CEI comments on the Justice Department and National Economic Council’s Request for Information Regarding State Laws with Extraterritorial Economic Impacts OLP182; Docket No. DOJ-OLP-2025-0169
RE: Justice Department and National Economic Council Effort to Identify State Laws with Out-Of-State Economic Impacts
OLP182; Docket No. DOJ-OLP-2025-0169
On behalf of the Competitive Enterprise Institute, we respectfully submit these comments to the Department of Justice (DOJ) and the National Economic Council (NEC) concerning their request for information about state regulatory overreach.
We first want to applaud the parties for their interest in this serious, but often neglected area of overregulation. Outside of American entrepreneurs with firsthand experience, little attention is given to the struggle of complying with fifty different regulatory regimes, frequently with distinct or even conflicting demands. States’ regulatory balkanization, fiscal extravagance, and moral hazard have combined to make a hostile commercial environment for citizens and businesses of every state.
Companies’ frequent, rational, but ultimately harmful reaction is known as the ‘California Effect.’ It is unilateral regulatory globalization and occurs when a state’s severe regulations create incentives for companies to adopt that most strict standard for their dealings in every jurisdiction in order to avoid the costs and complexity of compliance diversification. The phenomena can be observed specifically with California’s vehicle emissions standard and more broadly with consumer protection, data security, and labor issues. In this way, the most extreme states become the de facto regulator of the entire nation; it is a regulatory race to the bottom.
Adding to the morass, those being regulated often have little to no political redress. Businesses located entirely outside the aggressively regulating state are faced with the stark choice of costly compliance or of forgoing of customers, which in the cases of heavily populated (and regulation-heavy) states like California or New York, is a matter of significant revenue. If other states’ regulatory regimes can follow businesses to every consumer, there is no true exit, no real restraint on regulatory exuberance, and no beneficial competition among states.
This exporting of regulatory burden to the citizens of other states is not the “competitive federalism” to which we should aspire. Federal preemption by Congress and a Supreme Court motivated to protect a competitive federal order are crucial to moving away from the burdensome “cartel federalism” we see today.
With the relevant principles in behavioral economics and the U.S. Constitution addressed, we move on to specific items that adversely affect interstate commerce and unjustly harm interests in other states.
I. Artificial Intelligence
State-level artificial intelligence (AI) legislation is a prime example of state regulation that significantly affects interstate commerce. The current and anticipated patchwork of state laws creates new and crushing regulatory burdens on businesses and consumers. AI systems are inherently interstate. An AI-powered hiring tool, a chatbot, or generative model are not confined to state borders.
The complex web of potentially conflicting rules threatens to suffocate American innovation. This burden is particularly pertinent for small businesses and startups, which are disproportionately harmed by regulatory complexity. It would be difficult for any business to navigate the differing disclosure requirements of the Colorado law, the algorithmic audit rules of a New York City ordinance, and the transparency mandates of the Utah act. Instead of focusing on innovation and growth, companies are forced to divert resources to a state-by-state compliance effort.
California’s regulatory approach poses a significant threat to AI innovation. It’s likely for this reason that the House Judiciary Committee’s subcommittee will hold a hearing, this week, titled “AI at a Crossroads: A Nationwide Strategy of Californication.” California’s numerous proposed AI laws threaten to create a fragmented, costly, and burdensome regulatory environment that will harm national innovation, according to Kevin Frazier, AI innovation and law fellow at the University of Texas School of Law, and Adam Thierer, senior fellow for technology and innovation at the R Street Institute. In a recent op-ed, they argue that the state-level “California effect” moves in direct opposition to the Trump administration’s pro-innovation, market-oriented approach, which calls for a unified federal strategy. Without action, Frazier and Thierer write, “the California effect will once again become America’s default, and the nation’s AI future will be dictated not by federal vision buy by the preferences of one state legislature.”
One of us testified before the House Judiciary Committee’s Subcommittee on the Administrative State, Regulatory Reform and Antitrust earlier this year, urging Congress to preempt this growing patchwork of state-level AI regulation. The administration should continue to work with Congress to craft a fair-minded federal AI preemption bill that unleashes the full potential of this emerging technology while still maintaining states’ ability to govern intrastate effects.
Considering several state-level AI proposals deal with AI safety, it may also be fruitful for the DOJ’s Antitrust Division, together with the Federal Trade Commission (FTC), to open a 90-day comment period exploring the need for new Collaboration Guidelines. Biden officials withdrew the 2000 Collaboration Guidelines shortly before the change in administration. Companies may be dissuaded from engaging in AI safety collaborations for fear of running afoul of the antitrust laws.
II. Age Verification
Several states have passed age verifications laws directed at app stores or social media platforms. Both are constitutionally suspect and are likely to be struck down in court, despite the recent ruling in Free Speech Coalition v. Paxton involving obscene material. State age verification laws have the potential to become de facto national laws due to the internet’s interconnected nature, creating negative consequences for free speech, privacy, and access to information for all Americans. Further, these laws impose tremendous barriers to entry that will likely permeate among the states.
Supreme Court Justice Kavanaugh recently indicated that Mississippi’s social media age verification law “is likely unconstitutional,” but for now the law remains in effect. Broad definitions of “harmful to minors” can compel general-purpose sites to restrict information for all users, according to Jennifer Huddleston, senior fellow in technology policy at the Cato Institute. Huddleston points to an analogous law in the United Kingdom, writing that “[t]hese types of law resulted in the blocking of certain information around issues like Ukraine and Gaza, limiting the potential speech of Americans on those issues on platforms like X and Reddit.”
The cumulative effects of state age verification laws create a substantial regulatory burden that has interstate effects, making it harder for smaller platforms to scale their user base. Even if only a portion of the U.S. population is covered by these laws, that may be enough to stunt the growth of startups. Incumbents can benefit from this. They have the benefit of established business goodwill, and users may be deterred from using new services because that are hesitant to share sensitive information like government IDs or biological identifiers with companies with whom they are less familiar.
Last month, social media newcomer Bluesky announced that it would begin blocking Mississippi IP addresses from accessing their platform in response to the Mississippi law. This demonstrates how these laws entrench dominant companies, which can absorb the high cost of compliance, while forcing smaller platforms to shut down or leave a state, according to Molly Buckley, a lawyer with the Electronic Frontier Foundation. Buckley writes,
Proponents of age verification claim that these mandates will hold Big Tech companies accountable for their outsized influence, but really the opposite is true. As we can see from Mississippi, age verification mandates concentrate and consolidate power in the hands of the largest companies—the only entities with the resources to build costly compliance systems and absorb potentially massive fines.
These interstate anticompetitive effects apply equally to app store age verification laws. In a report published earlier this year by the Foundation for American Innovation (FAI), Luke Hogg and Evan Swarztrauber acknowledge the burden that age verification mandates would impose on smaller social media, e-commerce, and content platforms, which could involve “high up-front expenses for technology procurement, staff training, and ongoing maintenance.” “Without careful consideration of these challenges, overly burdensome regulations could discourage startups and smaller firms from entering or thriving in the market, reducing competition and innovation,” according to the FAI report.
Instead, Hogg and Swarztrauber posit that age verification mandates directed at app stores and operating systems are more feasible because “[t]he burden of implementing age verification at these layers would largely affect a handful of well-capitalized firms.” But this approach ignores the shifting anticompetitive effects created by laws passed in states like Utah, Texas, and Louisiana. App store age verification will likely entrench the competitive positions of these few well-capitalized firms. Even worse, the app store age verification laws may incentivize platforms to adopt a stricter, more risk-averse approach to application approval, leading to less entrants, less competition, and less innovation.
While state-level age verification proposals are well-intentioned, they will fail to keep kids safe online. Instead, they will create more problems, both interstate and intrastate, for free speech, privacy, and competition. Research shows that existing child safety tools are already being underutilized by parents. While the FTC has made some advocacy efforts in communicating these tools to the public, they could do more. The Commission has fallen short of including the tech industry in programing involving kids online safety.
This past June, the FTC hosted a workshop entitled “The Attention Economy: How Big Tech Firms Exploit Children and Hurt Families.” One panelist, Michael Toscano, expressed the desire to include members in these conversations: “I think one thing that would be good would be to convene a conversation between industry, the state and family, so that we can actually have a series of formal discussions about how we can potentially work together to come to solutions that are good for everyone.” The FTC’s June workshop would have been a good opportunity for these discussions. Unfortunately, big tech companies and free speech experts were excluded from the programming.
The federal government can also collaborate with states to be better improve digital literacy. According to Caden Rosenbaum and Gavin Hickman with Libertas Institute in Utah,
But where safety tools may fail, education and parental involvement have a major role to play in picking up the slack.
In this sense, states should look to update their educational curriculum instead of banning teens. Hefty civil penalties against social media companies may play well in headlines, but teens will pay the price if forced to grow up without learning to navigate the complex online world.
Of course, the DOJ should use any of its existing authorities to challenge these state laws on preemption grounds, particularly concerning issues of constitutionality under the First Amendment. But further, the DOJ and NEC should facilitate conversations among parents, states, industry, experts, and relevant federal agencies to arrive at free market solutions to problems facing kids’ online safety without the burden of complex regulations.
III. Right to Repair
There has been growing support and enthusiasm surrounding so-called “right to repair” laws. A total of six states have enacted right-to-repair legislation applying to consumer electronics, covering roughly one-third of all Americans, with five out of the six having already gone into effect. While state lawmakers admirably hope that these proposals will lower prices for consumers and lead to the growth of small businesses located in their respective states, right-to-repair laws will more likely raise prices for all consumers, discourage innovation, and undermine property rights. An article published in the economic journal of Management Science shows that the laws could create a “lose–lose–lose situation that compromises manufacturer profit, reduces consumer surplus, and exacerbates the environmental impact.” And the purported consumer savings touted by advocates of the legislation have been shown to be overestimated by over 500 percent.
The rhetoric and advocacy supporting these laws portray them as property rights laws. However, these are antitrust laws. The threshold question as to whether these laws apply to a specific part, service, or documentation is whether a manufacturer offers it. In turn, the right to repair laws passed create perversive incentives that may induce manufacturers to cease offering certain repairs or stop offering repair products altogether. The state laws only apply to manufacturers that compete. If a manufacturer stops offering repair, or stops offering a particular repair product, they no longer fall under the purview of the law.
At a time where the Trump administration is attempting to create a welcoming environment for domestic manufacturing, state right-to-repair laws do the opposite. Right-to-repair laws apply to all manufacturers, regardless of their market share. A startup with less than one percent market share is treated as an illegal monopolist the moment it offers a repair service. This discourages companies from offering repair and requires them to comply with a patchwork of laws across the country if they do.
FTC Commissioner Andrew Ferguson, now serving as Chair, recognized the complexity of repair markets when he dissented to the antitrust suit filed against John Deere at the start of this year. He observed that “[t]he repair market is extremely complicated, comprised of a web of authorized dealers, independent repair shops, customers, and parts manufacturers.” Companies are typically entitled to their day in court on these complex, economic issues. But state right-to-repair laws skip the fact-intensive economic analysis associated with antitrust law and go straight to remedies by forcing manufacturers to deal with all parties.
Many of the “Authorized repair provider[s]” covered under the laws are third-party, small businesses too. The biggest difference between authorized providers and “Independent repair provider[s]” is that authorized providers enter into voluntary contracts with manufacturers. Right-to-repair laws give independent providers the right to compel manufacturers into contracts.
Some tech policy scholars have also suggested that right-to-repair laws could become a backdoor for price controls. Juan Londoño with the Taxpayers Protection Alliance notes that as companies begin to price their parts to account for new production and inventory costs, they may face increased scrutiny under the laws’ “fair and reasonable” price provisions. This could ultimately lead to a degradation of quality and shortages of goods, according to Londoño. These harms will be felt by consumers of all states, not just those that have ratified right-to-repair laws.
The DOJ should consider to what extent state right to repair laws conflict with federal copyright law, as discussed in a 2022 report authored by Devlin Hartline and Adam Mossoff from the Hudson Institute. The administration may determine that there are deficiencies in federal IP law that unnecessarily limit the right to repair. But state-level antitrust laws directed at repair markets are not the proper solution.
Respectfully submitted,
Alex R. Reinauer
Research Fellow
Competitive Enterprise Institute
Jessica Melugin
Director of the Center for Technology & Innovation
Competitive Enterprise Institute