December 7, 2022

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Technological development

New Study Shows Section 230 Protects Small Companies Much More Than Big Ones


from the section-230-helps-everyone dept

We’ve tried to make this point many times before. A few months back I wrote a detailed post in response to a famed economist who kept insisting that repealing Section 230 would hurt Facebook, that the reality is the opposite. If you understand the mechanisms by which Section 230 actually works, the key is that it gets frivolous and wasteful lawsuits kicked out of court much earlier — when the costs are still intense, but more bearable. Without Section 230, the end result of the court case may be the same — where the company wins — but the costs would be much, much higher. For Facebook and Google that’s not going to make a huge difference. But for smaller companies, it can be the difference between life and death.

Thankfully, there’s a new study that goes super in-depth on this point and comes to the same conclusion. This new report, Understanding Section 230 & the Impact of Litigation on Small Providers, by Elizabeth Banker at the Chamber of Progress is really, really good. It opens with a quick case study that drives home the key point:

Take for example, the story of Allnurses.com: In 2014, a company offering test prep courses for nursing students sued an online forum called Allnurses.com (allnurses®) for allegedly defamatory posts from students discussing the merits of nursing test prep options.

In 2020, after six years of litigation, the Eighth Circuit Court of Appeals affirmed Allnurses’s Section 230 immunity. Is this a victory? In a blog post announcing the Second Circuit decision, Allnurses.com wrote, “Even though we won (successfully defended) the case, this long and drawn-out meritless lawsuit has resulted in tremendous mental anguish and massive legal costs.”

There are lots of cases like this. We’ve talked about Veoh, an early competitor to YouTube that was actually funded and founded by Hollywood insiders, but which was killed by long drawn out lawsuits, which it eventually won, but the company was already dead by the time that happened. That was in the copyright context, but we’ve seen other things in the 230 context as well. One of the most famous Section 230 cases was the Roommates.com case, in which the company was stripped of its Section 230 immunity for some parts of the lawsuit (other parts were protected by 230). In the (very, very) long run, Roommates actually won the case. The same thing was true for another infamous Section 230 case, involving Malwarebytes. For dumb reasons, Malwarebytes wasn’t allowed to use Section 230 to get the case kicked out early, so it went on and on and on… and eventually Malwarebytes won. But only after it ate up a ridiculous amount of time and money.

At least those companies survived. Many others are not so lucky. As this new report notes:

Most small businesses or individuals experience a lawsuit filed against them as an existential threat with profound emotional, financial, and opportunity costs. It may create worry about losing one’s livelihood and the ability to provide for dependents or continue to pay employees. Small providers and individuals may be faced with hard choices like whether to get a second mortgage or dip into savings to pay legal bills. Even getting a loan may be difficult, because being a party to a lawsuit must be disclosed on personal and business loan applications and may result in a loan being denied due to concerns about the ability to repay. A small business owner or individual has to worry not just about funding a defense to a lawsuit, but also the risk of a damage award against them which could put assets like a home, cars, children’s college funds, and other savings accounts at risk.

While defending a lawsuit, a business also misses out on important opportunities such as expanding the business; purchasing needed infrastructure; and attracting investment, new clients, employees, or partnerships with other organizations. Defending the suit will also take a significant amount of time
consulting with lawyers, appearing in court, and gathering information– distracting from the business as well as from family and other obligations. In other words, at the time when the business needs revenue and leadership the most, they may be the most scarce.

Most small businesses are uninsured, because liability insurance isn’t a realistic option. Beyond an initial price tag that may be out of reach for small providers, insurance is likely to have a high deductible that needs to be paid out of pocket (in addition to premiums) before insurance coverage will apply. Even with insurance, there is a risk the insurance carrier may dispute a specific claim if, for example, it was improperly tendered. And finally, if the business has already been sued once, getting insurance may prove impossible or the terms may be so bad that it is almost like not being covered by insurance at all.

As someone who has, unfortunately, been on the receiving end of multiple lawsuits, all of the above is both true and almost never talked about anywhere (other than moments when small business owners get to commiserate with each other over drinks). As the report notes, larger companies don’t have the same risks at all.

In contrast, larger enterprises are less impacted by lawsuits. The company may already have: 1) lawyers ready to deal with lawsuits (allowing the business to continue with minimal disruption); 2) insurance coverage that can offset the cost of a defense, a settlement, or a damage award; and 3) sufficient revenue and cash reserves such that most cases are viewed as a cost of doing business rather than a cataclysmic event.

Thankfully (and usefully!) the report lays out some of the costs for smaller businesses facing these lawsuits. In the US (unlike many other countries!), our legal system works where everyone pays their own way. That is, if you bring a frivolous case, you’re still going to be costing the defendant significant money to defend that case. This is what we talk about when we discuss SLAPP suits where the entire point is just to cost the defendant money (and mental energy), rather than to win the actual case. Taking away Section 230 would enable SLAPP suits to be a lot more effective because they would cost a lot more money.

Of course, one nice thing about some of the anti-SLAPP laws that are in some states is that some of them allow for a defendant in a SLAPP suit to demand the plaintiff pay for their legal costs. But, even then it only covers just some of the actual costs, and courts regularly reduce the amount awarded below the actual costs. The report notes that in the AllNurses case (mentioned above), the company asked for $130,000 for the costs associated with discovery, but the court only awarded $18,000 saying they could have done discovery cheaper.

The costs of these lawsuits pile up extraordinarily quickly, with no chance of recovery at all.

The paper also looks at ways to fix some of these problems — obviously starting with keeping Section 230 in place because of how much it helps protect against these frivolous lawsuits being dragged out to the point of destroying smaller companies.

Other suggestions include getting courts more open to the idea of imposing sanctions on those who bring abusive litigation — something judges have in their power but very, very rarely use, and when they do use it, it tends to only be in the most extreme circumstances (and often after multiple warnings).

But the paper also notes, correctly, that the best solution is pairing Section 230 with strong and robust anti-SLAPP laws because the combination of the two protects small companies and free speech against abusive, censorial litigation.

These are issues that we’ve written about here for years, and which often seem extremely misunderstood by critics of the big tech companies. For whatever reason, they seem to think that because Section 230 provides some benefit to larger companies that the way to punish those companies is to remove Section 230. However, as this report (and so much other stuff) makes clear, the real victims will be the smaller companies, who will be targets of abusive litigation.

Filed Under: abusive litigation, anti-slapp, free speech, litigation, section 230, slapp suits



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