The Dormant Commerce Clause, the Internet, and Geolocation

A response to Professors Goldsmith & Volokh

[Update 4/27—This posting has generated an unusually vigorous and enlightening discussion in the Comments section. Recommended reading.]

Several months ago, Eugene posted [here] an article that he and Jack Goldsmith had written for the Texas Law Review regarding the Dormant Commerce Clause and its application to State regulation of online activities. [The final version, in the Texas Law Review, is available here] "The constitutionality of such State regulation," they argue, "should generally turn on the feasibility of geolocation—the extent to which web sites or other Internet services can determine, reliably and inexpensively, which states users are coming from." Their argument goes something like this:

• In the Internet's early days—1995 or thereabouts—websites and other online businesses were unable, as a practical matter, with reasonable accuracy at reasonable cost, to determine user location.
• Therefore, requiring websites and other online businesses to "apply the proper state law to each user"—to treat Iowans (and transactions within Iowa) as Iowa law requires them to be treated, Floridians (and transactions within Florida) as Florida law requires them to be treated, etc.—would have imposed an enormous burden on those businesses.
• The Dormant Commerce Clause jurisprudence of the time recognized this. Many attempts by States to enforce their laws against out-of-state websites were accordingly struck down as impermissibly burdensome on interstate commerce, in significant part because of these difficulties of determining user location.
• But that condition no longer holds. "Geolocation has become feasible in recent years, and is routinely used by major web sites for ordinary business purposes."
• Thus there is now "more constitutional room for state regulation of Internet services, including social media platforms, than often believed."

The argument, while plausible enough, strikes me as misguided and deeply flawed, on a number of important dimensions. The legal rule for which they advocate amounts to a declaration that Internet businesses are subject to the local laws of all jurisdictions in which their users may be located, which would constitute a prodigious burden on interstate commerce—precisely the sort of thing the Dormant Commerce Clause protects (and should protect) against.

I was worked up enough to write a (moderately) detailed response (which the Texas Law Review Online has published here).  My counter-argument has three parts:

1. Goldsmith/Volokh greatly underestimate the burdens imposed by their multi-jurisdictional compliance scheme. Geolocation technology does not solve the problem of applying local law to online activity, it accentuates it. Determining where users are located is the easy part of the problem; the hard part is figuring out what the laws of the various jurisdictions require in any specific instance, information which geolocation tools do not and cannot provide.

2. Goldsmith/Volokh's argument relies on a transparent legal fiction: that activity on the network can be deemed to take place "in" any jurisdiction from which it can be accessed by users, i.e., that websites are doing business "in Wisconsin" and "in California" whenever they transmit information from or to users located in Wisconsin and/or California. Some legal fictions are useful; this is not one of them.

3. Goldsmith/Volokh's argument relies in large measure on a false equivalence between Internet and real-space commerce. They rely throughout their article on a straightforward analogy: Because brick-and-mortar businesses that deal with customers all over the country have to comply with the laws of the places where they operate, so too should Internet businesses that deal with customers all over the country have to comply with the laws of all of the places where they operate.

Again, it seems plausible. Why shouldn't Internet businesses be treated just like brick-and-mortar businesses for purposes of determining the laws applicable to their conduct?

My answer is a little complicated, but, I think, pretty fundamental.  In realspace, the vast majority of businesses of all sizes start their lives with a very restricted geographic reach. Think: Ray Kroc's first hamburger stand in Des Plaines, IL, Sam Walton's general store in Bentonville AR, Howard Schultz's coffee shop in Seattle WA. This is not just a sociological phenomenon; it's inherent in the physics of realspace, where the cost of transporting things (and people) is an increasing function of distance traveled. When their operations began, Schultz did not sell coffee, nor Kroc hamburgers, nor Walton shoes, in Colorado or Florida.

As a consequence, if, say, Colorado enacted a strict coffee-labeling statute, Schultz could ignore it, for he was not doing business in Colorado, and therefore his business was not subject to its law.

He could expand the geographical scope of his operations, of course—opening up a coffee shop in Oregon, or shipping roasted beans to retailers there. This would entail additional costs—not only distribution costs, but legal compliance costs as well; now that he is doing business in Oregon, he'll need to figure out what Oregon requires of retailers who do business in Oregon—its tax laws, employment laws, food-labelling laws, and all the rest—and then to re-configure his business if and as necessary to comply with those requirements.

Those additional costs are part of what we might call "the federalism bargain," costs that are inherent in having a federal system that allows WA and OR to regulate businesses in very different ways. The bargain is pretty straightforward: If you want to take advantage of the Oregon market—interstate commerce—you have to bear these costs; conversely, if you don't want to bear those additional discovery/compliance costs, you are free to stay out of Oregon.

The Internet inverts this logic completely. Again, its the physics of the place; the cost of transmitting bits is not an increasing function of distance in any meaningful sense. As a consequence, Internet businesses start their lives without any limitations on their geographic reach; a website in Bentonville, Arkansas is equally available everywhere on the global network. That's one of the things that has made the Internet the Internet.

So a rule that says "You must comply with the law in all jurisdictions where you conduct business" is vastly more burdensome on Internet businesses than on realspace businesses. Or so I argue.

Comments, of course, welcome.