Internet retailers face looming duty to collect out-of-state tax

Online shopping is hugely popular but not with state governments. For years, states have complained the internet shopping boom is costing them billions in tax revenue thanks to a long-standing law that prevents them from taxing distant retailers.

That’s set to change after a Tuesday Supreme Court decision that opens the door wide for states to expand their tax collection powers, and that will likely affect Amazon as well as smaller internet retailers.

In the ruling, Justice Anthony Kennedy said that the growth of the internet means it’s time for the top court to revisit a 1992 decision called Quill, which held that states can’t force a business to collect tax in a given state unless it has a physical presence there.

The Quill case, which was about mail-order catalogues, ensured that businesses didn’t have to worry about collecting and remitting taxes to dozens of different governments every time they made a distant shipment.

At the time, the decision was uncontroversial, presumably because people didn’t whip out a mail-order catalogue every time they fancied a purchase. That’s not the case today, however, since online purchases are so easy. On Tuesday, Justice Kennedy noted this trend and its impact on state coffers:

When the Court decided Quill, mail-order sales in the United States totaled $180 billion. … But in 1992, the Internet was in its infancy. By 2008, e-commerce sales alone totaled $3.16 trillion per year in the United States … Colorado’s losses in 2012 are estimated to be around $170 million. States’ education systems, healthcare services, and infrastructure are weakened as a result. […]

Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier

The ruling also comes at a time when main street retailers are increasingly upset at online competitors who, they say, offer lower prices since they don’t have to charge tax. Those retailers have been pushing the Marketplace Fairness Act, a bipartisan bill that would eliminate Quill as an obstacle for out-of-state tax collection, but one that has repeatedly failed to pass Congress.

But now the Supreme Court decision could make the Marketplace Fairness Act unnecessary. Instead, state governments may now be emboldened to simply write new tax collection laws, and then rely on Kennedy’s words if they are challenged in court.

The outcome is hardly a sure thing, of course, especially since Tuesday’s case was about a wonky procedural issue, and not about tax collection directly. (Kennedy’s words will instead lay the table for any state or group that aspires to challenge the Quill ruling head-on).

Meanwhile, those who oppose expanding out-of-state tax collection powers are unlikely to give up the fight. These opponents include the five states (Oregon, Delaware, Alaska, Montana and New Hampshire) that have no sales tax in the first place, and whose political leaders will argue it’s unfair for their businesses to have to carry out tax collection on behalf of others. The business community, led by the Wall Street Journal (paywall), have also opposed expanding out-of-state tax collection on the grounds that it could force retailers to deal with red tape in the forms of hundreds of city, state, country and Native American tax authorities.

(To get a deeper flavor of the legal issues at play, see Adam Liptak in the New York Times or Harvard Law professor Noah Feldman, writing at Bloomberg View)

Brands can’t use copyright to stop resales, court confirms

In 2013, the fate of everything from used bookstores to neighborhood garage sales hung in the balance as the Supreme Court decided whether it was legal for people to sell secondhand goods without the permission of the original owner. Fortunately for resellers, the court said it was and, this week, a new court ruling cleared up the issue once and for all — for physical goods that is. Digital possessions are still a different story.

If you’re unfamiliar, the Supreme Court case was about imported textbooks, but the reason the issue had become a national fuss in the first place was thanks to watch maker Omega, which made a devious decision to stop the retailer Costco from importing its watches.

Omega did this by putting a small picture on the watch, and then pointing to an ambiguous part of the Copyright Act (“lawfully made under this title”) to say that a right to resell works under copyright only applied if the goods were made in the U.S.

Even if Costco had bought the watches fair and square overseas, Omega argued, the small picture meant that the watches were covered by copyright law, and that Costco could not around and sell them in its U.S. stores. To the surprise of many, an appeals court in California bought this argument and, all of a sudden, anyone selling used goods not made in the U.S.A. faced the nasty possibility of having to seek permission from the overseas owner.

The ensuing legal squabble between Costco and Omega actually reached the Supreme Court in 2010, but resulted in a rare 4-4 tie, leaving the situation in further limbo. It wasn’t until the textbook case in 2013, known as Kirtsaeng, that the court finally cleared up the matter, ruling 6-3 that the so-called “first sale” doctrine — which ends the control of copyright owner to limit sales — applied to goods bought anywhere.

And now, in a bit of mop-up work, the California appeals court this week returned to the original Costco-Omega fight, but this time sided resoundingly with Costco.

Project Disco has a good write-up of the decision but, in short, the upshot is that a three-judge panel applied the Supreme Court textbook case to put a stop to Omega’s campaign. And in an interesting twist, one of the judges wanted to go further and uphold a lower court finding that Omega had committed “copyright misuse.”

While the whole affair might seem to be no more than a question of common sense, the issue of “first sale” could become a hot issue in the future as a result of many of our possessions becoming digital. Unlike a book or record on our shelf, we don’t actually own our iTunes songs or Kindle copies — we simply license them at the whim of Apple and Amazon. This situation has led some to argue before Congress, which is currently reviewing the state of copyright law, that there should also be a digital right of resale.

Supreme Court strips more power from controversial patent court

The Supreme Court issued a ruling Tuesday that will have a significant impact on the patent system by limiting the ability of the Federal Circuit, a specialized court that hears patent appeals, to review key findings by lower court judges.

The 7-2 patent decision, which came the same day as a high profile ruling by the Supreme Court on prisoner beards, concerns an esoteric dispute between two pharmaceutical companies, Teva and Sandoz, over the right way to describe the molecule weight of a multiple sclerosis drug.

The Justices of the Supreme Court, however, appears to have taken the case in part because it presented another opportunity to check the power of the Federal Circuit, which has been subject to a recent series of 9-0 reversals and which some regard as a “rogue court” responsible for distorting the U.S. patent system.

As for the legal decision on Tuesday, it turned on the question of whether the Federal Circuit judges can review patent claim findings as they please (“de novo”) or only in cases where they has been serious error. Writing for the majority, Justice Stephen Breyer concluded that the Federal Circuit could not second guess how lower courts interpret those claims (a process called “claim construction”) except on rare occasions.

Since claim construction is an important first step in deciding whether a patent has been infringed, this means that federal district judges throughout the country — rather than the Washington, D.C.-based appeals court judges — will have the final say in far more patent cases:

The ruling may also have implications for the tech industry, which has been frustrated by the Federal Circuit’s willingness to disregard the findings of highly respected jurists, such as Justice Richard Posner’s interpretation of “tap” and “swipe,” and Justice Alex Kozinski’s interpretation of navigation and Google Street View.

(Update: As Brian in the comments points out, Google and other tech companies submitted a friend-of-the-court brief in favor of preserving the Federal Circuit’s de novo review power. And on Twitter, some have suggested — here and here — that the ruling could benefit patent holders).

For the Federal Circuit, the ruling is another blow to its prestige and authority following an ethics scandal that last year led to the resignation of its Chief Justice.

Overall, the Supreme Court ruling also comes at a time when all three branches of government appear to be skeptical about the current state of the patent system. This includes Congress, which is expected to propose a law next month to reform abuses by patent trolls.

For those curious about the details of Tuesday’s decision, I’ve pasted a couple key paragraphs below (emphasis mine). The full majority opinion, from which Justices Thomas and Alito dissented, is further down.

Indeed, we referred to claim construction as a practice with “evidentiary underpinnings,” a practice that “falls somewhere between a pristine legal standard and a simple historical fact.” 517 U. S., at 378, 388, 390. We added that sometimes courts may have to make “credibility judgments” about witnesses. Id., at 389. In other words, we recognized that courts may have to resolve subsidiary factual disputes. […]

Finally, practical considerations favor clear error review. We have previously pointed out that clear error review is “particularly” important where patent law is at issue because patent law is “a field where so much depends upon familiarity with specific scientific problems and principles not usually contained in the general storehouse of knowledge and experience.” Graver Tank & Mfg. Co. v. Linde Air Products Co., 339 U. S. 605, 610 (1950). A district court judge who has presided over, and listened to, the entirety of a proceeding has a comparatively greater opportunity to gain that familiarity than an appeals court judge who must read a written transcript or perhaps just those portions to which the parties have referred. Cf. Lighting Ballast, 744 F. 3d, at 1311 (O’Malley, J., dissenting) (Federal Circuit judges “lack the tools that district courts have available to resolve factual disputes fairly and accurately,” such as questioning the experts, examining the invention in operation, or appointing a court-appointed expert)


Teva v Sandoz Fed Circuit Smackdown

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The trouble with the Supreme Court’s go-slow approach to tech

Chief Justice John Roberts published a report on the judiciary this week, and much of his meditation focused on technology, and courts’ historical reluctance to adopt it. He described, for instance, how the Supreme Court’s use of pneumatics (sending documents around via vacuum tubes) led a reporter in 1968 to describe the process as “perhaps the most primitive … in the entire communications industry.”

The tubes were finally removed in 1971, but the Supreme Court continues to go slow on other technologies. It won’t be until 2016, for instance, that the top court will begin to offer an internet-based filing system, according to Roberts. In the meantime, paper will be the only option.

For the Chief Justice, however, this plodding pace is a virtue:

Like other centuries-old institutions, courts may have practices that seem archaic and inefficient— and some are. But others rest on traditions that embody intangible wisdom. Judges and court executives are understandably circumspect in introducing change to a court system that works well until they are satisfied that they are introducing change for the good.

As technology proceeds apace, we cannot be sure what changes are in store, for the courts or society generally.

In some ways, Roberts is right. Courts are the antithesis of Silicon Valley startups, and must take the long view of important issues, including technology. What if the judiciary had swallowed the Valley’s 2013 views of wearable tech, and issued Google Glass to every sitting judge?

Roberts also makes a very good point about how the judiciary’s unique security situation affects tech adoption. As he explains, courts receive incredibly sensitive information, from criminal conspiracies to trade secrets, and their decisions can move markets. It would be disastrous to the country’s security and economy if Sony-style hackers could root around in internal court networks. (Fortunately — and perhaps ironically — the Supreme Court’s archaic paper practices means it may already be employing “air gaps” of the sort preached by IT security types).

Overall, however, the Chief Justice’s outlook on technology is unsatisfying. That’s because, in the interest of burnishing the mystique of the judiciary, Roberts misses an opportunity give the federal court system a much-needed kick in the rear.

A preference for paper

Rather than call attention, for instance, to the sorry state of the courts’ PACER system, which was subject to scandals over pricing and disappearing documents in 2014, Roberts concludes his article by waxing on about the tortoise-and-hare sculptures surrounding the court.

He also appears to miss the point when it comes to the internet’s potential for access to justice. In a well-meaning but odd comment, he suggests that the court must think of those who scribble out paper pleas (emphasis mine):

Unlike commercial enterprises, the courts cannot decide to serve only the most technically-capable or well-equipped segments of the public. Indeed, the courts must remain open for those who do not have access to personal computers and need to file in paper, rather than electronic, form.

Roberts’ comment is puzzling since even the most indigent will likely have some form of internet access by 2016, and because it assumes that trudging up the Supreme Court steps in Washington with an armful of paper is somehow more accessible than an online platform. Meanwhile, the Chief Justice completely ignores how courts’ failure to provide electronic access deprives impoverished litigants of the caselaw that is indispensable for persuading a judge. (Update: as law professor Orin Kerr notes, Roberts may have been contemplating prisoners without internet access).

And finally, the Chief Justice elides the fact that the reason that many judges stay tuned out to tech is simply because they can. For them, as for many older people, technology can be bothersome and intimidating, and day-to-day work life is easiest by doing things the same way one has always done them.

This is a problem, however, given that many of the most pressing legal and social issues we face today revolve around technology: NSA data-plundering, Facebook privacy policies, and borderless cloud computing are just some examples of how technology looms even larger today than it has in previous eras. And judges are the ones who have to sort out what the rules should be — rules that will be much better if the people making them are familiar with the tech they’re talking about.

Who gets it right

The good news is that some judges are already doing an excellent job of this. U.S. District Judge William Alsup, who taught himself Java before a huge Google-Oracle trial, is one example. So is his Northern California colleague, Lucy Koh, for whom Facebook is as familiar as the Federalist Papers.

Meanwhile, Roberts and the other Justices of the Supreme Court, in recent rulings on cell phones, have shown they (or their law clerks) get the implications of new computer technology. And if you want to see a court doing it right, the state of New York’s SCROLL system provides free and easy access to many documents — there’s no reason other courts can’t too.

Overall, though, courts across the country are woefully behind in using the internet to offer information and, with it, access to justice. Chief Justice Roberts missed a chance with his report to show some leadership, and force more judges to participate in the internet age. Here’s a copy of the report, which is worth reading in full:

Chief Justice 2014 Report

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Supreme Court sides with Amazon in worker security screening case

The Supreme Court handed employers a clear victory on Tuesday, ruling 9-0 that Amazon does not have to compensate workers for the time they spend waiting to clear security searches at the end of their shift.

The case, which was brought by Amazon warehouse workers in Nevada, will also affect companies like [company]Apple[/company], which is facing a similar court challenge over whether it must pay employees while they stand around for anti-theft procedures.

Writing for the unanimous court, Justice Clarence Thomas concluded that a California appeals court erred by focusing on the fact that the security searches were ordered by the employer. The proper test, he ruled, was instead whether the activity in question was essential to the job that the workers were being paid to perform:

The Court of Appeals erred by focusing on whether an employer required a particular activity. The integral and indispensable test is tied to the productive work that the employee is employed to perform. […]

The fact that an employer could conceivably reduce the time spent by employees on any preliminary or postliminary activity does not change the nature of the activity or its relationship to the principal activities that an employee is employed to perform.

Thomas also pointed to examples from earlier court cases in which employees performed duties that would qualify to receive payment. These included the time meatpacking workers had to spend sharpening knives, and battery factory workers who had to shower to remove toxic chemicals. In contrast, Thomas added, the time [company]Amazon[/company] warehouse workers spent on security searches was more like the unpaid time poultry workers spent putting on equipment — in both cases, the activity was “two steps” removed from the productive activity for which they were being paid.

Overall, the 14-page decision brings renewed clarity to a labor statute known as “the Portal-to-Portal Act of 1947,” which Congress passed in order to define the beginning and end of the workday.

For Amazon, the ruling means the end of a legal claim that sought $100 million in back wages on behalf of 400,000 workers who worked directly for Amazon and for various staffing agencies used by the retail giant. More broadly, it will also likely end ongoing and would-be class action cases faced by other retailers who employ security searches.

In a statement, Amazon repeated its contentions that the workers’ claims were largely unfounded:

“The allegations in this case were simply not true – data shows that employees typically walk through security with little or no wait, and Amazon has a global process that ensures the time employees spend waiting in security is less than 90 seconds.”

For workers, who have claimed that the unpaid anti-theft searches can take up to 30 minutes every shift, the ruling is a clear defeat.

The decision included a brief concurrence written by Justice Sonia Sotomayor, joined by Justice Elena Kagan, which reaffirmed that “preliminary or postlimininary” activities were not compensable under the Portal-to-Portal Act.

Here’s the ruling.

SCOTUS Busk Ruling

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This story was updated several times on Tuesday morning.

Facebook threats and the Supreme Court: a guide to today’s case

The Supreme Court on Monday will hear the appeal of a man who went to prison for posting violent rants on Facebook. The case will shape the future of what people can and can’t say online, and is being closely watched by the tech industry, domestic violence groups, and civil libertarians