By Daniel Lyons

Last week, Judge Yvonne Gonzalez Rogers released her long-awaited decision in Epic Games’ antitrust suit against Apple. As my colleague Mark Jamison discussed, the court largely vindicated the App Store business model, noting that “success is not illegal.” But Epic did not leave court empty-handed. The court enjoined Apple from enforcing its anti-steering provision — not because it violated federal law but rather because it violated California’s Unfair Competition Law.

Meanwhile, across the bay in San Francisco, the US Court of
Appeals for the Ninth Circuit on Tuesday heard oral argument in the broadband
industry’s challenge to California’s net neutrality law. Plaintiffs claim enforcement could
affect network operations nationwide. And businesses across the country have taken action to comply with the California Consumer
Privacy Act (CCPA).

For better or for worse, American tech policy is
increasingly being dictated from Sacramento.

California law,
extraterritorial effects

Though Epic lost its bid to declare Apple an illegal monopoly, it won a modest victory against Apple’s anti-steering provision, which prohibited app developers from directing customers to purchasing mechanisms outside their apps. (Judge Gonzalez Rogers expressed some concern at trial about this restriction, despite the Supreme Court upholding a similar provision in Ohio v. American Express.) Ultimately, the court found that this provision “threatens an incipient violation of antitrust law” by “preventing informed choice” among iOS users, which constitutes an “unfair” practice under California’s Unfair Competition Law.

Perhaps surprisingly, the court leveraged California law to
enjoin the provision nationwide. The question of whether a particular court can
enjoin conduct nationwide has been a hot topic in legal circles recently, as
individual federal judges have blocked politically controversial federal action
on topics such as healthcare and immigration policies. But this seems different
in kind than even those decisions: Judge Gonzalez Rogers has applied California
law to contracts between Apple and non-California developers, even if the
effects fall only on non-California residents. The injunction literally makes California
law the law of the land on this issue.

California’s tech-specific laws threaten similar
extraterritorial effects. SB822 requires California broadband providers to abide by
blocking, throttling, paid prioritization, and other prohibitions similar to
those that the Federal Communications Commission repealed in 2018. The act may
be read to regulate the nationwide practices of any broadband provider
operating in California, although it’s not clear this is California’s intent.
But even limiting the act to California-bound traffic could lead providers to
adopt California’s provisions nationwide to avoid balkanization and minimize
the risk of a violation. Indeed, this is why many businesses are abiding by the
CCPA even if they have minimal contacts with the state.

Federalism and tech
policy

Of course, California’s power to enact the will of California residents is a feature, not a bug, of our federalist system. Justice Louis Brandeis famously described the states as “laboratories of democracy,” in which states can “try novel social and economic experiments without risk to the rest of the country.” Through trial and error, this experimentation can lead to better policy than a single result dictated nationwide. Federalism also allows for differentiation of policy: What’s best for California may not be the same for Alabama, so generally decentralized authority allows each polity to enact its disparate preferences.

The great challenge to federalism is spillover effects — when one state’s action has effects beyond its borders. California is the world’s fourth-largest economy, so its decisions have an outsized impact on American companies. But its legislature consists of a Democratic supermajority whose views are often to the left of neighboring states. (It is currently debating a gender-neutral toy aisle mandate, which is unlikely to be a legislative priority in many other states.) This means Sacramento can effectively set national policy on certain issues despite being outside the national political median.

Courts are not unaware of this problem. One solution is the Dormant Commerce Clause, a judge-made doctrine that prohibits states from enacting legislation that unduly burdens interstate commerce. I have written elsewhere about the potential ways the Dormant Commerce Clause can affect state net neutrality laws. But most scholars agree that the doctrine is amorphous, and it’s difficult to predict in advance how such claims will fare.

Federalism is a key cornerstone of the American experiment.
Especially in an increasingly divided country, it is generally better to
devolve decision-making to the state and local level. California has every
right to protect its citizens in ways that it sees fit — as long as those
actions are not preempted by federal law. But policymakers should be cognizant
of spillover effects, particularly in network industries. As the national
economy grows increasingly intertwined, we should be aware of how state
regulatory decisions can reverberate nationally.

The post Apple, Epic, net neutrality, and privacy: California’s long shadow over tech policy appeared first on American Enterprise Institute – AEI.