There are a growing number of voices raising concerns about privacy rights and data security in the wake of news of data breaches and potential influence. The European Union (EU) recently adopted the heavily restrictive General Data Privacy Rule (GDPR) that favors individual privacy over innovation or the right to speak. While there has been some discussion of potential federal legislation related to data privacy, none of these attempts has truly gained traction beyond existing special protections for vulnerable users (like children) or specific information (like that of healthcare and finances). Some states, notably including California, are attempting to solve this perceived problem of data privacy on their own, but often are creating bigger problems and passing potentially unconstitutional and often poorly drafted solutions.

All states have at least minimal data breach laws and the quality of such laws both in effectiveness and impact on innovation varies. Normally states work as “laboratories of democracy” and are able to test out different regulatory schemes for new technologies with less demosclerosis than the federal process. Similarly, they are better able to account for different preferences in tradeoffs, and in some cases, they are more able to remove barriers to entry by reforming existing areas of law like licensure or products liability to accommodate a new technology. In areas like autonomous vehicles, telemedicine, and drone policy states are often leading the way to embrace these new technologies. However, a new trend in some states to formally regulate the Internet through laws aimed at data privacy or net neutrality to achieve what they perceive as failures of the federal government to act ignores the potential damage to the permissionless federal policy that made the Internet what it is today.

California has passed the California Consumer Privacy Act (CCPA) and other states are likely to follow suit. Unfortunately, these type of statutes are likely to impact innovation in a misguided attempt to correct issues with data privacy. However, these statutes could reach far beyond state borders and illustrate the potential risks of a fifty-state privacy patchwork.

These laws will likely lead to a problem in identifying what entities are covered by the privacy legislation. California’s recent CCPA defines those who are required to comply so ambiguously that a reasonable interpretation would imply the law applies so long as a single user is a resident of California whether they are accessing the website from California or not and no matter if the website purposefully avails itself of California or not.

State laws also unintentionally make it more difficult for small, local companies to compete with Internet giants. Large companies like Google and Facebook can afford the cost of additional compliance but it is more difficult for smaller and mid-size companies to cover such costs. As a result, if they are able to comply they often are more limited in their ability to fund future innovation as they instead invest resources in compliance. In a world of state based privacy laws, it’s inevitable that some would impose contradictory standards and as a result might actually make it worse rather than better as companies pick and choose which states to comply with. What is already playing out in Europe where small and mid-size companies are choosing to exit the market rather spend the cost in complying with new restrictions could play out for states with more restrictive data requirements. And it’s not just fledging startups that have difficulty, the L.A. Times and Chicago Tribune have been unavailable to Europeans since GDPR became effective as they had not completed compliance by the May deadline. In some cases companies have founded it easier to block or exclude effected users than to comply with onerous data restrictions.

In some cases, states making exceptions for companies below a certain number of user also may discourage investment at a certain point. For example the CCPA kicks in at 50,000 users. As a result there is a large marginal costs for gaining 50,001 ^st user as compliance with the standards are immediately required. This might lead to caps on certain newer platforms or encourage innovators to look for loopholes to avoid the high cost of compliance early on.

But even if states were able to create a sort of interstate compact that created an effectively uniform state level set of privacy laws, it would still be an inappropriate use of federalism for the state to govern data privacy due to its de facto impact on interstate commerce and the First Amendment.

The Internet by its very nature transcends states borders and any state laws aimed at impacting privacy are likely to have national and global impact. This is not what is intended by federalism and not just the case for states like California with a significant amount of tech companies. If there are 50 different state laws than new online intermediaries will have  develop 50 different compliance policies or the most restrictive state will become the de facto standard for everyone left in the industry. As Jeff Kosseff points out, a world of 50 variations of the same privacy law based on users would require out-of-state content creators would likely require significant changes to their existing systems and place an undue burden on content creators and users.

Additionally, there are legitimate concerns about the First Amendment rights to share information that may be in conflict with the way privacy rights are enforced under proposed laws. Requiring otherwise lawful content to be removed silences the speaker. For example, if a friend posts a picture from a party that includes you and you ask all your data be removed is that data yours or your friends. To remove the data would silence a speaker and value one individual’s right to privacy over another’s right to speak. In some cases it seems such tradeoffs could be reasonable such as speech that is not just merely offensive but causes clear harm to the person it is about such as revenge porn, but in many cases it is far less clear. Unfortunately when faced with the crippling potential sanctions of such laws, many companies take a remove first question second approach as has been seen with copyright under the Digital Millennium Copyright Act (DMCA).

While there is a growing voice for data privacy, there seems to be little willingness on the part of consumers or regulators to make such tradeoffs. The so called “privacy paradox” where people do not undertake the necessary actions to match with their stated desire for increased data privacy and many willingly admit they prefer the convenience they receive in exchange for their data. If action on data privacy is necessary, it should occur at a federal level to avoid the patchwork problems that would result from inconsistent state laws. Any law must be narrowly tailored to respect the First Amendment rights of both users and platforms. We also must be aware of the tradeoffs that we are making between innovation and privacy when we see calls for a US GDPR. At the same time we should be concerned that as a result of the heavy burden of compliance with GDPR, a more regulated Internet where only those who can afford to comply survive may replace the permissionless start-up American driven version.

While federal preemption may be needed to address a patchwork of state privacy laws, we should be cautious and seek to avoid the mistakes of GDPR type privacy laws that place a value on individual privacy above innovation and knowledge sharing. Simple steps in providing more transparent information and requirements for notification are more likely to allow individuals to make the privacy choices that best fit their needs.

A privacy patchwork of state based “solutions” is likely to create more problems than it solves. The real solutions to our current dilemmas will come from conversations about how we balance the rewards of innovation with individual preferences for privacy.

On July 27th, The Progress & Freedom Foundation hosted a Capitol Hill panel discussion entitled “Online Child Safety, Privacy, and Free Speech: An Overview of Challenges in Congress & the States.” The event featured remarks from:

• Parry Aftab, Executive Director, WiredSafety.org
• Todd Haiken, Senior Manager of Policy, Common Sense Media
• Jim Halpert, Partner, DLA Piper
• Berin Szoka, Senior Fellow, The Progress & Freedom Foundation

We’ve just released the transcript of the event, which I have also pasted down below the fold in a Scribd document reader. Also, the audio for this event can be heard by clicking below:

Download mp3

Here is the full event description:

Online child safety, privacy, and free speech remain hotly debated issues at both the federal and state level. Bills introduced in Congress to address cyberbullying concerns propose either educational initiatives or a criminalization approach. Access to objectionable content also remains a concern and a new, government-mandated task force is looking into those issues. Meanwhile, state officials, including many state attorneys general, continue to explore age verification mandates for social networking sites and some have considered building on the federal Children’s Online Privacy Protection Act (COPPA) to expand “parental notification” mandates. The Federal Trade Commission (FTC) has recently announced an expedited review of COPPA to see if it is keeping up with new developments. The FTC is also exploring child safety in virtual worlds. New concerns about “sexting,” or the sending of sexual explicit images over mobile devices, has also raised new concerns led some lawmakers to ponder penalties.

How serious are these concerns? Is legislation or regulation needed to address them? What free speech issues are at stake? Should Congress take the lead or leave it to the States to experiment with different models? These and other issues were discussed by a panel of leading experts in the field of online safety and privacy policy.

Transcript PFF Online Child Safety Privacy Hill Event (7-27-2009) http://d.scribd.com/ScribdViewer.swf?document_id=18756666&access_key=key-1blb7az1ag406howibuk&page=1&version=1&viewMode=

Adam Thierer & I have just released a detailed examination (PDF) of brewing efforts to expand the Children’s Online Privacy Protection Act of 1998 to cover adolescents and potentially all social networking sites—an approach we call “COPPA 2.0.”

As Adam explained on Larry Magid’s CNET podcast, COPPA mandates certain online privacy protections for children under 13, most importantly that websites obtain the “verifiable consent” of a child’s parent before collecting personal information about that child or giving that child access to interactive functionality that might allow the child to share their personal information with others. The law was intended primarily to “enhance parental involvement in a child’s online activities” as a means of protecting the online privacy and safety of children.

Yet advocates of expanding COPPA—or “COPPA 2.0″—see COPPA’s verifiable parental consent framework as a means for imposing broad regulatory mandates in the name of online child safety and concerns about social networking, cyber-harassment, etc. Two COPPA 2.0 bills are currently pending in New Jersey and Illinois. The accelerated review of COPPA to be conducted by the FTC next year (five years ahead of schedule) is likely to bring to Washington serious talk of expanding COPPA—even though Congress clearly rejected covering adolescents age 13-16 when COPPA was first proposed back in 1998.

We’ll discuss some of the key points of our paper in a series of blog posts, but here are the top nine reasons for rejecting COPPA 2.0, in that such an approach would:

• Burden the free speech rights of adults by imposing age verification mandates on many sites used by adults, thus restricting anonymous speech and essentially converging—in terms of practical consequences—with the unconstitutional Children’s Online Protection Act (COPA), another 1998 law sometimes confused with COPPA;
• Burden the free speech rights of adolescents to speak freely on—or gather information from—legal and socially beneficial websites;
• Hamper routine and socially beneficial communication between adolescents and adults;
• Reduce, rather than enhance, the privacy of adolescents, parents and other adults because of the massive volume of personal information that would have to be collected about users for authentication purposes (likely including credit card data);

• Would likely be the subject of massive fraud or evasion since it is not always possible to definitively verify the parent-child relationship, or because the system could be “gamed” in other ways by determined adolescents;
• Do nothing to prevent offshore sites and services from operating outside these rules;
• Present major practical challenges for law enforcement officials in the face of such evasion by both domestic users and offshore sites;
• Could destroy opportunities for new or smaller website operators to break into the market and offer competing services and innovations, thus contributing to consolidation of online content and services by erecting barriers to entry; and
• Violate the Commerce Clause of the U.S. Constitution, since Internet activity clearly represents interstate commerce that states have no authority to regulate.