Economic incentives provided by state and local governments to businesses to induce them to locate or expand operations in a particular place are both ubiquitous and controversial. Perhaps because of the role that such incentives play in corporate decision-making, political opponents of economic development incentives have launched numerous legal challenges to them. In 2006, the United States Supreme Court rebuffed one such challenge. In DaimlerChrysler Corp. v. Cuno, 126 S. Ct. 1854 (2006), taxpayers challenged economic incentives under the so-called Dormant Commerce Clause of the United States Constitution, alleging that such incentives unconstitutionally discriminated against interstate commerce. Although the United States Court of Appeals for the Sixth Circuit ruled for the plaintiffs and struck down the incentives, the Supreme Court vacated that decision, holding that the plaintiffs lacked legal standing to litigate their case in federal court.
The political controversy over, and the legal challenges to, economic development incentives that have occurred nationwide have also arisen in North Carolina. In 1996, the North Carolina Supreme Court broadly interpreted the legal authority of the State and localities to provide such incentives in Maready v. Winston-Salem, 342 N.C. 708, 467 S.E.2d 615 (1996). In that case, the Court held that incentives provided by the City of Winston-Salem to twenty-four businesses to locate or expand operations in the City did not violate the Public Purpose Clause of the North Carolina Constitution. Kilpatrick Stockton represented the City in that litigation and argued the case in the Supreme Court.
While many observers believed that Maready settled once and for all the constitutionality of economic incentives in North Carolina, a large package of incentives given by the State of North Carolina, the City of Winston-Salem, and Forsyth County in 2004 to Dell Computer Corp., to encourage Dell to locate its newest and largest manufacturing plant in the City and County, provided opponents yet another opportunity to challenge economic incentives. That lawsuit, filed in June 2005, asked the courts to narrowly construe Maready and also to strike down incentives on grounds not litigated in that case. Kilpatrick Stockton again represented the City as well as Forsyth County and several economic development non-profit agencies. In May 2006, the Superior Court for Wake County dismissed the complaint in its entirety, and the plaintiffs appealed.
On October 16, 2007, in Blinson v. North Carolina, 2007 WL 2990081 (N.C. App. 2007), the North Carolina Court of Appeals—after hearing oral argument from Kilpatrick Stockton partner Bob Elster, among others—affirmed the dismissal of the complaint. First, following the Supreme Court in Cuno, the Court of Appeals held that plaintiffs lacked standing to assert claims under the federal Commerce Clause as well as state discrimination claims. Specifically, the Court held that the plaintiffs were not among the class that was prejudiced by the state legislation, and therefore could not assert claims of discrimination.
Addressing whether the incentives were for a public purpose, the Court of Appeals held that it could “find no meaningful distinction between the present case and Maready.” Specifically, the Court of Appeals found that the County and City incentives were not "legally different" from the incentives at issue in Maready. The Court made the same conclusion as to the state incentives, categorically holding that Maready found such incentives to represent a public purpose. Finally, and most significantly for future legal challenges, the Court explained that under Maready a court is not permitted to weigh the public benefits of incentives against the private benefit obtained by the recipient; rather, the Court should inquire whether the aim of the incentive is to benefit the public. So long as public officials intend the incentives to benefit the public, they are constitutional—and the courts may not inquire into whether the public will in fact receive the benefits promised.
Given the political controversy regarding economic development incentives, it is unlikely that the Blinson decision will put an end to legal challenges to efforts by North Carolina governmental entities to encourage business relocation and expansion within the State. Nonetheless, the Court of Appeals’ decision reaffirms that, in North Carolina at least, such incentives stand on sure legal footing.