The Dormant Commerce Clause and Internet User Protections

[Jack Goldsmith and I will have an article out about the Dormant Commerce Clause, geolocation, and state regulations of Internet transactions in the Texas Law Review early next year, and I'm serializing it here. There is still plenty of time for editing, so we'd love to hear any recommendations you folks might have; in the meantime, you can read the entire PDF of the latest draft (though with some formatting glitches stemming from the editing process) here.]

The same basic analysis [as we laid out for tort law yesterday] applies to laws aimed at protecting not the subjects of speech on internet sites but rather the users of internet sites. Such laws are generally upheld against a Dormant Commerce Clause challenge, at least if they are limited to transactions with users in the state, and the site operators are able to at least roughly determine whether a user is in that state.

Let's begin with the Ninth Circuit's decision in Greater L.A. Agency on Deafness, Inc. v. CNN, Inc.[1] The California Disabled Persons Act (DPA) required CNN to provide closed captioning on programs accessed on the internet in California.[2] Such a requirement would require CNN, which is headquartered in Georgia, to create the closed captioning because California told it to do so. And of course the easiest way for CNN to comply with the California law would be to provide such closed captioning to everyone else in the country, which would affect not just CNN's Georgia-to-California communications (which at least would be "present" in some sense in California) but also its, say, Georgia-to-Texas communications (which would be purely extraterritorial with respect to California).

But, the court held, CNN didn't have to change what it displays to Texans, because modern technology allows it to identify where its users are, and to comply with California law just for Californians. As a result, the court held, the law did not violate the Dormant Commerce Clause: "even though CNN.com is a single website, the record before us shows that CNN could enable a captioning option for California visitors to its site, leave the remainder unchanged, and thereby avoid the potential for extraterritorial application of the DPA."[3] And the court concluded that the DPA's burden on interstate commerce might not be "clearly excessive in relation to [its] significant benefits," partly because "CNN already serves different versions of its home page depending on the visitor's country, . . . and provides no explanation for why it could not do the same for California residents."[4]

The Sixth Circuit's decision in Online Merchants Guild v. Cameron analyzed matters similarly with regard to Kentucky's price-gouging law, which limits charging supposedly "grossly" "excess[ive]" prices during an emergency.[5] An association of online merchants claimed that the law, as applied to sales on Amazon.com, violated the Dormant Commerce Clause's extraterritoriality prong: Amazon requires online third-party sellers to set a single national price for goods and doesn't permit them to withhold sales in specific states, and the association claimed that, since it would have to reduce its prices everywhere to comply with the Kentucky law, the law was impermissibly extraterritorial.

The court, though, upheld the law, because the law's purported extraterritorial impact stemmed not from Kentucky's actions as such, but rather from how Amazon structured its online marketplace:

If Amazon allowed for state-specific pricing or allowed third-party sellers to limit where their goods were sold—and no one contends that Amazon lacks the power to structure its marketplace in this fashion—then there would be no effect at all on interstate commerce (or at most the effect would be de minimis).[6]

In both these cases, the courts looked to whether and how the regulated internet operator (CNN and Amazon) might tailor its internet content geographically before examining the burden on interstate commerce. And both courts maintained that the principle that national firms must tailor in-state operations to comply with state law didn't change, for Dormant Commerce Clause purposes, merely because the in-state operations occurred in part on the internet.

Other courts have likewise stressed online merchants' ability to comply with different state laws by identifying the protected person's location. For example, courts have upheld:

• a Connecticut consumer protection law regulating (among other things) online sale of gift cards, in part because vendors could distinguish between online consumers in and out of Connecticut via credit card billing addresses;[7]
• a California law that regulates internet advertising that makes water treatment health claims, in part because "technology exists to separate [a] California website from the [rest-of-the-world] website," and because out-of-state sellers "could and can easily structure its websites to inform California customers at the point of sale (the 'check out' page of the website) that its devices are not certified by the State of California";[8]
• California and Maryland anti-spam laws, because senders can take steps to determine which recipients are residents of those states;[9]
• a New Jersey law that limited online wagering in New Jersey by non-New-Jersey residents and that was effectuated through state-mandated "installation of 'advanced geolocation software and controls' by [online gambling] companies";[10] and
• a Kansas law that limited online payday loans to Kansas consumers, stressing that a lender would generally know whether part of the transaction (such as the borrower's location or the location of the bank at which the borrower would receive the money) is in Kansas.[11]

The Supreme Court has also made clear that the ability of online firms to tailor their businesses by geography is relevant to Dormant Commerce Clause analysis. In South Dakota v. Wayfair, Inc., online retailers with no physical presence in South Dakota brought a Dormant Commerce Clause challenge to a South Dakota law that required out-of-state sellers of high-volume goods and services to collect and remit taxes made on in-state sales.[12] The Court ruled that the Dormant Commerce Clause did not invalidate such taxes merely because the retailer was physically located outside the state, overruling a 1992 case that had held the contrary.[13] The Court acknowledged the potential burden on firms, especially small ones, of complying with a plethora of state sales tax and remit laws, but noted that "software that is available at a reasonable cost may make it easier for small businesses to cope with these problems."[14]

Wayfair focused narrowly on taxes, and didn't resolve how such software mattered for the Dormant Commerce Clause more broadly.[15] But its logic is consistent with the cases we cite above—when an online business knows that it's sending things (whether tangible items or electronic communications) to a state, it may be required to comply with the laws of that state.

To be sure, some courts, especially early in the internet era, did hold that state laws governing internet speech were improperly extraterritorial and thus violated the Dormant Commerce Clause. But these cases tended to turn on the assumption that internet operators, unlike real-space actors, couldn't control the distribution of services and content by geography and thus couldn't conform their practices to various state laws.

The most influential expression of this view is American Library Association v. Pataki,[16] which struck down a New York law banning any person from intentionally using the internet "to initiate or engage" in certain pornographic communications deemed to be "harmful to minors."[17] The federal district court's ruling that the law violated the Dormant Commerce Clause rested on a particular conception of how the internet operated:

• the internet is "borderless" and "wholly insensitive to geographic distinctions" because internet protocols and addresses have no tie to real space;[18]
• "[o]nce a provider posts content on the Internet, it is available to all other Internet users worldwide";[19]
• "no aspect of the Internet can feasibly be closed off to users from another state";[20]

therefore, the "nature of the Internet makes it impossible to restrict the effects of the New York Act to conduct occurring within New York."[21]

Given its view of internet architecture, the court's conclusion that the New York law violated the Dormant Commerce Clause followed inexorably. The court ruled that the benefits of the law were "limited" since the law could do nothing to stop the transmission of communications from outside the United States, and yet the burdens were "extreme" because the law affected internet users everywhere.[22] The court further ruled that the law violated the extraterritoriality prong because by the very act of applying its law to the internet, New York "projected its law into other states whose citizens use the Net."[23] And the court ruled that, since cyberspace has no borders, any state regulation of the internet imposed impermissible inconsistent regulations.[24]

"[T]he unique nature of cyberspace necessitates uniform national treatment," the court concluded.[25] Several other courts, including federal courts of appeals, have followed Pataki's analysis and broad conclusion, albeit limited primarily to the context of state laws that regulate the dissemination of sexually explicit material harmful to minors.[26]

The question is whether the factual predicate underlying this reasoning continues to apply today, or whether, as in Wayfair, the facts have changed to the point that the courts should be more open to state regulations (as the courts cited in Parts II.A and II.B already have been). And that turns on the question whether online entities—and especially large for-profit entities—have adequate tools to make internet transactions "[]sensitive to geographic distinctions" rather than "wholly insensitive."

[1]. 742 F.‌3d 414 (9th Cir. 2014); see also Nat'l Fed'n of the Blind v. Target Corp.‌, 452 F. Supp. 2d 946, 961 (N.‌D. Cal. 2006) (applying a similar analysis).‌

[2]. Or so the court assumed for purposes of its analysis. See Greater Los Angeles Agency on Deafness, Inc. v. Cable News Network, Inc.‌, 742 F.‌3d 871 (9th Cir. 2014) (certifying to California Supreme Court whether DPA applies to web sites); Greater Los Angeles Agency on Deafness, Inc. v. Cable News Network, Inc.‌, 762 F.‌3d 1004 (9th Cir. 2014) (withdrawing certification request in light of CNN's motion to voluntarily dismiss appeal in Ninth Circuit).‌

[3]. 742 F.‌3d at 433.‌

[4]. Id.

[5]. 995 F.‌3d 540 (6th Cir. 2021).

[6]. Id. at 555.

[7]. SPGGC, LLC v. Blumenthal, 505 F.‌3d 183, 195 (2d Cir. 2007).‌

[8]. People ex rel. Brown v. PuriTec, 153 Cal. App. 4th 1524, 1531–36 (2007).‌

[9]. MaryCLE, LLC v. First Choice Internet, Inc.‌, 890 A.‌2d 818, 840–45 (Md. App. 2006); Ferguson v. Friendfinders, Inc.‌, 115 Cal. Rptr. 2d 258, 266 (2002); see also State v. Heckel, 143 Wash. 2d 824, 837 (2001) (upholding Washington's anti-spam law, but without discussing in detail how companies could determine where their recipients were located).‌

[10]. Stein v. Dep't of Law & Pub. Safety, 203 A.‌3d 160 (N.‌J. Super. Ct. App. Div. 2019).‌

[11]. Quik Payday, Inc. v. Stork, 549 F.‌3d 1302, 1308–09 (10th Cir. 2008).‌

[12]. 138 S. Ct. 2080, 2090 (2018).

[13]. Quill Corp. v. North Dakota, 504 U. S. 298 (1992), held that the Dormant Commerce Clause barred states from ordering a firm to collect and remits taxes for in-state sales unless the firm had a physical presence in the state.

[14]. Id. at 2098. Cf. Sable Communications of Cal.‌, Inc. v. FCC, 492 U.‌S. 115, 125 (1989) (local obscenity laws that require a "dial-a-porn" company to determine location of callers and tailor messages by location did not violate the First Amendment despite the costs of identifying and complying with various local laws).‌

[15]. The Court remanded the case so the lower courts could assess the undue burden test in the first instance. The Court noted that the South Dakota tax scheme "includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce," including "providing sellers access to sales tax administration software paid for by the State," the use of which confers immunity from audit liability. Id. at 2100.‌

[16]. 969 F. Supp. 160 (S.‌D.‌N.‌Y. 1997).‌

[17]. N.‌Y. Penal L. §§ 235.‌21(3).‌

[18]. Pataki, 969 F. Supp. at 168, 170.‌

[19]. Id. at 167.‌

[20]. Id. at 171.‌

[21]. Id. at 177; see also id. at 171 (New York anti-pornography law "cannot effectively be limited to purely intrastate communications over the Internet because no such communications exist"); id. ("no user could avoid liability under the New York Act simply by directing his or her communications elsewhere, given that there is no feasible way to preclude New Yorkers from accessing a Web site, receiving a mail exploder message or a newsgroup posting, or participating in a chat room").‌

[22]. Id. at 177–80.‌

[23]. Id. at 177.‌

[24]. Id. at 182–83.‌

[25]. Id. at 168; see also id. at 169 (concluding that "the Internet is one of those areas of commerce that must be marked off as a national preserve to protect users from inconsistent legislation that, taken to its most extreme, could paralyze development of the Internet altogether").‌

[26]. See, e.‌g.‌, PSINet, Inc. v. Chapman, 362 F.‌3d 227, 240–41 (4th Cir. 2004); American Booksellers Found. v. Dean, 342 F.‌3d 96, 103 (2d Cir. 2003); ACLU v. Johnson, 194 F.‌3d 1149, 1161 (10th Cir. 1999); see also Publius v. Boyer-Vine, 237 F. Supp. 3d 997, 1025 (E.‌D. Cal. 2017) (using the Dormant Commerce Clause as one basis for striking down California law restricting the publication of legislators' home addresses, in a challenge brought by a political activist running a noncommercial blog). One of us was one of the lawyers for Publius.‌‌