The Internet and the dormant commerce clause.

AuthorGoldsmith, Jack L.

First-generation Internet thinkers maintained that Internet communications could not be subjected to local regulation.(1) The argument went as follows: Internet content providers can inexpensively send content via the Internet into every territorial jurisdiction in the world. Territorial governments cannot stop this content at the border and cannot assert regulatory control over the content source located abroad. If governments try to filter content at the border, information can easily be rerouted. And if some governments happen to assert regulatory control over a content provider or its assets, the provider can cheaply and easily relocate to a permissive jurisdiction and continue sending content worldwide from there.

Events during the past five or so years have demonstrated that this conception of the Internet is wrong, or at least incomplete.(2) Contrary to early predictions, governments have taken a variety of steps within their borders to regulate Internet content flows. They have, for example, regulated users, hardware and software, Internet service providers, and financial institutions within their territory. These purely territorial regulations have raised the cost of transmitting and receiving Internet content, and have affected the price and availability of content even when it originates elsewhere.(3)

Many now complain that the Internet is threatened by a patchwork of state, national, and international regulations, and scores of lawsuits have sought to invalidate them. Lawyers in the United States have employed an array of legal weapons in this effort, the most prominent being the Constitution's First Amendment.(4) A less prominent but potentially more powerful weapon--at least with regard to state (as opposed to federal) Internet regulations--is the dormant Commerce Clause.

The dormant Commerce Clause is a judge-made doctrine that prohibits states from regulating in ways that unduly burden interstate commerce. To see how the dormant Commerce Clause has been applied to the Internet, consider the leading case of American Libraries Ass'n v. Pataki.(5) American Libraries Ass'n enjoined enforcement of a New York statute that prohibited the intentional use of the Internet "to initiate or engage" in certain pornographic communications deemed to be "harmful to minors."(6) In enjoining enforcement of the law, the American Libraries Ass'n court reasoned as follows: Because it is difficult for content providers to control access to their websites and communications, a content provider outside New York might inadvertently send proscribed content into New York. Fear of liability in New York thus might chill the activities of a content provider operating legally in California, thereby affecting legitimate commerce wholly outside New York. Moreover, because states regulate pornographic communications differently, "a single actor might be subject to haphazard, uncoordinated, and even outright inconsistent regulation by states that the actor never intended to reach and possibly was unaware were being accessed."(7) These extraordinary burdens on Internet communication were said to outweigh any regulatory benefit in New York. In sum, "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."(8)

As this last sentence suggests, the reasoning of American Libraries Ass'n extends far beyond the regulation at issue in that case. In fact, the dormant Commerce Clause argument, if accepted, threatens to invalidate nearly every state regulation of Internet communications. For under the logic of American Libraries Ass'n, nearly every state regulation of Internet communications will have the extraterritorial consequences the court bemoaned. This explains why the dormant Commerce Clause has been called "a nuclear bomb of a legal theory" against state Internet regulations.(9) And indeed, many courts have followed the logic of American Libraries Ass'n.(10) The decided cases have mostly involved pornography regulations and antispam statutes. But the logic of American Libraries Ass'n and the cases that follow its reasoning extends to state antigambling laws, computer crime laws, various consumer protection laws, libel laws, licensing laws, and many more.

Many academic commentators support the emerging conventional wisdom among courts that the dormant Commerce Clause requires invalidation of state Internet communication regulations.(11) In this Essay, we take issue with this conventional wisdom, which is flawed in three respects: It rests on an impoverished understanding of the architecture of the Internet, it misreads dormant Commerce Clause jurisprudence, and it misunderstands the economics of state regulation of transborder transactions. We do not argue that state regulation of Internet communications should be immune from dormant Commerce Clause scrutiny. Such a general conclusion would be inappropriate because different state regulations raise different empirical and technical issues that remain unresolved.(12) Our aim is simply to deflate the emerging conventional wisdom, and to show that the dormant Commerce Clause, properly understood, leaves states with much more flexibility to regulate Internet transactions than is commonly thought.

The analysis proceeds as follows: Part I reviews dormant Commerce Clause principles and describes how they have been applied to state Internet regulations. Part II explains why economic efficiency is the appropriate normative criterion under the dormant Commerce Clause and supplies the economic analysis needed to understand how the Clause should apply to Internet regulations. This analysis also contributes to dormant Commerce Clause theory generally by bringing theoretical clarity to the "extraterritoriality" and "inconsistent regulations" prongs of dormant Commerce Clause doctrine. Part III then explains why dormant Commerce Clause analyses of state Internet regulations to date have been flawed. The focus in Part III is on the two types of state Internet regulation that have been most frequently litigated: prohibitions on pornographic communication with minors and antispam statutes. The final Part extends the analysis to other state Internet regulations and comments on the treatment of these issues under international law.

  1. THE DORMANT COMMERCE CLAUSE AND THE INTERNET: EMERGING CONVENTIONAL WISDOM

    In this Part, we briefly review standard dormant Commerce Clause principles, and then describe how those principles have been applied to state regulations of the Internet.

    1. The Dormant Commerce Clause

      Article I of the Constitution gives Congress the power to regulate commerce "among the several States."(13) Even in the absence of affirmative congressional regulation of interstate commerce, the Supreme Court has long invoked the "dormant" Commerce Clause as a basis for judicial preemption of state law that unduly burdens interstate commerce. The Court has devised a number of tests to serve this end.

      The dormant Commerce Clause's central prohibition is on protectionist state legislation that discriminates against out-of-staters.(14) If a state law discriminates against out-of-staters, it is subject to "the strictest scrutiny of any purported legitimate local purpose and of the absence of nondiscriminatory alternatives."(15) Discriminatory state regulations rarely satisfy this standard.(16) A second dormant Commerce Clause test applies when a state law is nondiscriminatory on its face but nonetheless impinges on interstate commerce. In this context the Court applies a balancing test: "Where the statute regulates evenhandedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits."(17)

      The heightened scrutiny test for discriminatory state legislation and the balancing test for neutral state legislation that burdens interstate commerce form the core of dormant Commerce Clause jurisprudence. The dormant Commerce Clause, however, is also said to prohibit certain state laws that regulate extraterritorially and others that lead to inconsistent regulatory burdens. These aspects of the dormant Commerce Clause are unsettled and poorly understood, but they play an important role in the Internet cases.

      The Supreme Court sometimes invalidates state legislation on the ground that it regulates extraterritorially. Consider Healy v. Beer Institute,(18) which involved a challenge to a Connecticut law requiring beer companies to post prices monthly and affirm that they were not higher than in three contiguous states. The statute had the effect of limiting the ability of out-of-state beer shippers to alter their prices outside of Connecticut during the month in which they had affirmed prices in Connecticut. After noting that the "critical inquiry" under the dormant Commerce Clause "is whether the practical effect of the regulation is to control conduct beyond the boundaries of the State,"(19) the Court invalidated the statute. It reasoned that the Connecticut law had the "extraterritorial effect ... of preventing brewers from undertaking competitive pricing in Massachusetts based on prevailing market conditions."(20) On similar grounds, the Court has struck down a liquor price affirmation scheme(21) and an Illinois antitakeover law that governed communications between out-of-state acquiring corporations and the out-of-state shareholders of acquirees.(22)

      The scope of the extraterritoriality principle is unclear.(23) The Full Faith and Credit and Due Process Clauses prohibit states from regulating out-of-state conduct unless the conduct creates a "significant contact" or "significant aggregation of contacts" with the state.(24) Supreme Court dicta suggest that...

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