Taxing the Internet

Tuesday, January 26th, 2010

The US Supreme Court yesterday (25 January 2010) decided Hemi Group, LLC v. City of New York,, ___ US ___ (2010). (The link goes to the slip opinion of the Court, which is a .pdf).

Hemi Group sells cigarettes over the internet. They are based in New Mexico, well outside of the usual jurisdictional reach of New York City and its ordinances.

New York City has a city ordinance putting a surcharge tax of $1.50 per pack on all cigarettes sold within the five boroughs.

New York City likes the $1.50 it gets for every pack of cigarettes sold in the City; that’s a lot of $1.50 payments rolling in, and it produces significant income to the City. They are backed up by federal law: the Jenkins Law 15 U. S. C. §§375-378, requires out-of-state sellers to
submit customer information to the States into which they ship cigarettes, and New York State has agreed to forward that information to the City.

Hemi Group sells its cigarettes over the internet without registering with anybody and they certainly do not disclose their customer list to some City agency. After all, customer lists are commonly acknowledged to be trade secrets, and Hemi’s customers don’t need the City chasing them down to tax them for their packs of cigarettes: why should Hemi divulge just so New York can collect its surcharge?

New York City sued Hemi Group, LLC under RICO to recover the lists to enable them to go after the City residents who bought tax-free cigarettes.

The City’s theory went something like this:

Hemi committed fraud by selling cigarettes to City residents and failing to submit the required customer information to the State. Without the reports from Hemi, the State could not pass on the information to the City. Therefore, some customers who were legally obligated to pay the cigarette tax to the City failed to do so. Because the City did not receive the customer information, it could not determine which customers had failed to pay the tax. Without that information, the City could not pursue those customers for payment. The City thereby was injured in the amount of the portion of back taxes that were never collected.

It turns out that the City chose the wrong statute under which to sue. RICO requires a direct causation link between the deed and the harm. There are just too many layers here, since the Jenkins Act goes through the State. Thus, under RICO, not only must “but-for” causation exist, but also proximate causation must be very proximate, especially when dealing with a case that transcends jurisdictional lines over the internet.

On the surface (and I haven’t had the chance yet to read this case much below the surface), I like this case. RICO is a tough statute that carries some stiff penalties, as well it should: racketeering and corruption are things that, as a society, we’d like to discourage. However, RICO is just a wee bit too much for a firm that simply fails to register with a state before doing business in that state. Heck, if RICO applies every time a business does business across state lines without registering first, many, if not most, small enterprises would be promptly out of business because their owners would be in the federal pen. This is true more than ever with the geographic seamlessness of the internet; people in California can get to the website of a small business here in Schenectady just as easily as can the next door neighbor to the business. Does the internet mean that every small business has to register in every state? This case, on first reading, indicates probably not. Thank goodness.

Tags: Cyberlaw, e-commerce, RICO, US Supreme Court
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Supreme Court Justice Sonia Sotomayor gets feisty on big bench debut

Thursday, September 10th, 2009

Supreme Court Justice Sonia Sotomayor gets feisty on big bench debut.

It’s always fun to watch what the Nine Wise Ones are doing, but if this is “feisty,” the reporter who wrote this piece hasn’t seen many oral arguments before any appellate court, let alone the US Supreme Court.

Justice Sotomayer, the newbie Justice and the first Obama appointee to the High Court, asked a couple of questions. Supreme Court justices do that. So do appeals court judges. Usually they ask more than a couple of questions. There are times when the lawyers arguing the case can’t catch their breaths from the barrage from the bench. Seems to me that Justice Sotomayer sounds pretty restrained, not “feisty.”

But that’s me.

BTW, I’m glad to see that she doesn’t feel obligated to wear the ruffles and fluff around the collar that her two lady predecessors on the Court insist on wearing. Her picture is in a plain black robe, which is what every Supreme Court Justice should wear, regardless of gender.

Welcome to the highest bench, Justice Sotomayer.

For public consumption, Justice Sotomayer’s colleagues on the US Supreme Court bench are:

Chief Justice John G. Roberts, Jr. (Bush II)
Associate  Justice John Paul Stevens (Ford)
Associate Justice Antonin Scalia (Reagan)
Associate Justice Anthony M. Kennedy (Reagan)
Associate Justice Clarence Thomas (Bush I)
Associate Justice Ruth Bader Ginsburg (Clinton)
Associate Justice Stephen G. Breyer (Clinton)
Associate Justice Samuel A. Alito, Jr. (Bush II)

Two Justices have retired in recent memory:

Associate Justice (Ret.) Sandra Day O’Connor (Reagan)
Associate Justice (Ret.) David H. Souter (Bush I)

It’s fun to see how these people stack up politically (yeah, I know, the US Supreme Court is supposed to be free of politics. Ri-i-i-ight.). The appointing president is a good indicator of whether a Justice will swing toward the liberal or the conservative.

Those appointed by conservative presidents:

Roberts
Stevens
Scalia
Kennedy
Thomas
Alito

Those appointed by liberal presidents:

Ginsburg
Breyer
Sotomayer

Justice Stevens has been known to decide liberally, as has Justice Kennedy. I don’t know Chief Justice Roberts well enough yet to know how he leans (I suspect he’s a dyed-in-the-wool conservative, though), and Justice Sotomayer is, of course, brand-new (though she seems to be fairly liberal in her views). Justices Scalia, Thomas and Alito are pretty straight-line conservative, and Justices Ginsburg and Breyer are pretty straight-line liberal.

Heaven help Roe v. Wade with this line-up.

Tags: Justice Sonia Sotomayer, US Supreme Court, US Supreme Court Justices
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In re Bilski is Good Law Until the US Supreme Court Says Otherwise (Article – WSJ.com)

Thursday, July 9th, 2009

Article – WSJ.com. Subscription required after WSJ takes this article off the free space on its site.

In re Bilski is being applied as it waits for its hearing before the US Supreme Court in the fall as Bilski v. Doll. A Ninth Circuit district court judge ruled a business method patent invalid based on the Bilski standard of transformative use. The patent holder, DealerTrak Holdings, Inc., intends to appeal the holding.

This is a good chance for me to take a flying leap of logic and talk about how case law and the courts work in the USA.

We have two court systems: the federal system (which holds exclusive jurisdiction over matters involving federal statutes like patent and copyright) and the states’ systems (which holds jurisdiction over state-based matters like contracts and torts). These systems come in hierarchies. I’ll talk about the federal system only (state systems vary from state to state, but they follow this same basic model).

In the federal system, the lowest court is the district court. These are the trial courts; this is the only place where the parties actually have to show up. This is where juries are sworn, testimony is taken, and a record of the litigation is produced (through transcription and discovery). The record is very, very important. There is at least one district court in every state.

The district court judges, who are Article III judges with lifetime appointments just like their appellate brethren, can appoint, under Article I of the Constitution, so-called “magistrate” judges (I was lucky enough to take my law-school Trial Advocacy class with the New Hampshire magistrate, Hon. James Muirhead). Magistrates handle a lot of pre-trial work; they also sometimes handle the trial, if the parties agree. Magistrates report to the district judges. Magistrates’ appointments are for a term of years, not for life.

The district court judges and magistrates must follow the holdings of every appellate court that sits directly above them as they make their decisions. The Court of Appeals for the Federal Circuit (CAFC) sits above each and every district court in matters where the CAFC has exclusive jurisdiction — like patent matters. This means that the district court judges must know and apply CAFC law when deciding matters that fall under the exclusive jurisdiction of the CAFC, no matter which so-called “circuit” the district court sits in. If the matter does not fall within the exclusive jurisdiction of the CAFC, then the district court must apply the case law of its own individual circuit court of appeals, as well as its own case law. It must also, of course, follow US Supreme Court case law. The district court can overturn its own case law, but it must follow the case law from its own circuit court and the CAFC, and from the US Supreme Court.

The US has 13 circuits (numbered 1-12, and the federal circuit). Each circuit has one regional court of appeals; they hear the cases that come out of the district courts with a decision with which one of the parties is unhappy. They rule based solely on the record of the case (which is why the record is very, very important), the attorneys’ briefs, and sometimes oral arguments, and on existing law, including their own and US Supreme Court case law. It is free to overturn its own case law. It can follow the holdings of other circuits or it can branch out on its own and hold something entirely different.

When there is a split in the circuit courts of appeal on a question of law, the field is ripe for the US Supreme Court to step in to settle the matter (another ripening field for the US Supreme Court is when one of the lower courts rules in a way that they think needs to be examined). The US Supreme Court can pick and choose most of the cases it will hear (there are some that it must hear, specifically those with which original — trial — jurisdiction rests with them, such as disputes between the states), and it does not choose to hear most of the petitions for writs of certiorari (“cert”) that come before it. Denying cert says nothing about the case below; it simply says that the US Supreme Court chooses not to hear the matter.

The US Supreme Court sits above all other courts (both state and federal) in the country. The only case law it must apply (and it is free to overturn this) is its own.

Courts do not like to overturn their own case law. It tends to make something of a splash in the legal world when a court does that, and the higher the court is, the bigger the splash an overturned case makes.

Bilski has been decided by the CAFC. The holding — well, the parties disagree with it; hence the petition for cert to the US Supreme Court. The US Supreme Court granted cert on this one; they will hear and finally decide the questions presented by the case. Until the Nine Wise Ones (or at least a majority of them) say otherwise, the CAFC rule of “transformative use” stands, and by the CAFC ruling the district courts are bound.

Tags: appellate judge, Bilski v. Doll, DealerTrak Holdings, district judge, federal courts, federal judiciary, Hon. James Muirhead, In re Bilski, Inc., magistrate, US federal court system
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In re Bilski again

Friday, July 3rd, 2009

The US Supreme Court has granted cert on In re Bilski (now styled Bilski v. Doll). The case is now pending before the Nine Wise Ones. Here are the court filings (from the point of view of the USPTO).

Bilski, as you recall, requires that business method patents have some sort of “transformative” characteristic — that is, the invention must somehow transform data or information input into something surprisingly different coming out.

The questions presented to the Court are:

1. “Whether the Federal Circuit erred by holding that a “process” must be tied to a particular machine or apparatus, or transform a particular article into a different state or thing (“machine-or-transformation” test), to be eligible for patenting under 35 U.S.C. § 101, despite this Court’s precedent declining to limit the broad statutory grant of patent eligibility for “any” new and useful process beyond excluding patents for “laws of nature, physical phenomena, and abstract ideas.”

2. “Whether the Federal Circuit’s “machine-or-transformation” test for patent eligibility, which effectively forecloses meaningful patent protection to many business methods, contradicts the clear Congressional intent that patents protect “method[s] of doing or conducting business.” 35 U.S.C. § 273.

I hope Bilski gets overturned; I don’t like its holding. I REALLY hope Bilski gets overturned.

Tags: "machine or transformation" test for patent eligibility, Bilski v. Doll, In re Bilski, Questions presented, US Patent & Trademark Office, US Supreme Court
Posted in Patent, US Supreme Court | 1 Comment »

Small world…

Wednesday, May 27th, 2009

If the YouTube embedded video does not show up, here’s the URL.

The Rule of Six never ceases to amaze me. You know, the one that says that there are only six degrees of separation between every living human being on the planet.

Shortly after I posted the new US Supreme Court nominee mention, I got a FaceBook message from the mother of one of my daughter’s college friends telling me that the Judge Sotomayor’s brother is my friend’s allergist.

I do think an introduction is in order here.

Tags: Judge Sotomayer, Rule of Six, US Supreme Court
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Sotomayor nominated to high court

Tuesday, May 26th, 2009

Sonia Sotomayor nominated to high court — first Hispanic – Yahoo News.

So. US Supreme Court Justice David Souter has a potential successor. A female, brainy, bipartisan appellate judge (who was first appointed to the federal bench by President Bush I and appointed to the federal appellate bench by President Clinton) with lots of judicial experience (this is Good) who has a rip-roaring case of juvenile diabetes (this is not so good).

I like her as a potential Supreme Court Justice (the first Hispanic and the third woman in the history of the Court); she’s careful, not flashy and keeps her views to the case at hand, but I wonder how the rigors of life among the Nine Wise Ones will wear on a fragile system. Well, assuming she’s appointed (and appointment, while likely, ain’t certain; she has her detractors on the Senate Judiciary Committee, who are throwing around phrases like “judicial activist with her own agenda”), we shall see.

Congratulations, Judge Sotomayor. May your decisions be sound for a long time to come.

And thank you, Justice Souter, for waiting to retire until after Mr. Obama was sworn in!!!!!

Tags: Associate Justice David Souter, Judge Sonia Sotomayor, US Supreme Court
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