This post is not legal advice
In June, the North Dakota Farm Bureau brought a lawsuit against the state of North Dakota asking the federal district court to declare North Dakota's Anti-Corporate Farming Law unconstitutional. In June, North Dakota voters rejected moves by the state's legislature to loosen up the Anti-Corporate Farming Law. North Dakota is one of eight states with an anti-corporate farming law as either a statute or a constitutional amendment. Although these statutes/amendments have historical reasons for existence, they can have unintended consequences today, inhibiting a producer's ability to limit risk and develop workable farm transition plans for their operations.
North Dakota’s Law
To give you some background, North Dakota’s law provides: “All corporations and limited liability companies, except as otherwise provided in this chapter, are prohibited from owning or leasing land used for farming or ranching and from engaging in the business of farming or ranching. A corporation or a limited liability company may be a partner in a partnership that is in the business of farming or ranching only if that corporation or limited liability company complies with this chapter.” (N.D. Cent. Code § 10-06.1-02).
The law provides an exception for domestic family-owned corporations or limited liability companies (LLCs). In these types of corporations and companies, all members or shareholders must either be a parent, son, daughter, stepson, stepdaughter, grandparent, grandson, granddaughter, brother, sister, uncle, aunt, nephew, niece, great-grandparent, great-grandchild, first cousin, or a spouse of one of those listed (N.D. Cent. Code § 10-06.1-12). The other requirement is that all officers, directors, governors, or managers in the corporation or LLC must be shareholders or members actively engaged in farming, and one shareholder or member needs to be operating or residing on the operation.
Family-owned corporations and LLCs must be located in North Dakota to qualify for the exemption in North Dakota’s law. Non-North Dakota corporations and LLCs must create separate entities in North Dakota and meet the other qualifications to qualify for the exemption.
Dormant Commerce Clause
Why am I highlighting a challenge to a North Dakota law? To illustrate that issues can arise when state laws regulating how business conduct in the home state potentially impact out-of-state businesses. The U.S. Constitution gives Congress the power "To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes" (U.S. Con. Art. 1 § 8 Clause 3). When a state law conflicts with federal law related to the Commerce Clause, federal law overrules the state law.
The flip side of the Commerce Clause is the dormant Commerce Clause. The dormant Commerce Clause means since Congress has the authority to regulate interstate commerce, then states cannot regulate commerce in a way that discriminates or improperly burdens interstate business and commerce. Courts often use a two-tiered analysis to determine when a law violates the dormant Commerce Clause. The first tier requires courts to determine if the law treats out-of-state different than in-state, i.e. is discriminatory. The second tier requires courts to determine if the impacts to interstate commerce outweigh the local benefits, also known as the Pike balancing test. To learn more about this see, Pittman, The Constitutionality of Corporate Farming Law in the Eighth Circuit (2004).
Federal courts recently have often found anti-corporate farming laws violate the dormant Commerce Clause. In many cases, state legislature or state voters pass the laws to limit large corporations (for example, Smithfield, Tyson, or Perdue) from buying farmland to develop operations. In campaigns to pass the laws, language may be used which shows the impact is to limit those big corporations from moving into the state. This helps explain that the law has a discriminatory effect on interstate commerce.
Why discuss this issue? Well, these laws are often argued to be needed to keep large corporations out of a state, but the laws can have considerable impacts. North Dakota Farm Bureau's complaint highlights the broader implications. North Dakota's law contains exemptions for a limited class of family farm corporations and LLCs, which require relationship within a certain degree (for example, a farming operation made up of second cousins would not qualify).
When looking at this from a farm transition planning viewpoint, these laws could limit options or potentially create more elaborate plans for producers looking to transition to the next generation. For example, if your only possible successor is a family member outside the previously listed degree of relationship, then you will have to work more closely with an attorney to develop a business succession plan to operate in the confines of the law and still limits personal liability in the operation.
Other issues include keeping out out-of-state operations that are looking to expand. For example, if Pennsylvania has one of these laws, Maryland producers near the Pennsylvania state line would have to stay within confines of the law (setting up a new business entity or operating as a sole proprietorship) to expand into Pennsylvania. Creating these additional hassles may keep producers from expanding into a new state.
Challenges to anti-corporate farming laws are not new in the area of agricultural law. In many cases, these laws have been found to violate the dormant Commerce Clause of the U.S. Constitution. The laws can potentially impact the development of farm transition plans and how out-of-state producers look at expanding into new states.
N.D. Cent. Code § 10-06.1-02 (West 2016).
N.D. Cent. Code § 10-06.1-12 (West 2016).
Pittman, Harrison. The Constitutionality of Corporate Farming Law in the Eighth Circuit. National Agricultural Center Agricultural Law Research Article (June, 2004) Available at: http://bit.ly/2aBszRK.
National Agricultural Law Center, Corporate Farming Laws (last visited July 29, 2016), http://nationalaglawcenter.org/research-by-topic/corporate-farming-laws/.
North Dakota Farm Bureau v. Stenehjem, No. 1 16-CV-137 (D. N.D. June 2, 2016).
U.S. Con. Art. 1 § 8 Clause 3 (2016).