From the Digital to the Physical: Federal Limitations on Regulating Online Marketplaces with Abbey Stemler

Edelman, Benjamin, and Abbey Stemler. “From the Digital to the Physical: Federal Limitations on Regulating Online Marketplaces.” Harvard Journal on Legislation (forthcoming).


Online marketplaces have transformed how we shop, travel, and interact with the world. Yet, their unique innovations also present a panoply of challenges for communities and states. Surprisingly, federal laws are chief among those challenges despite the fact that online marketplaces facilitate transactions traditionally regulated at the local level. In this paper, we survey the federal laws that frame the situation, especially §230 of the Communications Decency Act (CDA), a 1996 law largely meant to protect online platforms from defamation lawsuits. The CDA has been stretched beyond recognition to prevent all manner of prudent regulation. We offer specific suggestions to correct this misinterpretation to assure that state and local governments can appropriately respond to the digital activities that impact physical realities.

Informal introduction:

Perhaps the most beloved twenty-six words in tech law, §230 of the Communications Decency Act of 1996 has been heralded as a “masterpiece” and the “law that gave us the modern Internet.” It was originally designed to protect online companies from defamation claims for third-party speech (think message boards and AOL chat rooms), but over the years §230 has been used to protect online firms from all kinds of regulation—including civil rights and consumer protection laws. As a result, it is now the first line of defense for online marketplaces seeking to avoid state and local regulation.

In our new working paper, Abbey Stemler and I challenge existing interpretations of §230 and highlight how it and other federal laws interfere with state and local government’s ability to regulate online marketplaces—particularly those that dramatically shape our physical realties, such as Uber and Airbnb. §230 is sacred to many, but as Congress considers revising §230 and Courts continually reassess its interpretation, we hope our paper will encourage a richer discussion about the duties of online marketplaces.

Assessing Airbnb’s Prospects in its San Francisco Litigation with Nancy Leong

Last week the Internet buzzed with news of Airbnb’s lawsuit against San Francisco. Dissatisfied with a new ordinance updating and enforcing 2014 regulations of short-term rentals, Airbnb filed suit against the city, arguing that the new ordinance violated both federal law and the federal constitution.

In today’s piece, Nancy Leong and I assess Airbnb’s arguments in its San Francisco complaint — finding some validity but, on the whole, considerable weakness.

Assessing Airbnb’s Prospects in its San Francisco Litigation – Yale Journal of Regulation – Notice & Comment

Spontaneous Deregulation: How to Compete with Platforms That Ignore the Rules

Edelman, Benjamin, and Damien Geradin. “Spontaneous Deregulation: How to Compete with Platforms That Ignore the Rules.” Harvard Business Review 94, no. 4 (April 2016): 80-87.

Many successful platform businesses–think Airbnb, Uber, and YouTube–ignore laws and regulations that appear to preclude their approach. The rule-flouting phenomenon is something we call “spontaneous private deregulation,” and it is not new. Benign or otherwise, spontaneous deregulation is happening increasingly rapidly and in ever more industries. This article surveys incumbents’ vulnerabilities and identifies possible responses.

When Your Competitors Ignore the Law

Last fall I flagged the problem of transportation network companies (Uber and kin) claiming a cost advantage by ignoring legal requirements they considered ill-advised or inconvenient. But the problem stretches well beyond TNCs. Consider Airbnb declining to enforce (or, often, even tell hosts about) the insurance, permitting, tax, zoning, and other requirements they must satisfy in order to operate lawfully. Or Zenefits using selling insurance via staff not trained or certified to do so (and, infamously, helping some staff circumvent state-mandated training requirements). Or Theranos offering a novel form of blood tests without required certification, yielding results that federal regulators found “deficient” and worse. The applicable requirements may be clear — get commercial insurance before driving commercially; be zoned for commercial activities if you want to rent out a room; be trained and licensed to sell insurance if you intend to do so. Yet a growing crop of startups decline to do so, finding it faster and more expedient to seek forgiveness rather than permission. And the approach spreads through competition: once one firm in a sector embraces this method, others have to follow lest they be left behind.

A first question is how violations should be sanctioned. I’ve long thought that penalties could appropriately be severe. Consider the Pennsylvania Public Utility Commission’s $49 million civil penalty against Uber for its intentional operation in violation of a PUC order. The PUC discussed the purpose of this penalty: “not just to deter Uber, but also [to deter] other entities who may wish to launch … without Commission approval.” Their rationale is compelling: If the legal system requires a permit for Uber’s activity, and if we are to retain that requirement, sizable penalties are required to reestablish the expectation that following the law is indeed compulsory. Now suppose every state and municipality were to impose a penalty comparable in size. Despite Uber’s wealth, the numbers add up — 100 such penalties would take $4.9 billion from Uber’s investors, a sizable share of Uber’s valuation and plausibly more than the company’s cash on hand.

Meanwhile, competitors are compelled to respond. For a typical taxi fleet owner or driver, or anyone else trying to compete with a law-breaking entrant, it’s little answer to hope that regulators may some day impose penalties. (And indeed there’s scant evidence that Pennsylvania’s approach will prevail more broadly.) What to do? Damien Geradin and I offer a menu of suggestions in two recent articles:

Spontaneous Deregulation: How to compete with platforms that ignore the rules – Harvard Business Review

Competing with Platforms that Ignore the Law – HBR Online

Efficiencies and Regulatory Shortcuts: How Should We Regulate Companies like Airbnb and Uber?

Edelman, Benjamin, and Damien Geradin. “Efficiencies and Regulatory Shortcuts: How Should We Regulate Companies like Airbnb and Uber?” Stanford Technology Law Review 19, no. 2 (2016): 293-328.

New software platforms use modern information technology, including full-featured web sites and mobile apps, to allow service providers and consumers to transact with relative ease and increased trust. These platforms provide notable benefits including reducing transaction costs, improving allocation of resources, and creating information and pricing efficiencies. Yet they also raise questions of regulation, including how regulation should adapt to new services and capabilities, and how to correct market failures that may arise. We explore these challenges and suggest an updated regulatory framework that is sufficiently flexible to allow software platforms to operate and deliver their benefits, while ensuring that service providers, users, and third parties are adequately protected from harm that may arise.

Digital Business Models Should Have to Follow the Law, Too

Digital Business Models Should Have to Follow the Law, Too. HBR Online. January 2, 2015.

A timeless maxim suggests that it’s better to ask forgiveness than permission. Nowhere is that more prominent than in the current crop of digital businesses, which tend to skirt laws they find inconvenient. Though these services and their innovative business models win acclaim from consumers and investors, their approach to the law is troubling — both for its implications for civil society and in its contagious influence on other firms in turn pressured to skirt legal requirements.

SaferTaxi: Connecting Taxis and Passengers in South America (teaching materials) with Peter Coles

Coles, Peter, and Benjamin Edelman. “SaferTaxi: Connecting Taxis and Passengers in South America.” Harvard Business School Case 913-041, April 2013. (Revised October 2014.) (educator access at HBP. request a courtesy copy.)

SaferTaxi, a taxi booking service in South America must develop its mobilization strategy; that is, it must attract enough passengers and drivers to make its service worthwhile for all. Drivers hesitate to pay for SaferTaxi’s smartphones and service unless these will deliver passenger bookings—and passengers have no reason to sign up unless drivers are available. Meanwhile, regulators question the permissibility of online taxi booking in light of regulatory requirements, and some existing taxi booking vendors feel threatened by SaferTaxi’s efforts to enter the market. As SaferTaxi attempts to satisfy these diverse constituents, international competition looms. What should SaferTaxi’s founders do next?

Teaching Materials:

SaferTaxi: Connecting Taxis and Passengers in South America – Teaching Note (HBP 913063)

Airbnb (teaching materials) with Michael Luca

Edelman, Benjamin, and Michael Luca. “Airbnb (A).” Harvard Business School Case 912-019, December 2011. (Revised March 2012.) (educator access at HBP. request a courtesy copy.)

After widely-publicized complaints of destructive guests and unreliable hosts, online apartment rental site Airbnb explores mechanisms to facilitate trust between guests and hosts. Flexible online reputation systems can collect and share information with ease, but Airbnb must decide which information guests and hosts should have to provide and how much flexibility each should have in selecting who to do business with. A full-featured system could provide all the information users have been requesting, but would it be too complicated for routine use?


Airbnb (B) – Supplement (HBP 912019)

Teaching Material:

Airbnb (A) and (B) – Teaching Note (HBP 912021)