Geographical Information and the Dormant Commerce Clause: Four Principles

[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 pervasive reality of geolocation and filtering services on the internet should thus affect Dormant Commerce Clause analyses of state internet regulation. Most courts that examine state internet regulations do so under the undue burden test and some version of the extraterritoriality test. Whichever of these tests courts deploy, and whatever version of the extraterritoriality test they use, the previous posts suggest that four principles related to the geographical element of online transactions should govern the analysis.

First, the internet is not a borderless medium. All major firms operating on the internet, and many smaller ones, collect and use location data about consumers and users, and shape content by geography. The technology that supports these practices is quickly growing more pervasive, more accurate, and less expensive.

Second, because geolocation and filtering technology is pervasive, courts should not presume that internet operators have any greater difficulties than "real-space" operators in identifying internet users based on geography and tailoring their products to state law. Assessing the costs and benefits of complying with state regulations, or of the extraterritorial impact of state regulations, must include realistically assessing compliance costs based on the current state of geolocation and filtering technology.

In this regard, courts should consider the ways that the firm challenging state regulation on Dormant Commerce Clause grounds uses geographical-identification technology to further its business interests. They should also consider the extent to which the costs of such technology can be decreased by the legal regime. For example, as courts have made geo-identification and filtering technology more relevant to personal jurisdiction, firms have increasingly deployed such technology to avoid activities that may expose them to personal jurisdiction, which has contributed to the expanded market for and lowered costs of such technology.[1] Similarly, a Dormant Commerce Clause jurisprudence that accommodates state differences will contribute to more sophisticated and less expensive geofiltering tools.

Third, in assessing the costs of compliance with state law for Dormant Commerce Clause purposes, a firm's preferred national market structure is irrelevant. For instance, the plaintiff in Exxon v. Governor challenged a Maryland law that banned national oil producers from operating retail service stations in the state, arguing that the law would interfere "with the natural functioning of the interstate market [through] burdensome regulation," would "change the national market structure," and might have "serious implications for their national marketing operations."[2] The Supreme Court rejected the argument on the ground (among others) that the Dormant Commerce Clause does not "protect[] the particular structure or methods of operation in a retail market."[3] Likewise, in Online Merchants Guild, discussed above, the Sixth Circuit applied a similar principle in the internet context when it noted that the costs to out-of-state third-party sellers on Amazon from complying with a Kentucky consumer protection law did not count for Dormant Commerce Clause purposes, even if the law affected prices outside the state, because the costs resulted from Amazon's voluntary decision to structure its online market place in a way that mandated uniform national pricing and forbade state-by-state pricing.[4]

Fourth, an online firm's inability to perfectly comply with a state regulation due to imperfections in the accuracy of geographical identification and filtering technology does not by itself mean the state regulation violates the Dor­mant Commerce Clause. The relevance of technological imperfection will depend in part on how demanding the state regulation is. Several state laws regulating minors' access to pornography online have survived Dormant Commerce Clause scrutiny because they criminalize only intentional transmissions of banned materials to minors or to minors within a state.[5]

For similar reasons, Dormant Commerce Clause concerns are significantly reduced if state law provides a defense for reasonable efforts to keep forbidden internet content out of the state. And the Supreme Court has stated that a State's efforts to minimize the interstate impact of a regulation, including through compliance software, is relevant to the discrimination and undue burden analy­ses.[6]

{Such compliance can be burdensome, and perhaps unduly burdensome, for small companies, whether small retailers or small platforms. The Dormant Commerce Clause balancing test (the Pike v. Bruce Church, Inc. test), under which a regulation may be struck down if "the burden imposed on such commerce is clearly excessive in relation to the putative local benefits,"[7] might limit such state laws in some measures, as applied to small retailers.[8] In the tax context, Wayfair recognized that the "burdens [of having to collect state sales tax] may pose legitimate concerns in some instances, particularly for small businesses that make a small volume of sales to customers in many States," and that it may be significant that a state "affords small merchants a reasonable degree of protection," for instance if they do very little business in the state.[9]

Yet even when discussing small businesses facing multijurisdictional legal burdens, the Court noted that, "[e]ventually, software that is available at a reasonable cost may make it easier for small businesses to cope with these problems."[10] The Court appeared to be referring to multistate tax compliance software that is a cousin of the geolocation software we have highlighted.[11] And any concern about undue burdens on interstate commerce should be further significantly reduced for large businesses, with users and advertisers all over the country, that deploy geo-identification software to serve business interests.}

[1]. See Trimble, supra note 113, at 23–25.

[2]. 437 U.‌S. at 127–29.‌

[3]. Id. at 128.‌

[4]. Online Merchants Guild v. Cameron, 995 F.‌3d 540 (6th Cir. 2021) (upholding Kentucky law against extraterritoriality challenge because its out-of-state effect "depends entirely upon Amazon's independent decisions in how it structures its online marketplace"). See also McBurney v. Young, 667 F.‌3d 454, 469 (4th Cir.‌2012) (rejecting Dormant Commerce Clause challenge where state law prevent plaintiff" "from using his 'chosen way of doing business,' but [did] not prevent him from engaging in business in the [State]"); Am. Express Travel Related Servs. Co. v. Kentucky, 730 F.‌3d 628, 634 (6th Cir. 2013) (rejecting Dormant Commerce Clause challenge where extraterritorial impact "resulted from seller's own choices").‌

[5]. E.g., Simmons v. State, 944 So. 2d 317, 332–33 (Fla. 2006) (citing cases); People v. Hsu, 82 Cal. App. 4th 976, 985 (2000); People v. Helms, 396 P.3d 1133, 1140–41 (Colo. App. 2016); Ex parte Lo, 424 S.W.3d 10 (Tex. Crim. App. 2013).

[6]. Wayfair, 138 S. Ct. at 2100 (noting that immunity from liability under state tax law for using state-financed software to facilitate compliance in complex multi-state environment is relevant to the Dormant Commerce Clause undue burden analysis).‌

[7]. 397 U.‌S. 137, 142 (1970); see Greater L.‌A. Agency on Deafness, 742 F.‌3d at 433 (applying the Pike test); Goldsmith & Sykes, supra note 11, at 806 (discussing a possible Pike-based analysis in extraterritoriality cases).‌

[8]. See Kearney v. Salomon Smith Barney, Inc., 45 Cal. Rptr. 730, 739 (Cal. 2006) ("On its face, application of the California law here at issue would affect only a business's undisclosed recording of telephone conversations with clients or consumers in California and would not compel any action or conduct of the business with regard to conversations with non-California clients or consumers. Although SSB may attempt to demonstrate, at a later stage in the litigation, that application of the California statute would pose an undue and excessive burden on interstate commerce by establishing that it would be impossible or infeasible for SSB to comply with the California statute without altering its conduct with regard to its non-California clients and that the burden that would be imposed upon it 'is clearly excessive in relation to the putative local benefits' (Pike v. Bruce Church, Inc.), SSB clearly cannot prevail on such a theory at the demurrer stage of the proceeding.") (citation trimmed).

[9]. 138 S. Ct. at 2098.‌

[10]. Id.

[11]. See Brief of South Dakota, https://www.supremecourt.gov/DocketPDF/17/17-494/36735/20180226222258706_17-494%20ts.pdf [https://perma.cc/QKJ6-Y74V], at 14-15; Oral Argument Transcript, https://www.oyez.org/cases/2017/17-494 [https://perma.cc/B3M8-ZLFK].