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Supreme Court Overrules Quill, States May Require Vendors Without Physical Presence to Collect Sales Tax

Introduction

The U.S. Supreme Court, in South Dakota v. Wayfair, Inc., reversed the long-standing rule that physical presence by a vendor is necessary for a state to require the vendor to collect sales tax on taxable goods and services purchased by consumers in the state.  Although the Court’s opinion in Wayfair clearly provides new opportunities for states to require out-of-state vendors to collect sales tax, the Court did not delineate a new standard for sales tax nexus, potentially opening up uncertainties in an area that has long had a black-and-white rule.

Background

In 1962, in National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967), the Supreme Court, relying on the Due Process Clause of the Constitution, decided that a state could require only vendors with a physical presence in the state to collect sales tax from sales to customers in that state. Thirty years later, when given the opportunity to reconsider National Bellas Hess in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the Court declined to do so and, relying on the Dormant Commerce Clause of the Constitution, again held that the vendor’s physical presence in the state was necessary for that state to require the vendor to collect sales tax. By relying on the Dormant Commerce Clause, and because Congress has the power to regulate commerce, Quill seemed to be an open invitation by the Court to Congress to establish a clear statutory standard for sales tax nexus. Congress, however, declined that invitation, leaving Quill as the nexus standard for another 26 years.

Since Quill, physical presence in a state by a vendor has been a necessary and sufficient condition for the state to require a vendor to collect sales tax. As a result, many remote sellers (particularly internet vendors) have been able to deliver goods and services without collecting sales taxes. Although, in virtually all such situations, the purchaser technically is required to pay corresponding use tax on the purchase of the goods or services, use tax is very difficult for states to police and collect. As a result, states regularly lose revenue because of unpaid use tax.

Wayfair Case and Opinions

In 2016, accepting the invitation of Justice Anthony Kennedy in his concurring opinion in Direct Marketing Association v. Brohl, 135 S. Ct. 1124 (2016), South Dakota set up a test case by enacting a law requiring remote sellers with (i) annual gross revenue from sales to South Dakota consumers of more than $100,000, or (ii) 200 or more separate sales transactions delivered to South Dakota in a year, to collect sales tax when making sales delivered to that state’s residents. South Dakota’s new law was effective prospectively. Several remote sellers, including Wayfair, challenged the new law. The South Dakota state courts, including the South Dakota Supreme Court, were bound by Quill and struck down the new statute.

When the Supreme Court granted certiorari in January 2018, many state and local tax practitioners believed that the Court would seize the opportunity to overrule Quill. However, following oral arguments in April 2018, some Justices seemed to express reluctance to step in when Congress had declined to do so. Notwithstanding that skepticism, the Court, in a 5-4 opinion authored by Justice Kennedy and joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito, and Neil Gorsuch, not only expressly overruled Quill and National Bellas Hess, but concluded that both decisions were wrong when they had been decided.

The Court stated that requiring physical presence in the state as a condition for sales tax collection unfairly advantaged companies without a physical presence in the state and had become largely unworkable, particularly in the internet economy. Although Wayfair and the other taxpayers argued that broad sales tax collection requirements would unfairly burden smaller businesses, the Court noted that software would be available to assist small businesses to comply with their sales tax collection obligations. Additionally, the Court mentioned that Wayfair specifically advertised that it was not required to collect sales tax on South Dakota sales—and seemed annoyed by this.

Chief Justice John Roberts authored the dissent—joined by Justices Stephen Breyer, Sonia Sotomayor, and Elena Kagan—stating that, although Quill and National Bellas Hess were decided incorrectly, the Court should be bound by stare decisis and should defer to those decisions in part, the dissenting Justices said, because they believed Congress would be better at considering the competing interests at stake. Thus, although Wayfair was a 5-4 decision, all nine Justices agreed that Quill and National Bellas Hess were wrongly decided, and the difference between the majority and the dissent solely concerned whether the error was better corrected by Congress or the Court.

The opinions leave open some very important questions, including:

  1. Since physical presence is not necessary to require a vendor to collect sales tax, what is the new standard? Is there any minimum number or dollar amount of sales that is necessary before a state may require a vendor to collect the tax or is one sale for $0.01 enough to create nexus for sales tax?

  2. Can states apply the Wayfair decision retroactively and seek to collect tax from vendors if their customers did not pay the tax on purchases in prior years?

The Court implied that rules like those in South Dakota, including the lack of retroactive application, may be necessary elements to pass muster, but did not announce a standard that could be used to review state rules.

The Court also noted that South Dakota is a signatory of the Streamlined Sales and Use Tax Agreement (SSUTA), an agreement among states designed to reduce administrative and compliance costs for sales and use taxes. The SSUTA requires a single, state-level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules among the participating states. The SSUTA also provides sellers with access to sales tax administration software paid for by the state and gives immunity from audit liability to sellers who choose to use such software.

That the Court seemed to give South Dakota’s participation in the SSUTA such significance begs the question of whether a state that is not a signatory to the SSUTA would bear a greater burden in arguing that its rules are fair to remote vendors because vendors in such a state would need to learn a separate set of state-specific rules in order to comply with sales tax obligations.

What Comes Next?

Currently, all but five states have sales and use taxes and almost certainly will be affected by Wayfair. These states likely will act quickly to seize the opportunity to collect additional revenue, but the approaches may vary. Some states may try to enact new legislation or promulgate new regulations—perhaps incorporating rules similar to South Dakota’s in an effort to ensure constitutionality. Other states may be far more aggressive and may enact laws requiring out-of-state vendors to collect sales tax with no minimum thresholds.

Although it is clear that the National Bellas Hess/Quill physical presence requirement is dead, it is not clear what standard will fill the void. Taxpayers may be inclined to challenge new state rules that impose collection requirements on businesses based solely on economic connections in the state. However, unless states pursue vendors retroactively, taxpayers with the greatest incentive to challenge new rules (i.e., businesses with only a handful of sales in a particular state) likely will be those that lack sufficient resources to mount a lengthy challenge like Wayfair. As a result, it may be some time before a high-level court is forced to rule on new standards imposed by states.

Finally, Wayfair likely will have an impact in the realm of state and local income taxes in addition to sales and use taxes.  Many states and cities have long believed that the physical presence requirement of Quill was limited to sales taxes and that they could impose income taxes on taxpayers without a physical presence based on so-called “economic nexus”—i.e., sufficient business connection in the taxing state. Quill, however, had left the door open—at least a bit—for taxpayers to push back against economic nexus by arguing that the Court’s interpretation of the Dormant Commerce Clause should apply equally to income taxes. However, in a world without Quill, that line of defense no longer exists.  Although, as is now the case for sales tax, the question remains open as to the level of activity that can give rise to economic nexus, physical presence in the taxing state seems not to be a necessary condition for income tax to be imposed.

Christopher Jones co-authored this post.

Copyright © by Ballard Spahr LLP
This article was written by Wendi L. Kotzen of Ballard Spahr LLP

Dissecting SCOTUS’ Ruling in Carpenter

In Carpenter v. United States, the U.S. Supreme Court recently held that the Fourth Amendment requires the government to get a search warrant to obtain Cell-Site Location Information (CSLI) from wireless carriers. CSLI reveals the location of a cell phone based upon the cell towers that the cell phone is using to obtain a signal. Carpenter marks an important and noteworthy change of course in Fourth Amendment jurisprudence.

The Carpenter decision is significant for a number of reasons.  First, the decision drastically alters the landscape of what information the government must obtain a search warrant for. Previously, a search warrant was generally not required in order to obtain transactional data in the possession of third parties. Second, the implications of the decision in Carpenter may be far-reaching. It remains to be seen what other information and records (e.g., metadata, real-time cell-site information, etc.) may fall within the purview of the decision.

The Carpenter decision may also have implications that extend beyond Fourth Amendment law into privacy regulation. While the FTC has long considered certain device-created tracking data to be more private than other types of information (e.g., Vizio), Carpenter may give additional ammunition for privacy advocates by elevating at least some longitudinal tracking data to Fourth Amendment-protected status. However, privacy scholars generally think about Fourth Amendment law as distinct from consumer-protection requirements because the purpose of the former is to protect individuals against nonconsensual government snooping, while the latter primarily serves to limit what companies can do with consumers’ data. Still, if law enforcement must obtain a warrant to access this data, privacy advocates may contend that companies should face increased restrictions on accessing other types of consumer data as well.

Expectation of privacy and third-party doctrine

The defendant, Timothy Carpenter, was convicted at trial of participating in a series of robberies following an investigation where FBI agents obtained 127 days of CSLI from Carpenter’s wireless carrier, via an order obtained pursuant to the Stored Communications Act (18 U.S.C. § 2703). The CSLI in question established that Carpenter’s phone was in the proximate area of several of the robberies in question.

Carpenter filed a motion with the District Court seeking to exclude the CSLI evidence because it was obtained without a search warrant. The District Court denied Carpenter’s motion and the Sixth Circuit Court of Appeals affirmed.

In its 5-4 decision, the Supreme Court overruled the District Court and the Sixth Circuit and held that a search warrant is required in order for the government to obtain CSLI. The opinion, authored by Chief Justice Roberts and joined by Justices Ginsburg, Kagan, Sotomayor, and Breyer, noted that CSLI “does not fit neatly under existing precedents,” and that “requests for cell-site records lie at the intersection of two lines of cases, both of which inform our understanding of the privacy interests at stake.” The first line of cases “addresses a person’s expectation of privacy in his physical location and movements.” The second line of cases stand for the proposition that “a person has no legitimate expectation of privacy in information he voluntarily turns over to third parties.”

The majority stated that CSLI “is detailed, encyclopedic, and effortlessly compiled.” However, “[a]t the same time, the fact that the individual continuously reveals his location to his wireless carrier implicates the third-party principle of Smith and Miller.” Under those cases and others articulating the so-called “third-party doctrine,” the Court had previously held that a person forfeits their expectation of privacy when they disclose information to a third party. As a result, the government typically did not need to obtain a search warrant to access transactional information held by third parties.

In Carpenter, the majority declined to extend the third-party doctrine to CSLI, noting that “[g]iven the unique nature of cell phone location records, the fact that the information is held by a third party does not by itself overcome the user’s claim to Fourth Amendment protection.” Specifically, the majority held that “an individual maintains a legitimate expectation of privacy in the record of his physical movements as captured through CSLI.” The majority reasoned that “[m]apping a cell phone’s location over the course of 127 days provides an all-encompassing record of the holder’s whereabouts. As with GPS information, the time-stamped data provides an intimate window into a person’s life, revealing not only his particular movements, but through them his ‘familial, political, professional, religious, and sexual associations.’” Thus, when the government obtains CSLI, “it achieves near perfect surveillance, as if it had attached an ankle monitor to the phone’s user.”

The majority further reasoned that the third-party doctrine was inapplicable to CSLI because “[t]here is a world of difference between the limited types of personal information addressed in Smith and Miller and the exhaustive chronicle of location information casually collected by wireless carriers today.” As such, given the nature of the information sought, the majority held that a search warrant is required in order to obtain CSLI.

The majority did, however, note that its decision was “a narrow one” which only addressed the issue of historical CSLI. The decision did not call into question the application of the third-party doctrine to other types of business records and recognized that there may be certain case-specific exceptions that would not require a warrant (e.g., exigent circumstances).

Dissenting opinions

Justices Kennedy, Thomas, Alito, and Gorsuch all filed dissenting opinions. Justice Kennedy argued that, because the CSLI was in the possession of wireless carriers, the third-party doctrine should apply and no search warrant is necessary. Justice Alito agreed with Justice Kennedy, and he further argued that the Fourth Amendment has not previously applied to the compulsory production of documents. Justice Thomas argued that the Fourth Amendment should only protect searches of property, as opposed to a violation of a person’s “reasonable expectation of privacy.”

Justice Gorsuch, on the other hand, questioned the relative narrowness of the majority opinion, suggesting that the third-party doctrine needed to be revisited in a systemic manner. Justice Gorsuch reasoned that the specificity and detail of the data collected is irrelevant. Rather, he argued that CSLI data should be considered personal data and not third party data – similar to the case of Ex Parte Jackson (1878) which determined that a letter in the mail was the property of the author, not of the post office that held it, and therefore warranted a search.

This is a broad reading of the property rights and could have made the opinion even more significant had it been the majority. But this argument was not preserved by Carpenter’s legal team, so Justice Gorsuch ultimately dissented from the majority opinion rather than filing a concurrence on his preferred grounds.  Nevertheless, Justice Gorsuch’s opinion is important because it indicates that advocates for broader Fourth Amendment rights may pick up an additional vote if future litigants preserve this argument.

Antonia Ambrose contributed to this blog post.

©2018 Drinker Biddle & Reath LLP. All Rights Reserved
This article was written by Peter Baldwin and Anthony D. Glosson of Drinker Biddle & Reath LLP

Seventh Circuit Affirms Denial of Pension Benefit to Daughter of Participant Who Died Three Days into Retirement

Linda Faye Jones was an employee of Children’s Hospital and Health System, Inc. Tragically, she developed recurring bladder cancer and at the age of 60, decided to retire. As a 37-year employee, Linda was eligible for a substantial pension under her employer’s defined benefit pension plan.

Linda retired on August 26, 2015 and elected to receive her pension in the form of a ten-year annuity. Payments under her pension were set to commence six days later, on September 1.  Unfortunately, Linda passed away on August 29, just three days into her retirement.

Linda was unmarried but had named her daughter Kishunda as her sole beneficiary for her pension payments. Unfortunately for Kishunda, the plan stated that as follows:

In the case of a Participant who dies prior to the date distributions begin, the Participant’s designated beneficiary will be his or her surviving Spouse, if any, pursuant to the terms of [another plan section].

Had Linda survived another six days until payments began, the plan would have honored her beneficiary designation and Kishunda would have received ten years’ worth of annuity payments.

Kishunda sued but the U.S. District Court for the Eastern District of Wisconsin, Judge Lynn Adelman presiding, held that the plan administrator’s determination that Kishunda was not eligible to receive the disputed pension benefits was not arbitrary and capricious. In part, the court noted that the rationale for the plan provision was to comply with federal tax laws that state that only spouses can collect pension benefits when a spouse dies before distribution. Finding that it was reasonable for the plan to be drafted in a manner that mimicked these laws, the court declined to adopt Kishunda’s strained interpretation of the plan. In the words of the Seventh Circuit, while the provision “has an unfortunate consequence here,” the provision is not unreasonable.

This case is a notable reminder of how ERISA’s “arbitrary and capricious” standard and lack of a right to a jury trial, can result in outcomes that even the court describes as “unfortunate.”  While readers may understandably question why an employer would insist on enforcing plan language that results in such an inequitable situation, it is also important to keep in mind that operating a plan contrary to its written terms threatens the continued tax qualification of the plan under IRS guidelines. It was no doubt a difficult decision to deny benefits to Kishunda, that decision may have been compelled out of a concern for the tax qualification of the plan as a whole.

The case is Jones v. Children’s Hosp. & Health System, Inc. Pension Plan, Appeal No. 17-3524 (June 13, 2018).

Copyright © 2018 Godfrey & Kahn S.C.
This article was written by Todd G. Smith of Godfrey & Kahn S.C.

5 Email Marketing Tips That Will Double Your Open Rates

The latest statistics show average email open rates for the legal industry are just over 21%. If your email campaigns are performing below this benchmark, you have some work to do to boost those open rates. Here are 5 tips to help you do that:

Tip #1: Resend to subscribers who didn’t open your email the first time.

You probably think that once you send an email to your list, there’s not much you can do to reach the non-openers with your message.   Oh, but there is. You can resend the same email campaign to subscribers who didn’t open them. All you need to do is change your subject line.

Whatever email distribution service you use — Constant Contact, MailChimp, etc. — offers a way to resend to non-openers. Just search for instructions in the Help section. You just need to wait several days — or even up to a month — to resend. While your open rate won’t be as high as the first time you sent your email, you will increase the number of subscribers who see your email and re-engage them so that the next time they receive an email from you, they are more likely to open it the first time.

Tip #2: Clean your list.

If you have people on your list who have not opened any of your emails for the past 18 months, you need to ask them if they still want to hear from you. Removing inactive subscribers does not hurt you, it helps you. Your open rates will increase, your bounce and unopen rates will decrease as will your email marketing costs. Search the help library on your email distribution service’s website for “clean list” and you will see instructions on how to send re-engagement campaigns to your 1- and 2-star subscribers — these are the ones who haven’t engaged much with your emails. Send the re-engagement campaign at least three times before you move them off your list.

Tip #3: Segment your list.

The more relevant your emails are to your recipients, the better your open rate will be. To achieve relevancy, you need to segment your list using criteria that aligns with your subscriber’s areas of interest (car accident/truck accident/motorcycle accident/bicycle accident) or buying patterns (prospect/new client/repeat client/old client (no business within past year). Creating campaigns for each segment that speaks to the uniqueness of each subscriber’s situation will really boost your open rates.

Tip #4: A/B test subject lines.

If you have a large list — more than 5,000 subscribers — you should be A/B testing your campaigns. Test two different subject lines on a small percentage of your list and then roll out the highest performing subject line to your entire list.

Tip #5: Examine open rates to create better subject lines.

Take a look at your top 5 best and worst performing email campaigns to see what they have in common. We’ve found that the best performing subject lines typically have:

  • 50 or fewer characters

  • Are personal or local (“Brian, these tips could save you a bundle in legal fees”)

  • Are concise and clear (“Free eBook offer ends August 1”)

Take what is working and replicate it for future campaigns and jettison what isn’t working.

© The Rainmaker Institute, All Rights Reserved
This article was written by Stephen Fairley of The Rainmaker Institute

Ninth Circuit Expounds the Meaning of Compensable Time

When is time compensable under California law? In a recent decision by the Ninth Circuit Court of Appeals, Sali v. Corona Regional Medical Center, the court explained that there are two categories of compensable time: (1) the time when an employee is “under the control” of the employer, whether or not the employee is actually engaging in work activities, and (2) the time when an employee “is suffered or permitted to work, whether or not required to do so.”

Background

The case involved registered nurses (RNs) who brought a putative class action against their employer, alleging, among other claims, that the employer’s rounding time policy failed to pay them for all compensable time. The company used an electronic timekeeping system that tracked when employees clocked in and out from work, and rounded the time to the nearest quarter hour. For example, if an RN clocked in at 6:53 a.m. or 7:07 a.m., the time was rounded to 7:00 a.m. This system is also known as “7/8 rounding,” meaning that clock ins made up to seven minutes before or after the hour are rounded to the hour, but clock ins made eight minutes or more before the hour are rounded back to the prior quarter hour and those made eight minutes or more after the hour are rounded up to the next quarter hour.

The district court denied class certification on the rounding time claim, concluding that individualized issues would predominate in determining the employer’s liability. The district court noted that “time records are not a reliable indicator of the time RNs actually spent working because RNs frequently clock in for work and perform non-compensable activities, such as waiting in the break room, getting coffee, or chatting with their co-workers, until the start of their scheduled shift.”

The Ninth Circuit’s Decision

The Ninth Circuit reversed the district court’s decision. First, the Ninth Circuit recognized that a rounding time policy is permissible under California law if it is “fair and neutral on its face and ‘it is used in such a manner that it will not result, over a period of time, in failure to compensate the employees properly for all the time they actually worked.’” The Ninth Circuit also said that the district court abused its discretion by incorrectly interpreting “actually worked” to mean “only time spent engaging in work-related activities.”

The court noted that compensable time in California includes “the time during which an employee is subject to the control of an employer, and includes all the time the employee is suffered or permitted to work, whether or not required to do so.” Time is compensable when an employee is working or under the control of his or her employer. For example, time could be compensable if an employee is working but is not subject to the employer’s control, such as when an employee works unauthorized overtime. And time may be compensable if an employee is not working but is under the control of the employer, for example, when the employee is required to remain on the company’s premises or the employee is restricted from engaging in certain personal activities.

For the purposes of class certification, the court said that the question of whether the rounding policy was unfair required a focus on the company’s policies and practices, and whether they “restricted RNs in a manner that amounted to employer control during the period between their clock-in and clock-out times and the rounded shift-start and shift-end times.” Since the Ninth Circuit concluded that the determination of this issue did not depend on individualized factual questions and was capable of class-wide resolution, the district court’s denial of class certification was reversed.

Key Takeaways

What can employers do?

  • If a company uses a rounding system, it may want to take caution to ensure that its system is fair and neutral, and that, on average, the amount of employee time that is deducted is the same or less than the amount added to time records as time worked. Further, a company can perform routine audits to ensure a neutral system.
  • Consider whether to use a smaller rounding interval to limit risk, like moving from a 7/8 system to a five-minute rounding system.
  • If an employer uses a rounding policy, it may want to consider providing employees with a grace period for clocking in late up to the rounding interval.
  • Employers may want to review their written policies and ensure that the policies clearly prohibit off-the-clock work and require employees to record all time worked. They can also clarify that employees are prohibited from working outside of their regular shift without management approval.
  • The policy can also clearly state that employees are not required to arrive at the workplace before the start of their shifts or to remain on the premises after their shifts end.
  • Consider adding more time clocks in the workplace to reduce any pressure on the employees to feel that they must arrive early to clock in.
  • Consider providing training for management on both categories of compensable time and explaining that if a manager requires employees to arrive at the workplace before their shifts or remain after their shifts, the employees’ time spent at the workplace before and after the shift may qualify as compensable time.
  • Employers can ensure that their meal period policies provide time that is duty free and allow employees to come and go as they please, including leaving the premises.
  • Consider providing a complaint procedure for employees to report any complaints about their schedules, meal and rest breaks, records of time worked, and pay.
© 2018, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.

California May Be Headed Towards Sweeping Consumer Privacy Protections

On June 21st, California legislature Democrats reached a tentative agreement with a group of consumer privacy activists spearheading a ballot initiative for heightened consumer privacy protections, in which the activists would withdraw the the existing ballot initiative in exchange for the California legislature passing, and Governor Jerry Brown signing into law, a similar piece of legislation, with some concessions, by June 28th, the final deadline to withdraw ballot initiatives.  If enacted, the Act would take effect January 1, 2020.

In the “compromise bill”, Assemblyman Ed Chau (D-Arcadia) amended the California Consumer Privacy Act of 2018, (AB 375) to ensure the consumer privacy activists, and conversely ballot initiative opponents, would be comfortable with its terms.

Some of the key consumer rights allotted for in AB 375 include:

  • A consumer’s right to request deletion of personal information which would require the business to delete information upon receipt of a verified request;

  • A consumer’s right to request that a business that sells the consumer’s personal information, or discloses it for a business purpose, disclose the categories of information that it collects and categories of information and the identity of any 3rd parties to which the information was sold or disclosed;

  • A consumer’s right to opt-out of the sale of personal information by a business prohibiting the business from discriminating against the consumer for exercising this right, including a prohibition on charging the consumer who opts-out a different price or providing the consumer a different quality of goods or services, except if the difference is reasonably related to value provided by the consumer’s data.

Covered entities under AB 375 would include, any entity that does business in the State of California and satisfies one or more of the following: (i) annual gross revenue in excess of $25 million, (ii) alone or in combination, annually buys, receives for the business’ commercial purposes, sells, or shares for commercial purposes, alone or in combination, the personal information of 50,000 or more consumers, households, or devices, OR (iii) Derives 50 percent or more of its annual revenues from selling consumers’ personal information.

Though far reaching, the amended AB 375 limits legal damages and provides significant concessions to business opponents of the bill. For example, the bill allows a business 30 days to “cure” any alleged violations prior to the California attorney general initiating legal action. Similarly, while a private action is permissible, a consumer is required to provide a business 30 days written notice before instituting an action, during which time the business has the same 30 days to “cure” any alleged violations.  Specifically, the bill provides: “In the event a cure is possible, if within the 30 days the business actually cures the noticed violation and provides the consumer an express written statement that the violations have been cured and that no further violations shall occur, no action for individual statutory damages or class-wide statutory damages may be initiated against the business.”  Civil penalties for actions brought by the Attorney General are capped at $7,500 for each intentional violation.  The damages in any private action brought by a consumer are not less than one hundred dollars ($100) and not greater than seven hundred and fifty ($750) per consumer per incident or actual damages, whichever is greater.

Overall, consumer privacy advocates are pleased with the amended legislation which is “substantially similar to our initiative”, said Alastair Mactaggart, a San Francisco real estate developer leading the ballot initiative. “It gives more privacy protection in some areas, and less in others.”

The consumer rights allotted for in the amended version of the California Consumer Privacy Act of 2018, are reminiscent of those found in the European Union’s sweeping privacy regulations, the General Data Protection Regulation (“GDPR”) (See Does the GDPR Apply to Your U.S. Based Company?), that took effect May 25th. Moreover, California is not the only United States locality considering far reaching privacy protections. Recently, the Chicago City Council introduced the Personal Data Collection and Protection Ordinance, which, inter alia, would require opt-in consent from Chicago residents to use, disclose or sell their personal information. On the federal level, several legislative proposals are being considered to heighten consumer privacy protection, including the Consumer Privacy Protection Act, and the Data Security and Breach Notification Act.

 

Jackson Lewis P.C. © 2018
This post was written by Joseph J. Lazzarotti of Jackson Lewis P.C.

“The Executive Order Has No Clothes!” Lawyer Moms of America Speak Out About Immigration Policy and Plan Action

News of children being taken away from their parents as both are sent to immigration detention centers has dominated the news cycle over the past few weeks, and a group of Lawyer Moms are doing something about it.  Specifically, the group is writing an open letter that demands a “just and humane” resolution to the crisis at the border, and they are planning a day of action to deliver their message directly to elected officials at their offices on June 29th.

The Trump Administration’s “zero-tolerance” policy has resulted in parents and children being separated at the southern border. And the images and audio of the distraught children and parents have prompted both Americans and pundits here and abroad to express their outrage.  The continuous media coverage and wide-spread outcry forced the issue and President Trump bowed to the political pressure, signing an Executive Order on Wednesday, June 20, saying that while the administration will enforce immigration laws “it is also the policy of this Administration to maintain family unity.”

Four self-described lawyer Moms, distraught by the images coming in the media surrounding this crisis, formed the group Lawyer Moms of America on Facebook.  Erin Albanese, one of the founding members says, that it all started with a Facebook posting.  One of the other co-founders, an immigration attorney, posted about her client, who had her child taken away and had not seen nor heard from her child in several weeks.  Albanese, says this story resonated, and she and the other co-founders thought, “there’s got to be something more that we can do.”

It turns out, there was.  The four co-founders, Tovah Kopah, Laura Latta, Elizabeth Gray Nuñez and Albanese started the group on June 7, and this group has grown to about 14,000 members as people are looking for ways to get involved and take action.  The group drafted an open letter to political leaders on the situation and are asking individuals and groups to sign it, they intend to deliver the letter on June 29th. Additionally, Albanese says, “we are working with organizations in this space that are already doing work and trying to amplify their efforts and connect people to places where they could volunteer or donate and get more information as well.”

Lawyers Mom’s Seek More than the Executive Order

The Lawyer Moms of America read the Executive Order and were not impressed.  Albanese says, “our catchphrase is ‘the Executive Order has no clothes’.  The more we look at it, the more unhappy we are.”   The group has determined that their number one concern is getting the families back together, and the Executive Order “EO” does not articulate how that is going to happen.  Albanese says, “The number one glaring issue is that it [the EO] doesn’t mention family reunification at all . . . It seems like there hasn’t really been a system for tracking families that have been separated and bringing them back together.”  This analysis has proven precedent, as of the 2500 children taken away from their parents, as of Saturday only 522 had been reunited.  Additionally, the Executive Order seems to solve the problem of family separation by creating indefinite detention, creating “internment camps” to house families for the foreseeable future, with little idea of when they will be released.  Albanese points out in her criticism of the Executive Order that, “Ending family separation by indefinite family detention is not a great fit.”  Perhaps most problematic, Trump’s Order does not address the root of the problem–the policy of “zero-tolerance” that created this situation in the first place.

This issue has proved a hot-button one for many, as it hits at something fundamental.  Albanese says, “Many have had a visceral reaction to this, because every one of us can put ourselves in that place or that child or that mother.”  With the situation far from resolved, there is still plenty of work to do.  Lawyer Moms of America have created a list of actions concerned individuals can take, and they are asking people to sign their open letter.  The Lawyer Moms of America group is aware that there are a lot of great groups at work on this issue, and they are focused on helping those groups in their respective missions.  Albanese says, “We are mobilizing and using the energy to help make some noise.   We’re trying to funnel resources to the folks that are already doing this and doing it well.”

On June 29, the group is looking to hand-deliver the letter to elected officials across the country, demanding action in a show of unity.  Albanese says, “Our goal would be to, at a minimum,  that we hit somebody’s office in every state. We’d love to hit every member of Congress’s office. But we’ll see if we get there.”

With a track record that includes a Facebook group growing from 4 to 14,000 members in a few days?  There’s a good chance it’ll happen.

 

Copyright ©2018 National Law Forum, LLC
This post was written by Eilene Spear of the National Law Forum, LLC.

Supreme Court Resolves Constitutionality of SEC’S ALJ Appointments — Now What?

Last week, the United States Supreme Court settled a circuit split regarding the constitutionality of the appointment of Administrative Law Judges (“ALJs”) by the Securities and Exchange Commission (“SEC” or the “Commission”).  In Lucia v. SEC, the Court held that the Commission’s five ALJs are “officers” subject to the Constitution’s Appointments Clause, which requires officers to be appointed by the President, “Courts of Law,” or “Heads of Departments.”  And because the SEC’s ALJs were hired by the agency’s staff, the Court reasoned, their appointments were unconstitutional.  The SEC reacted quickly, immediately issuing an order staying all pending administrative proceedings, the constitutionality of which is now unclear.

The Road to the Supreme Court

The Supreme Court’s decision arose from an SEC administrative proceeding against radio personality Raymond Lucia, charging him with violations of the Investment Advisers Act.  An ALJ, Cameron Elliot, heard the case and issued an initial decision finding against Lucia.  Lucia appealed to the SEC, arguing that because ALJ Elliott had not been constitutionally appointed, he lacked authority to issue such findings.  The SEC disagreed and affirmed the initial decision, prompting Lucia to appeal to the D.C. Circuit Court of Appeals.  Siding with the SEC, the D.C. Circuit held that SEC ALJs are not “inferior officers,” as Lucia argued, but rather “employees,” and therefore not subject to Appointments Clause requirements.  Meanwhile, in a similar case, Bandimere v. SEC, the Tenth Circuit reached the opposite conclusion, creating a circuit split requiring Supreme Court resolution.

The Ruling

In last week’s majority opinion, authored by Justice Kagan, the Court applied a test articulated in Freytag v. Commissioner, 501 U.S. 868 (1991) for distinguishing between officers and employees for Appointments Clause purposes.  In concluding that SEC ALJs are officers, the Court relied on the following facts: (1) they have career appointments and hold a continuing office established by law; (2) they exercise “significant discretion” when carrying out “important functions,” such as taking testimony, receiving evidence, examining witnesses, and enforcing discovery orders; and (3) when the SEC declines to review an ALJ’s initial decision, it becomes final and is deemed the action of the Commission.  In short, the Court held, the SEC’s ALJs are “near carbon copies” of the tax court judges found to be “officers” in Freytag.

Issues Left Unresolved

While the decision clearly settles the matter for Mr. Lucia, it leaves a number of issues unresolved, and its broader implications remain unclear.

Validity of SEC’s Prior Ratification

The biggest question left unanswered is whether the SEC’s attempt last year to cure any constitutional defect in its appointments scheme was sufficient.  While Luciawas pending before the Court, the Commission issued an order “ratifying” the prior appointments of its ALJs.  (See our prior blog post for additional discussion).  Lucia argued that the ratification was invalid and that the action did not in fact resolve the appointment defect.  The Court, however, declined to address this argument, noting in a footnote that the SEC had not indicated whether it intended to “assign Lucia’s case on remand to an ALJ whose claim to authority rests on the ratification order. The SEC may decide to conduct Lucia’s rehearing itself.  Or it may assign the hearing to an ALJ who has received a constitutional appointment independent of the ratification.”  The Court’s observation could be taken to suggest that the SEC’s ratification of the prior ALJ appointments did not in fact satisfy the Appointments Clause.  Perhaps in recognition of that possibility, the SEC promptly issued an order staying for thirty days, or until further other from the Commission, all of its pending administrative proceedings, including those in which an ALJ has already issued a decision.  The Commission presumably is now evaluating whether it needs to go beyond ratification to immunize its administrative proceedings from further constitutional attack.

Impact on Other Agencies

Another open question concerns the impact on other agencies’ administrative proceedings.  At oral argument, Justices Breyer and Sotomayor expressed concern that, if the Court were to rule in Lucia’s favor, proceedings in other federal agencies could be undermined as well.   While the majority opinion is silent on that question, Justice Breyer warned in his concurrence that the majority’s approach “risks . . . unraveling, step-by-step, the foundations of the Federal Government’s administrative adjudication system as it has existed for decades.”

ALJ Removal

Last, as noted in Justice Breyer’s concurrence, the Court’s decision raises questions about the constitutionality of limitations on ALJ removal under the Administrative Procedures Act (“APA”).   The APA provides that ALJs may only be removed “for cause.”  But if an SEC ALJ is a constitutional “officer,” that limitation may be invalid, as duly appointed officers are subject to removal at will.  Justice Breyer observed that, if ALJs are vulnerable to removal at any time, it could transform them “from independent adjudicators into dependent decisionmakers, serving at the pleasure of the Commission,” and therefore raise fundamental doubts about the legitimacy of their decisions.

Next Steps

As a result of the Court’s decision, Lucia himself will be entitled to a new hearing before a properly appointed ALJ or the Commission itself.  Given the questions that the Court declined to answer, and the SEC’s decision to temporarily stay its proceedings, however, we can expect further developments and continuing litigation in this area in the days and years to come.

 

© Copyright 2018 Squire Patton Boggs (US) LLP
For more coverage of the Supreme Court, see the National Law Review’s Litigation Page.

State Investments in Electric Vehicle Charging Infrastructure

Various studies indicate that an overall lack of charging infrastructure serves as an impediment to the widespread adoption of electric vehicles (EVs). However, the road to transportation electrification is officially under construction following several major state investments.

At the end of May, in the largest single state-level investment in EV charging infrastructure, the California Public Utilities Commission (CPUC) approved more than $760 million worth of transportation electrification projects by the State’s three investor-owned utilities. The CPUC’s Decision, See A.17-01-020, Proposed Decision of ALJs Goldberg and Cook (May 31, 2018),  authorized Pacific Gas and Electric Company (PG&E) and Southern California Edison (SCE) to install vehicle chargers at more than 1,500 sites supporting 15,000 medium or heavy-duty vehicles. The FD also approved rebates to San Diego Gas & Electric (SDG&E) residential customers for installing up to 60,000 240-volt charging stations at their homes. Moreover, PG&E was authorized to build 234 DC fast-charging stations.

Besides the total spend and resulting emissions reductions represented by the Commission’s action, the Proposed Decision is also notable for the policy priorities it advances.  For instance, it clearly prioritizes the creation of electrification-related benefits for California’s disadvantaged communities (DACs).  (The authorizing legislation, SB 350, found that “[w]idespread transportation electrification requires increased access for disadvantaged communities . . . and increased use of [EVs] in those communities . . . to enhance air quality, lower greenhouse gases emissions, and promote overall benefits to those communities” § 740.12(a)(1)(C) (De Leon)).  Accordingly, the CPUC focused on promoting construction of charging infrastructure in DACs.   For example, the PG&E fast charging program will target construction in DACs by providing up to $25,000 per DC fast charger in rebates to cover a portion of the charger cost for sites located in DACs.

The CPUC also prioritizes the survival of non-utility charging competition.  For example, the Proposed Decision eliminates utility ownership of the charging infrastructure on the customer side of the meter in the SDG&E residential charging program. Additionally, for the PG&E and SCE’s medium and heavy-duty programs, the utilities will own make-ready infrastructure, but not the Electric Vehicle Supply Equipment (EVSE). Instead, the utilities will allow customers to choose their own EVSE models, EVSE installation vendors, and any network services providers.

The CPUC noted several benefits of allowing the utility to own electrification infrastructure only up to the point of the EVSE stub.  First, the Commission found that “[u]tility ownership of the charging infrastructure dramatically drives up costs, in comparison to alternative ownership models.” Instead, restricting utility ownership of charging equipment will allow more charging infrastructure to be built at the same (or lower) cost to ratepayers. Second, it allows private parties to compete and innovate, which will improve charging technology and lower costs. Lastly, non-utility competition addresses “stranded cost” fears, since private parties will bear the risks of nascent charging technologies.

While California has made the largest commitment, other states have also joined the effort to pave a national road toward the widespread adoption of EVs.

In New Jersey, utility company PSE&G recently proposed spending $300 million to set up a network of up to 50,000 charging stations. This investment would constitute a massive upgrade to New Jersey’s charging infrastructure, which currently consists of less than 600 charging stations according to U.S. Department of Energy data. The proposed investment is part of a larger $5.4 billion expansion in PSE&G’s five-year infrastructure plan, and represents the first major proposal of New Jersey’s largest utility to invest in EV infrastructure.

In New York, Governor Andrew Cuomo announced a $40 million commitment (that could grow to $250 million by 2025) by the New York Power Authority for its EVolve NY initiative. The new funding will be used to build fast chargers and to support EV model communities. EVolve NY is a part of the broader Charge NY 2.0 initiative, which advances electric car adoption by increasing the number of charging stations statewide. The new funding will aid New York as it aims to meet its particularly ambitious goal of 800,000 electric vehicles on the road by 2025.

Late last year, the Massachusetts Department of Public Utilities approved a $45 million charging station program by local utility, Eversource. The program includes investments to support the deployment of almost 4,000 “Level 2 Stations” and 72 DC Fast Charging stations. Even more investment could be on its way to Massachusetts as utility company National Grid has also proposed investing in charging station infrastructure.

And in Maryland, utility companies have proposed spending $104 million to build a network of 24,000 residential, workplace and public charging stations. The program, currently before the state’s Public Service Commission, would be a major part of Maryland’s effort to reach 300,000 electric vehicles on the road by 2025.

On the federal level, energy-related projects could be eligible for the $20 billion “Transformative Projects Program” announced by the Trump administration in February.  However, President Trump recently remarked that his infrastructure plan will likely have to wait until after this year’s midterm elections.  In the meantime, states have shown that they are more than willing to take the lead in investing in transportation electrification infrastructure.  (In related news this week, Colorado’s decision to move toward adopting California’s greenhouse gas emissions standards for light-duty vehicles represents a parallel and noteworthy development, further indicating leadership and action from states focused on developing advanced vehicle technology.)  It’s also notable that in addition to utility commission activity, states are also expressing support for advanced vehicle technology While the states have certainly taken a lead, their investments also complement significant action in the private sector, including the recent effort to stand up the Transportation Electrification Accord.  See our recent post on that subject, and continue to follow Inside Energy and Environment for continued updates on this subject.

© 2018 Covington & Burling LLP

This post also includes contributions from Michael Rebuck, a summer associate.

This post was written by Jake Levine Covington & Burling LLP.

Supreme Court’s Carpenter Decision Requires Warrant for Cell Phone Location Data

In a decision that defines how the Fourth Amendment applies to information collected in the digital age, the Supreme Court today held that police must use a warrant to obtain from a cell phone company records that detail the location and movements of a cell phone user.  The opinion in Carpenter v. United States limits the application of the third-party doctrine, holding that a warrant is required when an individual “has a legitimate privacy interest in records held by a third party.”

The 5-4 decision, written by Chief Justice John Roberts, emphasizes the sensitivity of cell phone location information, which the Court described as “deeply revealing” because of its “depth, breadth, and comprehensive reach, and the inescapable and automatic nature of its collection.”  Given its nature, “the fact that such information is gathered by a third party does not make it any less deserving of Fourth Amendment protection,” the Court held.

As we previously reported, Carpenter stems from a criminal investigation in Detroit in 2011, where the government acted without a warrant in obtaining 127 days’ worth of cell phone location records for two suspects.  The government obtained the data under the Stored Communications Act, 18 U.S.C. §§ 2703(c)(1)(B), (d), which requires a showing of reasonable suspicion — but does not require probable cause.  For one suspect, the records revealed 12,898 points of location data; for another, 23,034 location points.  Both suspects were convicted, based in part on cell phone location evidence that placed them near the crime scenes.

Sensitivity of Information

In requiring a warrant to obtain cell phone location information, the Court emphasized the sensitivity of that information, which it called “an entirely different species of business record” than bank records or phone numbers.  Cell phone location information “implicates basic Fourth Amendment concerns about arbitrary government power much more directly than corporate tax or payroll ledgers,” the Court explained.  Throughout the majority decision, Chief Justice Roberts invoked his 2014 opinion in Riley v. California to underscore the sensitivity of this information.  As Riley recognized, a cell phone today is almost a “feature of human anatomy” that “tracks nearly exactly the movements of its owner.”

The Court also focused on the “near perfect surveillance” achieved by cell phone location records — and lack of resource constraints in obtaining them.  Before the digital age, law enforcement officers could surveil a suspect for brief periods of time but doing so “for any extended period of time was difficult and costly and therefore rarely undertaken.”  Unlike traditional surveillance methods, “cell phone tracking is remarkably easy, cheap, and efficient,” the Court said.  “With just the click of a button, the Government can access each carrier’s deep repository of historical location information at practically no expense.”  Cell phone location records thus provide information “otherwise unknowable,” as if the Government “had attached an ankle monitor to the phone’s user.”  Moreover, the Court emphasized, cell phone location information is collected on all cell phone users — not just individuals under investigation — meaning the “newfound tracking capacity runs against everyone.”

Limits of Third-Party Doctrine

In concluding the third-party doctrine did not apply to cell phone location information, the Court said the information “does not fit neatly under existing precedents.”  Rather, it falls at the “at the intersection of two lines of cases.”  The first line addresses an individual’s expectation of privacy in his physical locations and movements.  The second line embodies the third-party doctrine, under which an individual has no legitimate expectation of privacy in information voluntarily turned over to third parties.

While Carpenter does not overrule the third-party doctrine, it substantially limits its application.  Applying the third-party doctrine to cell phone location information would not be a “straightforward application” as the Government urged, but a “significant extension” of the doctrine that the Court rejected.  The Government’s invocation of the third-party doctrine “fails to contend with the seismic shifts in digital technology,” the Court found.

According to the Court, there is “a world of difference between the limited types of personal information addressed in” the third-party doctrine cases and “the exhaustive chronicle of location information casually collected by wireless carriers today.”  Moreover, the information is “not truly ‘shared’ as one normally understands the term.”  In part, that is because “[v]irtually any activity on the phone” generates location information.  “Apart from disconnecting the phone from the network, there is no way to avoid leaving behind a trail of location data.”  As a result, the Court held that users do not voluntarily assume the risk of turning over a comprehensive dossier of their physical movements, the Court held.  It emphasized that the case is not about a person’s momentary location while “using a phone” but “about a detailed chronicle of a person’s physical presence compiled every day, every moment, over several years.”

Ramifications of Decision

Chief Justice Roberts emphasized that the opinion of the Court was narrow, noting that it does not overrule the third-party doctrine or affect cases relating to foreign affairs or national security.  According to the majority, the decision also does not call into question “conventional surveillance techniques and tools” nor apply to “other business records that might incidentally reveal location information.”  Justice Kennedy disagreed with this characterization of the Court’s opinion, observing in dissent that the decision “will have dramatic consequences for law enforcement, courts, and society as a whole.”  According to Justice Kennedy, the majority’s reasoning will “extend beyond cell-site records to other kinds of information held by third parties.”

Justices Alito, Thomas, and Gorsuch also filed separate dissents.  Justice Gorsuch’s dissent advocated for a property-based approach to the Fourth Amendment that would abandon both the third-party doctrine and the reasonable expectation of privacy test.  That approach would focus on whether the individual has a property interest in the records at issue.  Under that framework it is “entirely possible a person’s cell site data could qualify as his papers or effects,” Justice Gorsuch observed, even though a cell phone carrier holds the information.  But Carpenter failed to raise a property-based argument before the district court, the court of appeals, or the Supreme Court, and therefore “forfeited perhaps his most promising line of argument,” according to Justice Gorsuch.

Like Justice Kennedy, Justices Alito and Thomas argued in separate dissents that cell phone location information belongs to cell phone companies, not to cell phone users, and thus did not qualify for protection under the Fourth Amendment.  Justice Thomas focused on the fact that Carpenter “did not create the records, he does not maintain them, he cannot control them, and he cannot destroy them.”  Justice Alito also cautioned that the majority’s decision was overly broad and would invite a “blizzard of litigation” because the majority opinion offered “no meaningful limiting principle, and none is apparent.”

 

© 2018 Covington & Burling LLP