Bernstein Shur Business and Commercial Litigation Newsletter #80

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Daniel J. Murphy, Paul McDonald

June 2018 | Issue 80

Our June recap addresses a Supreme Court case that overturned the “physical presence” rule for tax collection by online retailers, criminal charges unveiled against VW’s former CEO, passage of a unique data-brokering law in Vermont, and other news that will have an impact on business and litigation.

The U.S. Supreme Court has overturned the rule that prohibits states from requiring online retailers to collect sales tax unless they have a physical presence in the state.

In the case, South Dakota v. Wayfair, the Supreme Court overruled Quill v. North Dakota, 504 U.S. 298 (1992), which held that the Commerce Clause of the U.S. Constitution prohibited compelled collection of sales tax by retailers unless they maintained an in-state physical presence. The Commerce Clause, which grants Congress the power to “regulate Commerce … among the several States[,]” has been construed as prohibiting state regulations that inappropriately discriminate against or place undue burdens on interstate commerce. To that end, state tax laws that affect interstate burden will be permitted so long as they: (1) apply to an activity with a substantial nexus with the taxing State, (2) are fairly apportioned, (3) do not discriminate against interstate commerce, and (4) are fairly related to the services the State provides. In Wayfair, the Supreme Court concluded that the physical presence rule announced in Quill was “unsound” and “unworkable” in the modern age of online sales. Among other things, the majority, led by Justice Anthony Kennedy, noted that, despite a lack of a physical presence, a substantial nexus with South Dakota existed by way of economic and virtual contacts. It also noted that smaller retailers were protected because the South Dakota law applied only to online retailers with sales above $100,000 or sellers with 200 in-state transactions. In 2017, ME enacted a statute that is substantially similar to the South Dakota law.

Volkswagen is considering whether to seek monetary damages against its former Chief Executive Martin Winterkorn following the filing of criminal charges against him in the United States earlier this year.

In May, the indictment against Winterkorn was unsealed in the U.S. District Court for the Eastern District of Michigan, alleging that he conspired to violate the federal Clean Air Act and related authority. In the indictment, the Department of Justice alleged that Winterkorn and other VW executives were made aware of independent studies showing that affected VW diesel vehicles emitted smog-causing Nitrogen Oxide (NOx) at up to 35 times permissible limits. It further alleged that when faced with public disclosure of such results and a subsequent government investigation, VW executives, including Winterkorn, intentionally failed to disclose that the car-maker used sophisticated software designed to defeat U.S. emissions testing. In the wake of the indictment, VW’s board is considering seeking damages against Winterkorn to address the expense of retrofitting and buyback of vehicles.

Vermont has enacted the first law in the nation that regulates data brokers.

Data brokers purchase and sell personal information about individuals obtained through consumer transactions, online activities, and publicly available information. It is estimated that there are approximately 3000-4000 data brokers operating worldwide, with the largest company, Acxiom, claiming to have files on 10 percent of the world’s population. Among other things, Vermont’s data brokering law: 1) eliminates fees for a freeze of credit reports after a data breach; 2) prohibits fraudulent acquisition of data; 3) provides concrete standards for minimum data security requirements for commercial data brokers; and 4) includes additional provisions designed to increase transparency regarding data brokering activities.

Justice Anthony Kennedy announced that he would retire his seat on the U.S. Supreme Court as of July 31, 2018.

Justice Kennedy, who often provided crucial “swing” votes on notable cases, is to step down from the bench after more than three decades of service on the High Court. During his tenure, Kennedy authored many significant opinions. Those opinions include the following: Citizens United v Federal Election Commission (holding that political spending is a form of protected speech under the First Amendment and that corporations have a constitutional right to spend money in support of individual candidates in elections); Planned Parenthood v. Casey (upholding constitutional protection of the abortion rights under the Fourteenth Amendment, while introducing the “undue burden” standard of review); and Ashcroft v. Iqbal (implementing more stringent pleading standards in federal court, requiring sufficient factual allegations to allow a claim for relief to be “plausible on their face.”). Analysts belief that Judge Brett Kavanaugh, a former Kennedy law clerk, is a front-runner to replace the retiring jurist.