Court to Hear Challenge to Third-Party Electronic Reporting

Government overreach of its police power and property rights are the central core of a new legal challenge that could impact any ISRI member or private enterprise facing electronic reporting mandates utilizing third-party private database companies.

Two ISRI member companies that operate in Omaha, Nebraska are challenging a year-old municipal ordinance designed to clamp down on metals theft. The two companies say the law illegally ties compliance to a privately-driven mandate forcing them to relinquish control of their private property without compensation.


No matter what commodity in which you trade, all ISRI members should be watching closely. At the heart of the matter lies a question of law that has thus far avoided judicial scrutiny: can the government force two private entities into a binding contract against one party’s wishes and without compensation or consent.


The implications of compliance with electronic reporting mandates are commonly misunderstood and this question of law is more than ripe for court review. As legislatures across the nation are increasingly granting government agencies the right to require recyclers to convey their records in electronic format for ease of inspection, it is the private sector that is primarily becoming data collection and management agents for the government. The agents control access to the portal required to comply with the law and therefore have tremendous leverage over the regulated entities, including the ability to essentially force recyclers to grant unrestricted royalty-free access and use of any data submitted through the portal.


Omaha Ordinance

In 2015, the Omaha City Council passed an ordinance requiring electronic reporting to the Omaha Police Department by scrap metal recyclers and pawn brokers. The city then contracted with LeadsOnline as the information processor for the Police Department. Scrap metal recyclers and pawn brokers are now required to electronically report their information to LeadsOnline. As seen in many jurisdictions around the nation with similar ordinances, in order to electronically report to the Omaha PD through its vendor LeadsOnline, salvage dealers and pawnbrokers are required to register their businesses on the privately-owned LeadsOnline website. LeadsOnline utilizes a website user agreement (“checkbox contract”) that all registering businesses must sign (i.e. agree by checking a box to formalize agreement) before being granted use of the website to report in compliance with the law. 


The coerced agreement to this “checkbox contract” is obtained by harnessing the city’s police power and its rights to enact ordinances for the public good, safety, and welfare. Compliance with the law is conditioned upon utilizing the services of a privately-owned company with no alternative or options available. As such, acting as agent for the city of Omaha, LeadsOnline has the leverage to effectively force recyclers to enter into a binding contract that relinquishes all rights to control use of their private company records that are reported through the website and indemnifies LeadsOnline for damages if the information is leaked or otherwise misused. The recycler has absolutely no bargaining ability to decline the contract or to set agreeable terms and conditions.  


As most everyone knows, Internet sites that collect data from users have a broad set of terms and conditions that favor the legal rights and monetary interests of the Internet site owner. Plaintiffs in the Omaha case are arguing that LeadsOnline is taking advantage of its “agent” status to procure information for its own benefit. As evidence of the fact, the allegations point to the LeadsOnline website user agreement which demands concessions from the recyclers such as the grant of an “unrestricted” and “royalty-free” license to utilize the reported data. Plaintiffs in this case fully outlined these concerns to the city council prior to enactment of the ordinance but were ultimately ignored.


Once the reporting business accepts the website user agreement (i.e. “checks the box”) – which is mandatory to complete the registration process for reporting - neither the Omaha PD nor the city of Omaha has any control over how LeadsOnline utilizes the data that is reported. This is because in the small print of the “checkbox contract” the business owner is required to completely release control of the data to a third-party, thus removing its “confidential” status under applicable consumer privacy protection laws. Plaintiffs in the case argue that LeadsOnline utilizes this “checkbox contract” to get around confidentiality laws and subvert any authority the city of Omaha has to restrict use of the reported data for law enforcement purposes only. 


Constitutional Questions

The reason all ISRI members should be watching this case closely stems from the fact that the questions of law hit on fundamental constitutional rights that are threatened by these reporting laws involving third-party vendors. Property rights and individual liberties such as the right to contract are quietly under siege by legislative activity that is going unchallenged and mostly unnoticed by the general public. For instance, the law considers business records to be private property protected under the Fifth Amendment of the Constitution. Yet, the Omaha ordinance facilitates the taking of this private property without compensation by allowing the city’s agent to essentially seize control of the recyclers’ data through its website user agreement. Furthermore, this “checkbox contract” also forces Omaha recyclers to indemnify LeadsOnline for damages as well as take any litigation to Dallas, Texas where LeadsOnline is headquartered and laws differ. There is no negotiation allowed, thus creating essentially a government-endorsed one-sided contract in violation of the 14th Amendment’s right to be free from governmental interference with the right to bargain and contract.


The Plaintiffs in the Omaha litigation have made it clear that they are not challenging the reporting ordinance itself but the fact that its implementation allows LeadsOnline to exceed the government’s authority.  These companies have been in the scrap metal recycling business in Omaha and Nebraska for many years. They have long complied with state and city laws requiring them to report specific information to law enforcement.


In fact, the recyclers are in full support of halting scrap metal theft and are willing to give all of the required information directly to the Omaha Police Department. They have indicated they will comply with the Omaha ordinance but not under the conditions of the LeadsOnline “checkbox contract” that forces them to relinquish control and sign over complete unrestricted access and use of the reported data to a commercial for-profit database company. Nothing the recyclers are asking for in the lawsuit changes this or seeks to reduce the required information.


The lawsuit challenges only the fact that the mandated reporting process allows for LeadsOnline to gain access and use of proprietary information. This information includes confidential matters such as clients’ names, drivers licenses, finger prints, and sensitive commercial data that belong to their customers, many of whom are Omaha residents. Specifically, the objectionable language that is being challenged is found in the LeadsOnline website Terms & Conditions contract:


 “4.9 Subject to the terms of this Agreement, Reporting Business hereby grants to Leads a perpetual, irrevocable, unrestricted, non-exclusive, royalty free license to use, copy, distribute, display, reproduce, transmit, modify, and otherwise use such Data in accordance with and to the extent allowed by the terms of this Agreement. Also subject to the terms of this Agreement, Reporting Business hereby waives all rights to any claim against Leads for any alleged or actual infringements of any proprietary rights, rights of privacy and publicity, moral rights, ownership rights and rights of attribution in connection with such Data.


6.8 This Agreement shall be governed by and construed in accordance with the laws of Texas, without regard to conflicts of laws provisions. Sole and exclusive jurisdiction and venue for any action or proceeding arising out of or related to this Agreement shall be an appropriate state or federal court located either in Dallas County or Collin County, Texas.”


The Omaha legal challenge raises the question of the cost the public willing is to pay for some of these electronic reporting initiatives. This question is not aimed at the monetary costs alone but suggests that individual liberties and basic constitutional rights are at risk. Businesses use websites to advertise, provide information, sell products and reach new customers. This is all good. However, the appeal may wane when one considers the fact that such benefits come only after one agrees to give up one’s fundamental property and liberty rights such as the right to contract. This is what is at stake in Omaha.


Have Questions?