Supreme Court Grants Cert in Case Regarding State Regulation of E-Commerce

June 25, 2007. The Supreme Court of the U.S. (SCUS) granted certiorari in Rowe v. New Hampshire Motor Transportation Association, a case involving whether portions of a statute of the state of Maine that regulate the sale and delivery of tobacco products purchased via the internet is preempted by the Federal Aviation Administration Authorization Act of 1994 (FAAAA). See, Orders List [12 pages in PDF] at page 2.

The lower courts issued rulings in favor of the New Hampshire Motor Transportation Association (NHMTA) and the other carriers, and against Steven Rowe, the Attorney General of Maine. The courts held that portions of the state statute are preempted by the FAAAA. The Supreme Court may reverse, and issue an opinion that authorizes certain state by state regulation of e-commerce via regulation of air carriers and delivery companies.

Federal Statute. The FAAAA contains sections that preempt state laws and regulations that attempt to regulate prices or services of not only air carriers, but also motor carriers, including delivery companies. The relevant sections of the FAAAA, which is sometimes pronounced as "F Quad A", are codified in 49 U.S.C. 14501 and 49 U.S.C. 41713.

These provide that states cannot regulate "service of any motor carrier ... with respect to the transportation of property" or "service of an air carrier".

Subsection 14501(c)(1) provides that "a State, political subdivision of a State, or political authority of 2 or more States may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of any motor carrier (other than a carrier affiliated with a direct air carrier covered by section 41713(b)(4)) or any motor private carrier, broker, or freight forwarder with respect to the transportation of property." (Parentheses in original.)

Subsection 4173(b)(4)(A) provides that "a State, political subdivision of a State, or political authority of 2 or more States may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of an air carrier or carrier affiliated with a direct air carrier through common controlling ownership when such carrier is transporting property by aircraft or by motor vehicle (whether or not such property has had or will have a prior or subsequent air movement)." (Parentheses in original.)

State Statute. The state of Maine enacted a statute, that is codified at 22 M.R.S.A. 1551, 1555-C & 1555-D, that regulates the sale of tobacco products, including internet sales. It contains a ban on the sale of tobacco products to minors. It also provides for the licensing of tobacco retailers. However, these provisions are not at issue in this case.

This case involves those portions of the Maine statute that impose burdens upon air carriers and motor carriers, such as United Parcel Service (UPS), for the purpose of enforcing a ban on sales to minors.

The relevant sections of the statute have the effect of requiring these companies to ascertain the content of packages, the age of the addressee of packages, and whether the addressee is of legal age to receive the package (27 years old in the case of tobacco products). It further requires them to ascertain whether the retailer was licensed by the state of Maine to sell tobacco products.

The statute imposes burdens and costs upon carriers, and requires that they change their national business practices to enforce a ban that only reaches transactions with buyers in the state of Maine.

Questions Presented. The questions presented to the SCUS are as follows:

Notably, this is not a commerce clause, or dormant commerce clause, case. The issues pertain only to federal preemption by the FAAAA.

Taxes on Internet Commerce. The questions presented do not pertain to the scope of state tax authority.

TLJ spoke Melissa Reynolds O'Dea, an Assistant Attorney General for Maine. She said that this case has nothing to do with tax collection or enlisting carriers to collect state taxes. Taxation "is a red herring", said O'Dea, and has "never been what this case is about".

TLJ also spoke with Beth Brinkmann of the Washington DC office of the law firm of Morrison & Foerster (MoFo), who represents the carriers. She said that taxation is not at issue in this case.

However, TLJ also spoke with Eric Lindblom, Director of Policy Research at the Campaign for Tobacco-Free Kids (CTFK), which submitted an amicus curiae brief urging the SCUS to grant certiorari. He said that while the Maine statute under challenge does not involve tax collection, tax evasion via the internet is a target of other states' laws, and those laws may be affected by this case.

He said that "a lot of states have passed laws ... designed to stop tax evasion". He said that states are losing billions of dollars in tax revenues as a result of internet sales of tobacco. He added that "that is why those laws have been passed".

He elaborated on the CTFK's concern over tax collection. He said that the banning sales of tobacco products to minors is just one way to limit smoking by minors. Another way is to raise the price of tobacco via high taxes. That is, the higher the total price of cigarettes, the fewer people will smoke, including minors. Hence, the CTFK supports state tax collection efforts.

Proceedings Below. The New Hampshire Motor Transport Association (NHMTA) and other trade groups that deliver packages challenged the Maine statute. They filed a complaint in U.S. District Court (DMaine) against Steven Rowe, the Attorney General of Maine, seeking declaratory and injunctive relief that the Maine statute is preempted by the FAAAA.

The District Court granted summary judgment to the NHMTA, and Maine appealed.

The U.S. Court of Appeals (1stCir) issued its opinion on May 19, 2006, 2006, affirming in part the judgment of the District Court granting summary judgment the plaintiffs. See, story titled "1st Circuit Rules Federal Aviation Statute Preempts Part of Maine's Internet Tobacco Sales Statute" in TLJ Daily E-Mail Alert No. 1,381, May 31, 2006. That opinion is also reported at 448 F.3d 66.

The Court of Appeals held that "the FAAAA focuses on the effect that a state's law has on carriers, and not on the state's objective in passing the law. To the extent that Maine's Tobacco Delivery Law requires (or has the effect of requiring) carriers to implement state-mandated procedures in the processing and delivery of packages, it is preempted by the FAAAA. But to the extent that the Tobacco Delivery Law merely bars all persons (including carriers) from knowingly transporting contraband tobacco into Maine, the FAAAA is not implicated." (Parentheses in original.)

Supreme Court. The SCUS has now agreed to hear the case.

The Office of the Solicitor General (OSG) submitted an amicus curiae brief at the request of the SCUS in which it stated that the "court of appeals is correct and does not merit this Court's review".

In addition to the CTFK, other states filed an amicus brief brief urging the SCUS to grant certiorari.

The state of Maine asserts that its statute does not impose economic regulation on carriers, such as entry barriers, tariff filing requirements, or price controls. It asserts that the statute at issue protects public health and welfare, and is therefore not preempted by the FAAAA.

The Maine AG's O'Dea told TLJ that this case is about "the health and safety of children", and that there is nothing protectionist about the statute.

Granholm v. Heald. The SCUS ruled in 2005 against states that regulate direct sales of wine, including internet sales. See, May 16, 2005, opinion [73 pages in PDF]. See also, story titled "Supreme Court Rules in Internet Wine Sales Case" in TLJ Daily E-Mail Alert No. 1,137, May 17, 2005

The SCUS held that Michigan's and New York's regulatory schemes that permit in-state wineries directly to ship alcohol to consumers, but restrict the ability of out-of-state wineries to do so, violate the dormant commerce clause.

However, while the policy questions in the present case and Granholm v. Heald are similar, the underlying legal issues are different. Both cases involve a state statute that burdens interstate and internet commerce. Granholm involved the Constitution's 21st Amendment and the commerce clause, but not the FAAAA, or federal preemption. The present case involves preemption by the FAAAA, but no constitutional issues. Moreover, in Granholm, the states of Michigan and New York carved out an exception for in state wineries, while in the present case there is no exception for in state tobacco sellers. That is, there was a protectionist element to the state wine laws, while the carriers do not assert that there is a protectionist motive behind the Maine statute.

The SCUS divided 5-4 in Granholm v. Heald. The court did not break down on partisan or ideological lines. Rather, the older members dissented. Two of the dissenters, Rehnquist and O'Connor, are no longer on the court. This may work to the advantage of the carriers, and proponents of internet commerce generally, in the present case.

Brinkman, who represents the NHMTA and other carrier groups, told TLJ that Granholm involved different legal issues. O'Dea, who represents Maine, told TLJ that the legal issues are different, but that the present case "is a logical case to follow up on Granholm". She added that "the law is different, but it certainly has similarities."

Why Grant Certiorari? The Court of Appeals affirmed the District Court. The three judge panel was unanimous. There is no split between the circuits. The OSG opposed granting certiorari. The only issues involve the scope of FAAAA preemption.

Yet, the SCUS granted certiorari.

According to academic studies, and statements of Justices, the SCUS tends to grant certiorari when the OSG requests that it do so, when there is a circuit split, and/or when the question is particularly important. The first two criteria are clearly lacking in the present case. Moreover, the meaning of the FAAAA is not one of the more important issues of the day. Hence, the question remains, why did the Court grant certiorari?

The Supreme Court does not publish opinions explaining its reasons for granting certiorari.

One reason for granting certiorari may be that while the District Court, Court of Appeals, and OSG are in agreement as to outcome, and there is no circuit split, a review of the opinions and brief shows that the District Court, Court of Appeals, and OSG differ in their reasoning.

Another may be that Justices of the SCUS intend to use this case as a vehicle for clarifying the law regarding federal preemption generally.

A third reason may be that the SCUS intends to use this case to examine preemption laws in the context of regulation of internet related activity.

Technically, only two preemption sections of the FAAAA are at issue (those relating to air carriers and motor carriers). However, there are other types of carrier regulation. The Congress began by regulating rail carriers in the late 19th Century. The Congress extended carrier regulation from the carriage of physical items to the carriage of voice communications with the Communications Act of 1934. The Federal Communications Commission (FCC) is now in the process of applying common carriers regulations, on a component by component basis, to internet protocol based services. All of these carrier, or carrier like, regulatory regimes also contain partial preemptions of state laws and regulations.

Governments (federal, state, local, and foreign) seek to regulate the production and sale of various goods and services. For example, Maine asserts in this case that it seeks to regulate the sale of tobacco products in Maine on the basis of age.

Regulatory regimes of this nature can target producers, consumers, or intermediaries. Previously, states could regulate the retailers that sold tobacco in Maine. However, the growing prevalence of internet sellers in this sector, as in many other sectors, serves to partially disintermediate previous intermediaries. But, internet commerce also creates new intermediaries, such as processors of financial transactions, providers of internet connected servers, networks that carry IP communications, and the companies that deliver the physical products purchased over the internet. This case involves a law that targets these latter class of intermediaries.

In contrast, commercial regulatory regimes rarely target consumers or users. There are too many of them, and they each have a vote. Moreover, regulating internet based commerce, or similar transactions, by focusing on consumers and users is difficult, expensive, and usually futile. Hence, it is rare. Most situations where this is attempted occur because the usual intermediaries are absent. For example, the record industry brings private actions against peer to peer infringers because of the absence of financial intermediaries (it is free), ISPs (it is over decentralized peer to peer systems), and delivery companies (it is digital downloads). Governments prosecute consumers of child porn for the same reasons.

Similarly, in the context of internet commerce, regulating producers is often futile. Producers can locate out of state, on Indian lands, or abroad. They are sometimes too numerous or too difficult to track.

Hence, when governments now seek to regulate commercial activity that is internet based, the most likely targets are not either the producers or the consumers, but rather the new intermediaries. They are the easiest targets to regulate. Moreover, regulating intermediaries provides governments the opportunity to shift the costs of regulation from the government (and hence the voters) to intermediaries, which from the perspective of state regulators, are often out of state, and cannot vote. Of course, this raises prices to consumers of things purchased over the internet -- a sort of hidden tax on consumers.

One question that arises from this new environment is what is the appropriate government authority for the imposition of regulations on the new intermediaries of internet based commerce -- the federal government, the states, or both. Perhaps SCUS Justices view the present case as important because it goes to this larger question.

The SCUS could write a short, narrow, and technical interpretation of two obscure sections of the FAAAA.

On the other hand, it could write a broader opinion that discusses the states' ability to impress carriers of things, carriers of information, financial intermediaries, and ISPs to put into effect various attempts to regulate internet based commerce. These regulatory regimes could target not only tobacco sales, but also other products, such as pornography, guns, pharmaceuticals, and alcohol. The opinion might also discuss state regulation for other purposes, such as consumer protection and public safety. Hypothetically, the SCUS could also discuss the abuses of state regulatory powers, such as protection of in state producers from internet based competition, and protection of local brick and mortar intermediaries from internet competition.

Congress. Attempts in recent Congresses to enact legislation affecting states' ability to regulate and tax internet sales of alcohol and tobacco failed.

In the current Congress, there is S 1027 [LOC | WW], the "Prevent All Cigarette Trafficking Act of 2007" or "PACT Act". The Senate Judiciary Committee (SJC) approved it on May 17, 2007.

See also, HR 2824 (108th Congress), the "Internet Tobacco Sales Enforcement Act". And see, story titled "House Judiciary Committee Approves Internet Tobacco Sales Enforcement Act" in TLJ Daily E-Mail Alert No. 826, January 29, 2004.

It should also be noted that the Jenkins Act, which is codified at 15 U.S.C. 375-378, already requires direct shippers of tobacco products to report to state tax agencies.

The Jenkins Act, enacted in 1949, does not create a federal tax collection regime. Rather, it established reporting requirements. It requires that any person who sells and ships cigarettes across a state line to a buyer, other than a licensed distributor, to report the sale to the buyer's state tobacco tax administrator. Some states impose vastly higher taxes on the sales of cigarettes than others. The Jenkins Act helps these states enforce their cigarette tax laws.

The CTFK's Lindblom added that if the SCUS were to hold that the FAAAA preempts the Maine statute, then "it would increase pressure for Congress to pass a law", such as the PACT Act.

Case Information. This case is Steven Rowe v. New Hampshire Motor Transport Association, et al., Sup. Ct. No. 06-457, a petition for writ of certiorari to the U.S. Court of Appeals for the 1st Circuit, App. Ct. No. 05-2136. The Court of Appeals heard an appeal from the U.S. District Court for the District of Maine, Judge Brock Hornby presiding. Judge Howard wrote the opinion of the Court of Appeals, in which Judges Boudin and Stahl joined.

The NHMTA is represented before the SCUS by Beth Brinkmann of the Washington DC office of the law firm of Morrison & Foerster (MoFo). Ruth Borenstein of MoFo's San Francisco office argued the case before the First Circuit.

See also, SCUS docket.