CURRENT MONTH (February 2021)
Facebook Must Provide Electronic Communications Related to its FTC Settlement
By Reuben Gottlieb, Young Conaway Stargatt & Taylor LLP
In Employees’ Retirement System of Rhode Island v. Facebook, Inc., C.A. No. 2020-0085-JRS (Del. Ch. Feb. 10, 2021), an action under Section 220 of the Delaware General Corporation Law, the Delaware Court of Chancery examined whether stockholders of Facebook, Inc. were entitled to documents to investigate Facebook’s data privacy practices after the 2019 Cambridge Analytica Scandal. Facebook and the FTC reached a $5 billion settlement, which stockholders alleged was made to protect Facebook CEO Mark Zuckerberg from substantial personal liability. Under Delaware law, the stockholders had a right to demand books and records regarding the settlement. Facebook refused to provided documents related to electronic communications and privileged documents concerning the FTC negotiations. However, the court ruled that while the plaintiff successfully demonstrated the limited non-privileged communications were necessary and essential to pursue its purposes for inspection, they had failed to demonstrate good cause under the fiduciary exception to attorney-client privilege.
As to the electronic communications, Facebook argued that it had already produced “sufficient” information to fulfill its obligations to assist the plaintiff with its inspection. The court held that the information already provided by Facebook failed to allow the plaintiff to conduct a Section 220 action. While mentioning the FTC investigation, Facebook’s privilege log failed to provide substantive insight into Facebook’s decision-making process for settling with the FTC.
Regarding the privileged communications, the court ruled that the plaintiff had not sufficiently demonstrated that the privileged information was unavailable elsewhere. Therefore, the court found the plaintiff had not sufficiently carried the burden necessary for the court to compel production of the privileged communications.
Maryland Tax on Technology Revenues Challenged in Court
By John E. Ottaviani, Partridge Snow & Hahn LLP
Can Maryland tax the Internet? The Maryland General Assembly says “Yes,” but a complaint filed in Federal court in Baltimore in February says “No.”
The new Maryland law seeks to bring Maryland’s tax regime into the modern world of online and social media advertising. Under the new law, Maryland would tax revenue that certain companies make on digital advertisements shown in Maryland. The tax rates would only kick in when a company’s global annual gross revenues reach $100 million and would range from 2.5 % up to 10% for companies with annual gross revenues of $15 billion or more.
The lawsuit, filed in U.S. District Court in Baltimore, contends the law “is illegal in myriad ways.” It alleges the law violates the federal Internet Tax Freedom Act, a 1998 federal law that prevents "state and local governments from taxing internet access, or imposing multiple or discriminatory taxes on electronic commerce," according to the Congressional Research Service, as well as the Constitution’s commerce and due process clauses. The plaintiffs include the U.S. Chamber of Commerce and a coalition of industry groups and companies including Amazon, Google and Facebook.
The moratorium on taxing internet access and electronic commerce in the Internet Tax Freedom Act was supposed to last only three years but has been renewed eight times. With states needing revenue to deal with COVID-related expenses, the case is being watched closely to see if it provides a roadmap for other states to bring in revenue from the big technology companies.
Ninth Circuit Orders Arbitration for Proposed Alexa Class Action
By Frank Hosking, Drexel University Thomas R. Kline School of Law
On February 19, 2021, the United States Court of Appeals for the Ninth Circuit, in a split panel decision, reversed the district court’s decision and sent the claims of a proposed class action suit against Amazon’s Alexa to arbitration. Tice v. Amazon.com, Inc., No. 20-55432 (9th Cir. 2021). The majority held that the district court erred in preventing the surreptitious recording claims from going to arbitration.
The class action suit was brought by Hayley Tice, who alleged civil claims and sought civil remedies under the California Invasion of Privacy Act. Tice alleged that she and other class members were injured as a result of Amazon’s voice activated device, Alexa, recording their communications without their consent.
The majority found that the district court too narrowly construed the arbitration clauses to cover only Tice’s use of the Alexa device. Rather, the arbitration clauses broadly stated that any disputes or claims arising from any use of Amazon products or devices were subject to arbitration. Accordingly, the majority declared that whether the surreptitious recordings were beyond the scope of arbitration was a question for the arbitrator to decide and one concurring judge found that the complaint suffered from a jurisdictional defect because it alleged no specific instances of being recorded surreptitiously.
The dissenting judge concluded there was no contract between Tice and Amazon that would require arbitration, and if there were such a contract, the claims were outside the scope of the contract and therefore not subject to arbitration.
First Circuit Upholds Warrantless Border Searches
By Roxanne Eastes, Young Conaway Stargatt & Taylor, LLP
In a recent ruling, the U.S. Court of Appeals for the First Circuit held that searches of cellphones and other electronic devices at the U.S. border do not require a warrant or even probable cause and that these searches were not limited to searches for contraband. Alasaad v. Mayorkas, No. 20-1077 (1st Cir. Feb. 9, 2021).
The Court of Appeals found that the government’s security interests are at their “zenith” at the border and that the two policies in question allowing for warrantless electronic device searches did not violate the First or the Fourth Amendment.
The First Circuit split from the Ninth Circuit, which previously held that warrantless searches are restricted to searches for contraband, finding that holding too narrow. It joined the Eleventh Circuit in holding that advanced searches of electronic devices at the border do not require a warrant or probable cause and agreed with the Ninth and Eleventh Circuits that basic border searches of electronic devices are routine searches that may be performed without reasonable suspicion.
The Court of Appeals noted in its opinion that the First Circuit is the first circuit to tackle these issues in a civil case, although several others had addressed similar issues in criminal cases.
Online Gambling Wins in the First Circuit
By John Ottaviani, Partridge Snow & Hahn LLP
In January 2021, the U.S. Court of Appeals for the First Circuit determined that the 1961 federal Wire Act prohibitions on interstate gambling only apply to sports betting and not to other types of betting and gambling, such as online raffles and sweepstakes, online poker and online lotteries. New Hampshire Lottery Commission v. Rosen, No. 19-1835 (1st Cir. Jan. 20, 2021).
The Wire Act provision in dispute states that using “a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest” is illegal. In 2011, the Department of Justice’s Office of Legal Counsel (OLC) issued an opinion clarifying that this prohibition only applies to sports bets and not to other forms of gambling such as online lotteries. However, in 2018, the OLC reversed its position and issued a new opinion, which said that the Act was “not uniformly limited to gambling on sporting events or contests”. Instead, it said only the portion referring to “assisting in the placing of bets or wagers” was limited just to sports.
To protect its online lottery established in reliance on the OLC’s 2011 opinion, the New Hampshire Lottery Commission and one of its vendors challenged the OLC’s 2018 interpretation in the federal district court in New Hampshire. The district court found that the OLC’s 2018 opinion violated the federal Administrative Procedure Act, and also found that the Wire Act’s prohibition only applies to bets and wagers on sporting events or contests.
On appeal, the First Circuit reviewed the legislative history of the Wire Act, and also the different interpretations offered by the parties. After deciding that the statutory language was unclear, the First Circuit concluded that, when considering the statue as a whole, the interpretation that the entire statute covers only bets or wagers that are placed on sporting events is “the most natural reading” and therefore correct. The First Circuit also noted that this interpretation would be consistent with that of a 2002 Fifth Circuit decision.
Unless a contrary opinion is issued by the Supreme Court, for now the decision removes the uncertainty of Wire Act liability for all sorts of online gambling activities, including non-profit raffles, online poker and online lotteries. Of course, these activities still need to run the gauntlet of a myriad of other federal and state laws restricting and regulating such activities. The online sports betting industry, however, will need to wait for Congressional action, or DOJ indication of non-enforcement, to reduce its risk of liability.