before Wynne (and unrepudiated by
it), the Court had upheld even discriminatory laws “in cases without evidence of a subjective
intention to distort competition.” Daniel Francis, The Decline of the Dormant Commerce
Clause, 94 Denv. L. Rev. 255, 292 (2017) (collecting cases); see also Regan, supra, at 1092. On
this theory, discriminatory purpose is necessary, though perhaps never sufficient; and Wynne
might be confined to the special realm of tax cases. Francis, supra, at 292.
No. 21-6069 Foresight Coal Sales, LLC. v. Chandler, et al. Page 7
Happily, we need not settle the place of protectionist purpose in the “quagmire” of
Commerce Clause jurisprudence. See W. Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 210
(1994) (Scalia, J., concurring). Here, the law discriminates, if not on its face, then in effect, and
so we have no occasion to consider whether discriminatory purpose alone could ever suffice.1
And, to the extent that a protectionist purpose is necessary, we find that too.
B.
The parties spend considerable energy debating whether SB 257, which does not mention
any state by name, nonetheless discriminates on its face. Foresight Coal says that it does because
it “extend[s] beneficial treatment to producers from severance-tax states” and denies them to
others. Appellant Br. at 28. But in the Commission’s view, that “is an argument that a facially
neutral statute discriminates in effect.” Id. at 24. Which party is right turns on how close a
proxy must be before we may find facial discrimination. But, in this case, not much turns on the
answer. Whether labeled as “facial” or “in effect” discrimination, SB 257 discriminates against
out-of-state coal.
SB 257 requires the Commission to “evaluate the reasonableness of fuel costs in
contracts and competing bids based on the cost of the fuel less any coal severance tax imposed
by any jurisdiction.” Ky. Rev. Stat. Ann. § 278.277(1) (emphasis added). A severance tax is a
tax imposed by a state (or political subdivision) upon natural resources extracted or “severed”
from the land within its borders.2 See Maryland v. Louisiana, 451 U.S. 725, 759 (1981). Only
the state from which a natural resource was extracted may impose a severance tax on it. Id.(noting that “Louisiana ha[d] no sovereign interest in being compensated for the severance of
resources” outside of its borders). So “any coal” that has paid a severance tax to “any
1
Still, we are skeptical. It’s hard to “imagine a case in which a state legislature intended to discriminate
against interstate commerce but did not make that purpose clear in the statute (and thereby did not facially
discriminate) and also failed to achieve that purpose (and thereby did not discriminate in effect).” Wynne v.
Comptroller of Md., 228 A.3d 1129, 1142 n.28 (Md. 2020); see also Am. Trucking Ass’ns, Inc. v. Alviti, 14 F.4th 76,
89 (1st Cir. 2021). Nor would such a case seem practically problematic. See Associated Indus. of Mo. v. Lohman,
511 U.S. 641, 654 (1994) (“[T]he flow of commerce is measured in dollars and cents, not legal abstractions.”).
2
That a municipality could, in theory, impose a severance tax makes no difference for Commerce Clause
purposes. See Fort Gratiot Sanitary Landfill, Inc. v. Mich. Dep’t of Nat. Res., 504 U.S. 353, 357, 361 (1992)
(rejecting the state’s argument that policies did “not discriminate against interstate commerce on their face or in
effect because they” differentiated based on “county”).
No. 21-6069 Foresight Coal Sales, LLC. v. Chandler, et al. Page 8
jurisdiction” necessarily originated in that jurisdiction, and SB 257’s text requires the
Commission to discount coal that has paid severance taxes. Quite plainly then, the statute
demands that coal from non-severance taxing states (e.g., Illinois) be treated one way, and coal
from severance-taxing states (e.g., Kentucky) another. Even coal from the various severance-
taxing states is given further disparate treatment, depending on the amount of each state’s tax.
Thus, applying SB 257 starts and ends with the state. The fact of the severance tax is, therefore,
a near perfect proxy for the coal’s state of origin.
Acknowledging the proxy problem, the Commission argues that SB 257 doesn’t
differentiate based on state because coal from the same state may be treated differently. For
example, “Montana imposes a different severance tax based on how the coal is severed . . . and
the coal’s heating quality.” Appellee Br. at 23. But regardless of whether all Montana coal is
treated the same, Montana coal is treated differently from coal in other states by virtue of its
being Montana coal. Applying SB 257 to Montana coal still starts and ends with the state, even
if that state’s law is more complex.
Does this tight correlation mean that we should call SB 257’s severance-tax-based
discrimination “facial” state-of-origin discrimination? The question is interesting but ultimately
unimportant. Whether a law discriminates in explicit terms against out-of-state goods, or does so
merely “in effect,” the result is the same. As is true of other constitutional doctrines, “[t]he
commerce clause forbids discrimination, whether forthright or ingenious.” Best & Co. v.
Maxwell, 311 U.S. 454, 455 (1940); cf. Bray v. Alexandria Women’s Health Clinic, 506 U.S.
263, 270 (1993) (“A tax on wearing yarmulkes is a tax on Jews.”). So a law discriminatory in
effect must be justified as if it discriminated on its face. See Wyoming v. Oklahoma, 502 U.S.
437, 454 (1992) (“When a state statute clearly discriminates against interstate commerce, it will
be struck down, unless the discrimination is demonstrably justified by a valid factor unrelated to
economic protectionism.” (citation omitted)).
C.
The real question then is not whether SB 257 differentiates between in-state and out-of-
state coal but whether it impermissibly discriminates, as that term is used in the Commerce
No. 21-6069 Foresight Coal Sales, LLC. v. Chandler, et al. Page 9
Clause. That is, does the law benefit in-staters and burden outsiders? Or. Waste Sys., 511 U.S.
at 99. We conclude it does. SB 257 requires the Commission to treat coal that has paid
severance taxes (to Kentucky or the handful of other states that impose them) better than it treats
coal that has not paid such a tax: Coal from severance tax states is artificially discounted by the
amount of the tax; other coal is not discounted at all. So, “[t]he [Kentucky] provision at issue
here explicitly deprives certain products of generally available beneficial [regulatory] treatment
because they are made in certain other States . . . .” New Energy Co. of Ind. v. Limbach, 486
U.S. 269, 274 (1988).
The Commission points out that some out-of-state coal could benefit from SB 257—if
that state had a higher severance tax than Kentucky. But that can’t save the statute. In Hunt v.
Washington State Apple Advertising Commission, the Supreme Court held that a North Carolina
statute forbidding nonfederal grading of apples violated the Commerce Clause because it
stripped Washington of the competitive and economic advantages of its superior grading system,
while giving a boost to North Carolina’s apples. 432 U.S. 333, 351 (1977). The North Carolina
statute also benefitted apple producers from nearly half of the other states competing in the North
Carolina apple market, which had no state grading systems of their own. See id. at 349. But that
made no difference to the Court. Id.; see also Lohman, 511 U.S. at 645, 649–50 (rejecting the
contention that the “overall effect of the use tax scheme across the State was to place a lighter
aggregate tax burden on interstate commerce than on intrastate commerce”). Nor could it. “The
facial unconstitutionality of [a state regulation] cannot be alleviated by examining the effect of
legislation enacted by its sister States.” Tyler Pipe Indus. v. Wash. State Dep’t of Revenue, 483
U.S. 232, 242 (1987); see also Freeman v. Hewit, 329 U.S. 249, 256 (1946) (“The immunities
implicit in the Commerce Clause and the potential taxing power of a State can hardly be made to
depend, in the world of practical affairs, on the shifting incidence of the varying tax laws of the
various States at a particular moment.”). And, to violate the dormant Commerce Clause, a
regulation needn’t discriminate against every state or industry. Limbach, 486 U.S. at 276(“[N]either a widespread advantage to in-state interests nor a widespread disadvantage to out-of-
state competitors need be shown.”); Lohman, 511 U.S. at 650 (“[D]iscrimination is appropriately
assessed with reference to the specific subdivision in which applicable laws reveal differential
treatment.”).
No. 21-6069 Foresight Coal Sales, LLC. v. Chandler, et al. Page 10
The Commission raises several arguments in response. First, it points us to the standard
of review. The district court declined “to find at this time that S.B. 257 discriminates in effect,”
concluding that there was “not enough evidence in the record to properly ascertain whether S.B.
257 will disadvantage states that do not impose severance taxes.” Foresight Coal Sales, 2021
WL 5139491, at *9. The Commission says this is a finding of fact that we may set aside only if
“clearly erroneous.” City of Pontiac Retired Emps. Ass’n, 751 F.3d at 430. But, as we will
show, the district court didn’t err by finding a wrong fact; it erred by asking the wrong question.
So the district court’s determination that SB 257 likely doesn’t have a discriminatory effect (i.e.,
that it does not treat out-of-staters worse than in-staters) is a legal error that we review de novo.
Id.As for findings of fact, the district court found it “obvious that cost is an important factor
in the reasonableness analysis” but that it is “only one factor that the Commission analyzes when
conducting its reasonableness inquiry.” Foresight Coal Sales, 2021 WL 5139491, at *9. The
Commission’s review is “holistic.” Id. And, at least once, a utility purchased more expensive
coal based on “other considerations.” Id. From these facts, the district court essentially
concluded that, even with SB 257 in effect, Kentucky utilities might still buy Illinois coal, based
on factors besides cost, and still qualify for the fuel-adjustment clause. Id. Even if each of these
findings is correct, they don’t lead to a legal conclusion that SB 257 isn’t discriminatory.
The question the Commerce Clause cases ask is whether SB 257 burdens Illinois coal—
not whether that burden is so insurmountable that no Illinois coal will ever again be sold to a
Kentucky utility. See Or. Waste Sys., 511 U.S. at 99. The question isn’t even whether Foresight
will necessarily lose market share. Instead, any economic disadvantage will do—whether
measured in loss of market share or in lost profits due to decreased prices. W. Lynn Creamery,
512 U.S. at 195 n.11 (forcing out-of-state industry “to cut its profits by reducing its sales price
below the market price sufficiently to compensate” for an imposed disadvantage is “an economic
barrier against competition”). We can see that in Hunt. There, the Court concluded that North
Carolina’s forced “downgrading” of Washington apples would “[a]t worst, . . . have the effect of
an embargo against those Washington apples in the superior grades,” and “[a]t best . . . will
deprive Washington sellers of the market premium that such apples would otherwise command.”
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Hunt, 432 U.S. at 352. Either effect constituted impermissible “discrimination against
commerce.” Id. at 353.
Here, Kentucky artificially discounts its own coal, and coal from other severance-tax
states, by the amount of the tax. Because non-severance-tax state coal gets no such discount, the
effect is to make Illinois coal relatively more expensive. That, in turn, will cause Illinois coal
either to lose market share or to lower its price. See, e.g., W. Lynn Creamery, 512 U.S. at 195
n.11. Either way, Illinois coal is worse off as a matter of basic economics and Supreme Court
precedent. And either result is sufficient to find discrimination. Id.; Hunt, 432 U.S. at 352–53.
In this litigation, everyone agrees that cost is one of the most substantial factors for the
utilities. This is also common sense. When Kentucky utilities incur high energy costs, they want
to be able to pass them on to customers; the fuel adjustment clause lets them do that. See 807
Ky. Admin. Regs. § 5:056(1)(1). But, to keep this ability, the utilities must pay “[]reasonable”
prices for coal. Id. § 5:056(3)(3)–(4). Under SB 257, the Commission must discount severance
taxes from the reasonableness calculation; the law gives it no discretion. Ky. Rev. Stat. Ann. §
278.277. And we assume that the Commission will follow the law. Cf. U.S. Postal Serv. v.
Gregory, 534 U.S. 1, 10 (2001) (“[A] presumption of regularity attaches to the actions of
Government agencies.” (citing United States v. Chem. Found., Inc., 272 U.S. 1, 14–15 (1926))).
So coal from severance tax states will be treated as cheaper for the utilities (though not for their
customers) by the amount of that severance tax. The district court may well be right that the
amount of loss is still unknown. But “the magnitude and scope of the discrimination have no
bearing on the determinative question whether discrimination has occurred.” Lohman, 511 U.S.
at 650; see also Maryland, 451 U.S. at 759–60 (“It may be true that further hearings would be
required to provide a precise determination of the extent of the discrimination . . . but this is an
insufficient reason for not now declaring the Tax unconstitutional.”).
D.
SB 257 is also purposefully discriminatory. To determine the purpose of a statute, we
start with the text. Am. Bev. Ass’n, 735 F.3d at 371. Usually, the text is sufficient to determine
purpose. E. Ky. Res., 127 F.3d at 542. Such is the case here.
No. 21-6069 Foresight Coal Sales, LLC. v. Chandler, et al. Page 12
The text of SB 257 is plain: In calculating the reasonableness of fuel costs for
Kentucky’s utilities, the Commission must consider the “cost of the fuel less any coal severance
tax imposed by any jurisdiction.” The immediate goal of this text is to make severance-tax-state
coal cheaper, which will, in turn, encourage Kentucky utilities to buy more coal from severance-
tax jurisdictions, like Kentucky, and less from other states. And, as we have explained above,
that purpose is discriminatory.
The parties debate the importance of the prior regulation and of various floor
statements—some suggesting that the aim of the bill was to prop up the Kentucky coal industry,
others suggesting that the legislators had no intent to “run afoul of interstate commerce.” But
none of that matters, at least not when the purpose is plain from the text. See Int’l Dairy Foods
Ass’n v. Boggs, 622 F.3d 628, 648 (6th Cir. 2010). We note, moreover, that the Commission
itself has offered only one purpose for SB 257: to “even out the playing field” between
Kentucky coal and competing coal from non-severance tax states. And, as we explain next, that
purpose is itself discriminatory.
III.
A.
The Commission’s primary defense of SB 257 is that the law does not impermissibly
discriminate within the meaning of the Commerce Clause because Kentucky coal isn’t really
advantaged by the policy; it’s just no longer disadvantaged by Kentucky’s own severance tax.
Similarly, Illinois coal isn’t really burdened by the policy, it’s just no longer unfairly propped up
by its state’s lack of a severance tax. As the Commission puts it, SB 257 at most “evens a
playing field” that the severance-tax states have tilted against themselves. Appellee Br. at 13.
The Commission believes that such a law cannot be discriminatory. But a discriminatory policy
is no less discriminatory because it has a “leveling” effect. In fact, the “leveling” effect may be
precisely what is discriminatory.3 See Hunt, 432 U.S. at 351 (holding that a state statute which
had “a leveling effect” violated the Commerce Clause).
3
The Commission offers Lebamoff Enters. Inc. v. Whitmer, where we briefly suggested in dictum that
“evening the playing field” might be a “legitimate goal.” 956 F.3d 863, 874 (6th Cir. 2020). But Lebamoff is a
No. 21-6069 Foresight Coal Sales, LLC. v. Chandler, et al. Page 13
This conclusion follows naturally from three principles in the Supreme Court’s dormant
Commerce Clause jurisprudence. First, one state’s discriminatory policy doesn’t authorize
another’s. See Limbach, 486 U.S. at 278 (“[E]ven if [an] Indiana subsidy were invalid [under the
Commerce Clause], retaliatory violation of the Commerce Clause by Ohio would not be
acceptable.”). Such a tit for tat is precisely the kind of economic balkanization the dormant
Commerce Clause seeks to prevent. See Wayfair, 138 S. Ct. at 2089. And “[a]ny other rule
would mean that the constitutionality of [a regulation] would depend” on the laws in “49 other
States.” Armco Inc. v. Hardesty, 467 U.S. 638, 644–45 (1984). So SB 257 isn’t somehow
justified by Illinois’ policy not to have a severance tax.
Second, with one exception discussed below, a policy that benefits out-of-state interests
doesn’t justify another that burdens them. In Armco Inc. v. Hardesty, the Court rejected West
Virginia’s argument that it could exempt local manufacturers from a gross receipts tax because
they paid “a much higher manufacturing tax.” 467 U.S. at 641–42. In Tyler Pipe, the Court
invalidated Washington’s exemption to its manufacturing tax for goods sold locally, even though
“absent the exemption, a local manufacturer might be at an economic disadvantage because it
would pay both a manufacturing and a wholesale tax, while the manufacturer from afar would
pay only the wholesale tax.” 483 U.S. at 243. And, in Baldwin, the Court held that New York
couldn’t protect local milk, which had to conform to New York minimum price laws, from
Vermont milk, which had no such minimum price restrictions. 294 U.S. at 520, 528. The
caselaw is clear: SB 257 must be judged discriminatory or not, regardless of other Kentucky
policies that might benefit out-of-state coal. So SB 257 isn’t justified by Kentucky’s severance
tax.
Third, a policy is discriminatory if its claim to neutrality depends on another state
enacting the same policy. See id. at 521 (“New York has no power to project its legislation into
Vermont.”). The Court has repeatedly rejected attempts by states to condition favorable
Twenty-First Amendment case, which has an “accordion-like interplay” with the Commerce Clause and, therefore,
requires a “different” test. Id. at 869, 871. “The Twenty-first Amendment ‘gives the states regulatory authority that
they would not otherwise enjoy.” Id. (quoting Tenn. Wine & Spirits Retailers Assoc. v. Thomas, 139 S. Ct. 2449,
2474 (2019)). Lebamoff didn’t consider Limbach, Hunt, or the other dormant Commerce Clause cases. Anyway,
our comment about legitimate ends was just one response to a “doubtful” piece of legislative history that didn’t
affect the outcome. Id. at 874.
No. 21-6069 Foresight Coal Sales, LLC. v. Chandler, et al. Page 14
treatment for out-of-state interests on reciprocal or similar legislation. See, e.g., Tyler Pipe, 483
U.S. at 242; Great Atl. & Pac. Tea Co. v. Cottrell, 424 U.S. 366, 380–81 (1976); Sporhase v.
Nebraska ex rel. Douglas, 458 U.S. 941 (1982). In Limbach, the state regulation at issue gave
tax subsidies to local ethanol as well as to out-of-state ethanol that returned the favor. 486 U.S.
at 272. Nonetheless, the Court found that the state regulation was facially discriminatory, even
though “many States” would be treated equally. Id. at 271; see also Hunt, 432 U.S. at 349(holding that North Carolina’s statute banning state grading of apples was discriminatory even
though six other states also had no state grading). So, here, SB 257’s discrimination isn’t
alleviated either by the fact that some states already impose severance taxes (in varying amounts)
and that others may choose to impose severance taxes of their own. See Tyler Pipe, 483 U.S. at
242 (1987) (noting that a discriminatory policy cannot be alleviated by “examining the effect of
legislation” in other states).
A contrary result in this case would violate these three principles. And it would mean
that a state could “force its own judgments” on other states by using access to its market to
encourage them to enact certain policies. See Cottrell, 424 U.S. at 380. A state with a high
minimum wage, like Illinois, or California, might, for example, manipulate its sales tax to “level
out” its high labor costs relative to states like Kentucky, whose policy has been to track the
federal minimum wage. Ky. Rev. Stat. Ann. § 337.275. This process could play out in every
state; no doubt every tapestry of regulations has some economic effects to “even out.” But the
principal aim of the dormant Commerce Clause cases is to avoid such “commercial warfare.”
See H. P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525, 533 (1949).
B.
The Commission draws our attention to the one exception where the Supreme Court has
deemed leveling a permissible purpose. In Henneford v. Silas Mason Co., the Supreme Court
held that a 2% use tax on out-of-state goods did not violate the Commerce Clause because it was
equivalent to the 2% sales tax on goods sold in the state. 300 U.S. 577, 579–81 (1937). The
Court pointed to the complementary nature of the two taxes, noting that “retail sellers in
Washington will be helped to compete upon terms of equality with retail dealers in other states
who are exempt from a sales tax or any corresponding burden.” Id. at 581. The Commission
No. 21-6069 Foresight Coal Sales, LLC. v. Chandler, et al. Page 15
compares SB 257 to the use tax in Silas Mason, arguing that SB 257 helps Kentucky coal
“compete upon terms of equality” with Illinois coal not subject to a severance tax. See id.Initially, we note that Silas Mason confirms our conclusion that leveling the playing field
is discriminatory under the Commerce Clause. A compensatory tax à la Silas Mason is still a
facially discriminatory tax, just one that is sufficiently justified. See Or. Waste Sys., 511 U.S. at
102 (“Though our cases sometimes discuss the concept of the compensatory tax as if it were a
doctrine unto itself, it is merely a specific way of justifying a facially discriminatory tax as
achieving a legitimate local purpose that cannot be achieved through nondiscriminatory
means.”).
And Silas Mason created a narrow exception. See Fulton Corp. v. Faulkner, 516 U.S.
325, 344 (1996) (“While we doubt that . . . a [compensatory tax] showing can ever be made
outside the limited confines of sales and use taxes, it is enough to say here that no such showing
has been made.”); Or. Waste Sys., 511 U.S. at 105 n.8 (calling the compensatory tax cases
“carefully confined”). The compensatory tax exception exists to ensure that states can collect
revenue through sales taxes, see generally Wayfair, 138 S. Ct. at 2096, but it has not extended
further, Fulton, 516 U.S. at 338 (The Supreme Court “ha[s] shown extreme reluctance to
recognize new compensatory categories”; indeed, “use taxes on products purchased out of state
are the only taxes [the Court] ha[s] upheld in recent memory under the compensatory tax
doctrine”). It does not apply here.
First, SB 257 is not a tax. Silas Mason appears to extend only to use taxes—not even
other kinds of taxes—so it certainly doesn’t apply to regulatory schemes that aren’t taxes at all.
See Fulton, 516 U.S. at 344. Expanding Silas Mason to a non-tax would hardly keep the
doctrine “carefully confined,” as the Supreme Court has directed us to do. Id. at 335 (quoting
Or. Waste Sys., 511 U.S. at 105 n.8). Second, even if SB 257 were a tax, it wouldn’t qualify for
the Silas Mason exception. Compensatory taxes must meet three criteria. First, the State must
identify a “burden for which the State is attempting to compensate.” Tyler Pipe, 483 U.S. at 242(quoting Maryland, 451 U.S. at 758). Second, the State must demonstrate “[e]qual treatment of
interstate commerce.” Id. at 243 (quoting Bos. Stock Exch., 429 U.S. at 331) (alteration in
original). Third, the State must show “‘substantially equivalent’ events on which the ‘mutually
No. 21-6069 Foresight Coal Sales, LLC. v. Chandler, et al. Page 16
compensating taxes’” are imposed. Id. at 244 (quoting Armco, 467 U.S. at 643). SB 257 doesn’t
pass the test.
The “substantially equivalent” prong asks whether the taxes fulfill the same purpose.
Tyler Pipe, 483 U.S. at 244. But the purpose of the severance tax and SB 257 are different. We
know this because the Supreme Court told us so in a remarkably similar case. In Maryland v.
Louisiana, the Supreme Court held that a severance tax is not substantially equivalent to a use
tax. 451 U.S. at 759. There, Louisiana had a 7-cent severance tax for natural gas, imposed per
thousand cubic feet extracted. Id. at 731. Concerned about the influx of gas from federal
reserves in the Gulf of Mexico, Louisiana imposed an equivalent use tax on gas coming from
territories without a severance tax. Id. Most states had a severance tax equal to Louisiana’s at
the time and would have been treated equally, but the Court still found that the use tax could not
be justified as a compensatory tax; instead, it violated the Commerce Clause. Id. at 758–59. The
Court emphasized the difference between a sales tax and a severance tax. Specifically, a
severance tax serves the “interest in protecting [the State’s] natural resources.” Id. at 759. But a
use tax could not be “designed to meet these same ends since Louisiana ha[d] no sovereign
interest in being compensated for the severance of resources from [federally owned land].” Id.Here, Kentucky has no interest in the extraction of natural resources from Illinois land, so it can’t
enact a Silas Mason-like tax to level the effects of its severance tax. Id.C.
Framing the argument another way, the Commission contends that Illinois coal did not
“earn” whatever advantage it had before the enactment of SB 257, so Kentucky is free to nullify
it. But that argument also misunderstands Commerce Clause jurisprudence. The Commission
gleans its “earned advantage” principle from Hunt. There, the Supreme Court held a statute
unenforceable where it stripped away “the competitive and economic advantages [the
Washington apple industry] ha[d] earned for itself through its expensive inspection and grading
system.” Hunt, 432 U.S. at 351. But Hunt didn’t say that “unearned” advantages could be
stripped away. The cases remark on whether there is an advantage; they do not turn on how it is
derived. See, e.g., Or. Waste Sys., 511 U.S. at 99 (focusing on “differential treatment,” not the
No. 21-6069 Foresight Coal Sales, LLC. v. Chandler, et al. Page 17
source of the difference); W. Lynn Creamery, 512 U.S. at 194 (asking whether the state policy
“neutraliz[es] advantages belonging to the place of origin” (quoting Baldwin, 294 U.S. at 527)).
What’s more, the Commission does not tell us what it means by “earned.” It might mean
that only the fruits of human labor and ingenuity, perhaps combined with the blessings of nature,
are protected by the Commerce Clause. The Commission suggests, for example, that if Foresight
had shown that its “coal [was] of a better quality” or that it could “transport its coal more cheaply
or quickly,” those advantages would be protected. Appellee Br. at 13. That leaves in the
unprotected category state-created advantages, like (the lack of) a severance tax. But this
argument is squarely foreclosed by Hunt itself; it was the Washington “state legislature [that]
ha[d] sought to enhance the market for Washington apples through the creation of . . . the
Washington State Apple Advertising Commission.” 432 U.S. at 336. The state’s “stringent,
mandatory inspection program, administered by the State’s Department of Agriculture” graded
the apples. Id. And this state-created grading system was the advantage protected in Hunt. Id.The dormant Commerce Clause prohibited North Carolina from leveling the playing field that
Washington law had tilted toward itself. Id. at 350.
Limbach, too, stands in the way. There, the Court took note of Indiana’s cash subsidy
“program for in-state ethanol producers,” remarking that it was surely “effective in conferring a
commercial advantage over out-of-state competitors.” Limbach, 486 U.S. at 278. Still, the Court
cautioned that Ohio could not erase the effects of this state-created advantage through a
discriminatory tax: “Direct subsidization of domestic industry does not ordinarily run afoul of
[the Commerce Clause]; discriminatory taxation of out-of-state manufacturers does.” Id.In any event, the Commission never explains how it would have us distinguish between
human (or nature)-created and state-created advantages. How much of a business’s “economic
and competitive advantage” is traceable to natural resources or individual pluck? And what
portion shall we assign to labor policies, the educational system, corporate tax rates, or
environmental policy in the State? For good reason, the caselaw doesn’t parse whether an
advantage is state created. See Tyler Pipe, 483 U.S. at 234 (manufacturing taxes); Limbach, 486
U.S. at 271 (ethanol tax credits).
No. 21-6069 Foresight Coal Sales, LLC. v. Chandler, et al. Page 18
D.
Foresight Coal is likely to be able to show that SB 257 discriminates against interstate
commerce. There remains, however, the question whether that discrimination can nonetheless be
justified. Laws that discriminate against interstate commerce are “virtually per se” invalid, City
of Philadelphia, 437 U.S. at 624. But a few survive. E.g., Maine v. Taylor, 477 U.S. 131, 148
(1986) (upholding absolute ban on the importation of baitfish into Maine because of
environmental risks). Here, the Commission has proffered no explanation for SB 257 except that
it is designed to nullify the competitive disadvantages created by Kentucky’s severance tax. See
City of Philadelphia, 437 U.S. at 624 (noting that the “crucial inquiry” is whether the policy “is
basically a protectionist measure” or is instead directed “to legitimate local concerns” with only
“incidental” effects on interstate commerce). Because Kentucky may not level the playing field
in this way, Foresight Coal is likely to succeed on the merits.
***
Having concluded that Foresight Coal was not likely to succeed on the merits, the district
court declined to address the rest of the preliminary injunction factors. We remand for the
district court to examine the other three factors in the first instance. See Nationwide Biweekly
Admin., Inc. v. Owen, 873 F.3d 716, 738 (9th Cir. 2017).
We REVERSE and REMAND for further proceedings consistent with this opinion.
No. 21-6069 Foresight Coal Sales, LLC. v. Chandler, et al. Page 19
______________________________________
CONCURRING IN THE JUDGMENT
______________________________________
ALICE M. BATCHELDER, Circuit Judge, concurring in the judgment. While I agree
with the majority’s conclusion, I depart slightly from the underlying analysis.
As I see it, SB 257 is not facially discriminatory. To be sure, SB 257 treats different
states differently based on their differing severance taxes. But suppose Kentucky were to repeal
its coal severance tax. In that scenario, SB 257 would not favor Kentucky, meaning it would not
discriminate against out-of-state interests. Therefore, SB 257 does not discriminate on its face; it
discriminates in effect due to the existence of Kentucky’s coal severance tax.
SB 257 is discriminatory in effect because Kentucky’s coal severance tax makes it
discriminatory. By requiring the Commission to pretend that the price of Kentucky coal is 4.5%
lower than its true price, SB 257 gives Kentucky coal a comparative price advantage over out-of-
state coal that does not receive this pretend discount. This is virtually the same case as New
Energy Co. v. Limbach, 486 U.S. 269 (1988), in which the Court rejected Ohio’s attempt to deny
its tax credit to Indiana’s ethanol. I would stop there and take the analysis no further.