This week, the Ninth Circuit explores the constitutionality of a state statute aimed at protecting consumer information given to car dealers, and clarifies the preemptive scope of federal regulatory approval of food labels.
The Court holds that plaintiffs were unlikely to succeed in showing that the Arizona legislature’s Dealer Law—a statute aimed at strengthening privacy protections for consumers whose data is collected by car dealers and restricting anticompetitive business practices by technology companies that provide database services for dealers—was either preempted by the Copyright Act or unconstitutional under the Contracts and Takings Clauses.
The panel: Judges William A. Fletcher, Miller, and Forrest, with Judge Miller writing the opinion.
Key highlight: “The law advances its purposes in a reasonable way. The record shows that contractual restrictions on third-party access to [Dealer Management Systems] have led many dealers to download their data in plain text and email it in an unsecured format to their application providers. By ensuring that third-party providers have direct access to dealer data through a secure API, the Dealer Law eliminates the incentive for dealers to resort to unsecured email transfers. At the same time, as the district court explained, the law advances its pro-competitive purpose by prohibiting a provider ‘from monopolizing data that is not its own to its great financial advantage.’”
Background: Plaintiffs are technology companies that license dealer management systems (“DMSs”)—specialized software that car dealers use to manage their operations that stores information about a dealer’s customers, vehicles, accounting, parts, and services. Dealers often reply on separate software applications for aspects of their business and, in order to function, those third-party applications must be able to access the data stored in a dealer’s DMS. The plaintiffs, who control a substantial majority of the DMS market, used to allow dealers to share access to the DMS with third-party data-integration companies that would extract and reformat the data for use in the dealer’s other software applications. But a few years ago, plaintiffs began to prohibit the practice, effectively requiring dealers to pay the plaintiffs themselves significantly higher prices to perform the data-integration services. In 2019, the Arizona Legislature enacted the Dealer Law to ensure that dealers retain control over their data. The Dealer Law prohibits DMS providers from taking any action to limit a dealer’s ability to use data the dealer has stored in its DMS and requires DMS providers to adopt and make available a standardized framework for the exchange, integration and sharing of data with authorized data-integrators. Upon enactment of the Dealer law, plaintiffs sued the Attorney General of Arizona for declaratory and injunctive relief, arguing that the Dealer Law is preempted by the Copyright Act and the Computer Fraud and Abuse Act, that it violates the Contracts Claus and Takings Clause, and that it is void for vagueness. The district court denied a preliminary injunction and plaintiffs appealed.
Result: The Ninth Circuit affirmed. Preliminarily, the Court held that it lacked jurisdiction over plaintiffs’ CFAA and vagueness claims because its jurisdiction was premised on 28 U.S.C. § 1292(a)(1), which gave the Court jurisdiction to review an interlocutory order denying injunctive relief, and the district court had dismissed the CFAA and vagueness claims before ruling on the preliminary injunction.
The Court next held that the district court properly denied a preliminary injunction because plaintiffs had not established a likelihood of success on the merits of its remaining claims. In particular, the Court concluded that the Dealer Law was not facially preempted by the Copyright Act. The Court explained that the Copyright Act does not preempt market regulations that merely touch copyrighted works indirectly and the Dealer Law only touches plaintiffs’ copyrighted work indirectly, if at all. Although plaintiffs contended that the Dealer Law’s open access integration method would interfere with its exclusive right to reproduce its copyrighted DMS, expert testimony showed that it may be possible for plaintiffs to comply with the law without being forced to create a new copy of its software to process third-party requests. And even if it were forced to create new copies, plaintiffs had not shown that those copies would infringe its reproduction right because those copies would be on plaintiffs’ own servers and not shared with anyone else. Furthermore, plaintiffs had presented no evidence that the law would require the embodiments of its DMS to persist for a more than transitory period, and thus may not constitute copies under the Copyright Act at all. The Court also rejected the argument that the law would vitiate plaintiffs’ exclusive rights in their APIs because the law does not require the plaintiffs to use or create an API, which might not be subject to copyright protection anyway. The Court next rejected the argument that the Dealer Law conflicts with the Copyright Act because it gives dealers and authorized integrators the right to copy and distribute plaintiffs’ copyrighted data compilations. The Court explained that although the law bars DMS providers from limiting access to protected dealer data, it nowhere requires or permits the copying of any copyrighted data compilations, and providers do not hold a copyright in the data itself.
Finally, the Court rejected the plaintiffs’ constitutional claims. The Court found that plaintiffs forfeited their claim that the Dealer Law impairs plaintiffs’ contracts with third-party vendors by not raising it in their complaint. And it concluded that the Dealer Law does not impose a substantial impairment on plaintiffs’ ability to discharge their contractual duty to keep dealer data confidential. And even if it did impose a substantial impairment, the law did not violate the Contracts Clause because it was reasonable drawn to serve an important public purpose, namely promoting consumer data privacy and competition. The Dealer Law also did not violate the Takings Clause. The law did not effect a per se physical taking because it did not authorize integrators to physically invade the systems at all, but merely authorized integrators to exchange messages with DMS providers’ systems. Plaintiffs also did not show that the law effected a regulatory taking because the law’s economic impact is minimal and does not impermissible interfere with distinct investment-backed expectations. As a general matter, in the case of personal property, by reason of the State’s traditionally high degree of control over commercial dealings, a property owner ought to be aware of the possibility that new regulation might even render his property economically worthless.
The Court holds that a defendant invoking federal preemption must present evidence that its product labels were approved by a federal agency when that issue is contested, and that claims based on website advertising are not preempted by federal labeling approval when the language used is not materially identical to the approved label.
Panel: Judges Bennett, Nelson, and Ezra (D. Hawaii), with Judge Bennett writing the opinion.
Key Highlight: “[T]he mere existence of the label is insufficient to establish that it was reviewed and approved by FSIS. Preemption is an affirmative defense, so the defendant bears the burden of pleading and supporting its preemption argument. Thus, when the parties dispute whether FSIS review occurred at all, the defendant must produce evidence that the label was reviewed and approved by FSIS.”
Background: Robert Cohen brought state claims against ConAgra for allegedly falsely advertising its frozen chicken products as natural and preservative-free. The district court found that the United States Department of Agriculture’s Food Safety and Inspection Service (FSIS) had approved ConAgra’s poultry labels, and thus Cohen’s claims challenging both the label and ConAgra’s website advertising were preempted.
Result: The Ninth Circuit affirmed in part and reversed in part. First, the Court explained that when the FSIS reviews and approves a label, the agency is deciding that the label is not false or misleading under the PPIA, and thus imposes a federal requirement with preemptive effect under the statute. The PPIA’s savings clause authorizes states to enforce federal requirements, but not to create their own. For those reasons, the Court said, “if ConAgra’s labels were reviewed and approved by FSIS, then Cohen’s claims challenging the labels would be preempted.” The problem was that there was no evidence in the record—other than the label itself—that the FSIS reviewed the particular label at issue. Because Cohen disputed that point—arguing that ConAgra bypassed FSIS review—the Court held that “the mere existence of the label is insufficient to establish that it was reviewed and approved by FSIS.” On a “limited” remand, the Ninth Circuit directed the district court to decide “only whether ConAgra’s label was reviewed and approved by FSIS.”
Next, the Ninth Circuit held that Cohen’s claims based on ConAgra’s website advertising were not preempted by FSIS approval of product labels. Federal regulations require only the review of labels, the Court explained, which “means a display of written, printed, or graphic matter upon any article or the immediate container . . . of any article.” 21 U.S.C. § 453(s). While plaintiffs cannot circumvent preemption “by simply challenging an online picture of a label rather than the label itself,” claims based on materially different language are not preempted. Here, Cohen could challenge part of ConAgra’s website statements because they, unlike the label, claimed that the products as a whole contain “no preservatives.”
Finally, the Court concluded that the primary jurisdiction doctrine did not require the case to be referred to the FSIS to be decided in the first instance. The primary jurisdiction doctrine “is a prudential doctrine under which courts may, under appropriate circumstances, determine that the initial decisionmaking responsibility should be performed by the relevant agency rather than the courts.” But because the question whether ConAgra’s product labels are false or misleading was “not a complicated issue or even an issue of first impression,” presented “no risk of conflict between FSIS and courts,” and Cohen’s path to seek an administrative ruling was unclear, the Court declined to invoke the primary jurisdiction doctrine here.