Data as Property at the Supreme Court (UPDATED)

Yesterday, SCOTUS decided the much anticipated case of South Dakota v. Wayfair et al. Although this is primarily viewed as a state tax/constituitonal law dispute, it actually has some significant property law aspects to it. The fight was over the ability of South Dakota (and really, any state) to impose an obligation on out-of-state companies to collect and remit sales taxes on sales that are conducted with in-state consumers but when (and here's the kicker) the out-of-state company has no "physical presence" in the taxing state. The issue is actually quite significant. By some estimates, states lose somewhere between $8 and $33 billion per year in uncollected sales taxes from online transactions. It's actually not a matter of states not being able to tax these transactions. Indeed, they most certainly have the authority to tax online sales--or at least to collect use taxes from buyers who do not otherwise pay sales tax when they make an online purchase. The problem is forcing out of state companies to collect and remit the sales tax (recognizing that most people are noncompliant in paying their use taxes).

The obstacle for states has been two SCOTUS decisions - National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 (1967) and Quill Corp. v. North Dakota, 504 U. S. 298 (1992). In those cases (particularly Quill), the Supreme Court held that a state cannot impose an obligation on out of state companies to collect and remit sales taxes for transactions with residents of the state if the company lacks a physical presence in that jurisdiction. What this means is that even a very large company (think Overstock.com, Amazon, etc.) that does substantial business in a given state, but has no physical location or employees in that state, does not have to collect sales taxes for transactions with in-state residents. On the other hand, a small business with one employee and thin margins must collect and remit the sales taxes for those same transactions. Many have decried the market distortion that Quill and Bellas Hess have created--essentially a tax shelter for certain online retailers.

But yesterday SCOTUS overruled the physical presence rule of these older cases (much to the delight of states, including my own which is currently facing a major budget shortfall due to a lack of revenue). The case is worth reading for a number of reasons--particularly the dissent by Chief Justice Roberts, joined by Justices Breyer, Kagan, and Sotomayor (an interesting read about administrability, stare decis, and the proper role of the courts v. Congress). However, what I think you'll be interested in reading is the following passage from Justice Kennedy's majority opinion:

Modern e-commerce does not align analytically with a test that relies on the sort of physical presence defined in Quill. In a footnote, Quill rejected the argument that “title to ‘a few floppy diskettes’ present in a State” was sufficient to constitute a “substantial nexus,” id., at 315, n. 8. But it is not clear why a single employee or a single warehouse should create a substantial nexus while “physi­cal” aspects of pervasive modern technology should not. For example, a company with a website accessible in South Dakota may be said to have a physical presence in the State via the customers’ computers. A website may leave cookies saved to the customers’ hard drives, or cus­ tomers may download the company’s app onto their phones. Or a company may lease data storage that is per­ manently, or even occasionally, located in South Dakota. 

I think it's noteworthy that while the Court rejected the physicality test, it still hems to the physicality notion of property. Data, to be sure, is intangible--it has no physical body. Yet, the Court seems determined (albeit indirectly) to apply some level of physicality to data--or at least to adopt proxies for physicality. Why is this so? I'll be thinking about this more over the coming months, but I surmise it's because so much of our law uses property as a base. We say something is property, and thus is owned by someone, and then we use that concept as a socket to plug in lots of other areas of law (IP, secured finance, privacy, constitutional law, tax, etc.). But when we talk about data, we haven't completely made the leap to "data as property" quite yet. I think, however, we're trying to get there and this language in Wayfair is representative of our desire to do so. If data is property then it has to be owned by someone (or someones). That might mean that data cannot be as free-flowing as it seems to be now, which in turn might result in more limited or slower innovation, since making data property could drive up transaction costs. After all, if we say data is property then we might want to better formalize instances in which we give it away (see the Cambridge Analytica and Facebook scandal). We might also be less likely to want our law to respect sweeping licensing agreements that we click-through and give our data away even before it's created.

More to come! Feel free to share your thoughts in the comments below or shoot me an email. Have a great weekend!

UPDATE:

Friends, I spoke too soon! Just yesterday the Court decided Carpenter v. United States. Again, this case doesn't have much to do with property law (at least not facially). It was about whether there was an unlawful search under the Fourth Amendment when the government obtained cell phone location records from a mobile phone company and, in doing so, arrested multiple individuals for several robberies. On the one hand, one could argue that the actual records themselves (the data) were the property of the cell phone companies. Indeed, the customer agreements with the consumers provided that the company could collect cell phone location data generated from cell sites near where a person makes a call, sends an email, fires off a text message etc. But, such a view of the data as being the property of the company and not the property of the customer was not shared by the majority. Instead, the majority opinion held that this was still a search (and although they didn't say this, what is implied is that this is the case despite whatever the customer agreement might have said). Take a read:

The Government’s position [that this is not a search] fails to contend with the seismic shifts in digital technology that made possible the tracking of not only Carpenter’s location but also everyone else’s, not for a short period but for years and years. Sprint Corporation and its competitors are not your typical witnesses. Unlike the nosy neighbor who keeps an eye on comings and goings, they are ever alert, and their memory is nearly infallible. There 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. . .

Cell phone location information is not truly “shared” as one normally understands the term. In the first place, cell phones and the services they provide are “such a pervasive and insistent part of daily life” that carrying one is indispensable to participation in modern society.

As a result, in no meaningful sense does the user voluntarily “assume[] the risk” of turning over a comprehensive dossier of his physical movements.

The majority is basically saying that even though the agreement between the cell phone provider and the customer says that the information collected about user location belongs to the provider, this doesn't necessarily mean that the customer has no privacy interest in that information. Because this kind of data is so pervasive and so insistent in everyday life, we can't just treat it as someone else's property for Fourth Amendment purposes.

Now, Justice Kennedy (in his dissent) didn't like this at all because he said the Court was wrongly moving away from the property-based approach to the Fourth Amendment. He stated that the defendants could "'assert neither ownership nor possession' of the records because the records were created, owned, and controlled by the companies. . . The businesses were not bailees or custodians of the records, with a duty to hold the records for the defendants’ use." He argues quite simply that “This case should be resolved by interpreting accepted property principles as the baseline for reasonable expectations of privacy."

Justices Alito and Thomas generally agree with this so-called more property-based approach. Thomas wrote:

By obtaining the cell-site records of MetroPCS and Sprint, the Government did not search Carpenter’s property. He did not create the records, he does not maintain them, he cannot control them, and he cannot destroy them. Neither the terms of his contracts nor any provision of law makes the records his. The records belong to MetroPCS and Sprint.

Alito follows up in stating that:

By allowing Carpenter to object to the search of a third party’s property, the Court threatens to revolutionize a second and independent line of Fourth Amendment doctrine.  . . . The Fourth Amendment does not confer rights with respect to the persons, houses, papers, and effects of others.  . . the cell-site records obtained by the Government belong to Carpenter’s cell service providers, not to Carpenter.

So the basic divide between the majority and these three dissents is that if you take a traditional property approach then there was no search and if you move away from a property approach then there is a search. But the most fascinating part of the case, I think, is the final dissent by Justice Gorsuch. He says that in taking a property approach you could easily conclude that there was a search. How is this so? Take a read:

Just because you entrust your data—in some cases, your modern-day papers and effects—to a third party may not mean you lose any Fourth Amendment interest in its contents. . .

I doubt that complete ownership or exclusive control of property is always a necessary condition to the assertion of a Fourth Amendment right. Where houses are concerned, for example, individuals can enjoy Fourth Amendment protection without fee simple title. Both the text of the Amendment and the common law rule support that conclusion. . . .use of technology is functionally compelled by the demands of modern life, and in that way the fact that we store data with third parties may amount to a sort of involuntary bailment too.

And here's the best part:

It seems to me entirely possible a person’s cell-site data could qualify as his papers or effects under existing law. 

Plainly, customers have substantial legal interests in this information, including at least some right to include, exclude, and control its use. Those interests might even rise to the level of a property right.

So what is Justice Gorusch saying? I think what he means is that property law is not so monolithic as his colleagues suggest. In other words, it's not simply what's yours is yours and what's mine is mine. Property is a bundle of sticks! (you knew I had to throw that in, right?). We've never really considered property to be monolithic when dealing with traditional assets (i.e., tangibles) and so why do we have to do so with data (non-rivalrous intangibles)? True, he doesn't come up with a big theory of data as property, but he does suggest there's room to figure that out--you don't have to jettison property law in order to deal with data/digital information.

In this way, the thinking of the majority that people have an interest in data (regardless of contract law) and the thinking of Gorsuch (the notion of property law being contextualized and nuanced when it comes to data) are quite reconcilable. 

Comment away!