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States in business: What laws apply?

When a state government competes for profit in national commercial markets, should the state be held accountable to the same federal laws as private businesses?

In a country where federal law is the supreme law of the land, the answer would be yes. In a country where individual states retain sovereignty, the answer would be no.

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But what about a country, like the United States, where federal law is the supreme law of the land and the states retain their own sovereignty? That is the fundamental constitutional dilemma facing the US Supreme Court in a case to be heard today. It's the second time in two months that the high court is examining the balance of power between the states and the federal government.

Last month, the court heard arguments in a case that will determine whether states can be sued in their own state courts for alleged violations of federal law. With today's case, the high court's federalism agenda extends to the question of whether a state that competes with a private sector business can be held to the same congressionally mandated legal standards that regulate interstate commerce.

Both issues are among the most significant of the term, legal analysts say. "The stakes are very high here both as a political and a practical matter," says Martin Redish, a law professor at Northwestern University School of Law.

At the center of the federalism debate is the concept of a government comprising dual sovereigns - the federal government on one hand, and state governments on the other. The Constitution sharply limits the powers of the federal government to national issues and concerns like treaty-making, defense, and regulation of interstate commerce, and leaves all remaining powers to the states.

But what happens when federal and state powers intersect or collide? Many conservatives, including five of the nine justices on the nation's high court, believe that Congress and the federal government have at times overstepped their constitutional authority by encroaching into areas the Founding Fathers reserved exclusively to the states.

The case to be heard on Tuesday involves the issue of whether a state that engages in a form of interstate commerce must comply with the same federal business laws that help regulate national commercial activity and the national economy. Those laws include patent and trademark regulations, and bankruptcy and antitrust statutes.

The case involves allegations that the State of Florida engaged in illegal practices while in business competition with a New Jersey firm selling tuition savings investments. In 1988, Florida created a program to help Florida parents save enough money to pay for their children's future college education at the state's colleges and universities. Nineteen other states have similar tuition savings programs.

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The Florida Prepaid Postsecondary Education Expense Board attracted more than $184 million during its first seven years in operation. But not everyone was happy about the effort.

College Savings Bank of New Jersey was offering a similar college tuition savings service to parents nationwide. The company sued the Florida program, claiming it was making false claims in advertisements and illegally infringing on the company's patented method for managing its tuition savings service Florida denied the allegations but asked that the suits be dismissed on grounds that Florida as a sovereign state could not be sued without its consent. The false advertising suit was dismissed, but an appeals court upheld the patent infringement suit.

The Supreme Court must now decide whether Florida is immune from such suits or whether by engaging in a form of competitive interstate enterprise the state waived its immunity and thus in that limited circumstance can be sued in federal court for violating federal laws.

On one side of the issue are businesses and trade groups, which argue that states competing with private sector firms in a national market should comply with the same federal laws that apply to private companies.

"If the state wins this, we would have the anomalous situation where the state could sue one of its competitors under [federal business law], but the state would still stand immune when it does those same [illegal] actions to harm private competitors," says Mr. Redish, who filed a legal brief in the case on behalf of the International Trademark Association.

On the other side are 27 states, including Florida, and states' rights advocates who say that if private businesses suffer an injury as a result of business competition with a state they should seek recourse within the state's own courts.

"It is our view that to the extent that patent infringement can be characterized as a 'taking' [of property], there is a remedy in every state court for that," says Louis Hubener, a Florida assistant attorney general.

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