Federalism in Cyberspace Revisited

Abstract:     
Transborder flow of digitized goods and services has become a major feature in the debate over Internet regulation. Some commentators have argued that the architecture of the Internet changes everything; others have replied that it changes nothing. This updated article addresses federalism issues raised by on-line interjurisdictional competition, arguing that despite the suggestions of the "unexceptionalist" school of commentary, Internet regulation remains anything but "business as usual." Analysis of interstate competition in law as a product is appropriate in determining the proper scope of state regulation of on-line activity. Two lines of constitutional cases define the parameters of proper interstate regulatory competition: those dealing with personal jurisdiction, and those dealing with the dormant commerce clause. Inherent in the Supreme Court's Due Process holdings is the principle that interstate diversity in law products is desireable and central to a federal system. The minimum contacts test of International Shoe and subsequent cases preserves the individual's right to vote with his feet in selecting among the law products offered by the several states. Competition for law as a product can only be maintained if states are prevented from externalizing the costs of their local regulations. The Supreme Court holdings regarding the dormant commerce clause indicate that this constitutional doctrine serves to prevent states from exporting their law products to other jurisdictions by attempting to control wholly extraterritorial activity. Although the Internet may in some cases facilitate externalization of state regulatory costs, centralized regulation by the federal government, rather than overreaching by the states, is the proper solution to such externalities.

Keywords: federalism, Tiebout, commerce clause, dormant commerce, jurisdiction, Internet, race to the bottom, race to the top

JEL Classifications: H73, O32 ,L86 , O19, O31, O33, O38, P16, R58, R53

Accepted Paper Series