California Gov. Gavin Newsom
SAN JOSE, CALIFORNIA - A California federal judge says Sacramento can't enforce key sections of a law, passed to address online sales of stolen goods, that would have required Facebook, Amazon, Ebay, Etsy and other operators of online marketplaces to collect business data, including banking information, about so-called "high-volume sellers" using their sites.
On July 11, U.S. District Judge Beth Labson Freeman granted a preliminary injunction against two recently enacted amendments to California's so-called INFORM Act. In the ruling, the judge determined the changes to the state law likely violate the First Amendment and are preempted by a similar, but less stringent federal law.
The decision was hailed by NetChoice, a group which advocates for large tech companies and which filed the lawsuit challenging the recently enacted provisions
“NetChoice is grateful the court recognized the serious legal infirmities with California’s INFORM Act amendments," said said Paul Taske, co-director of the NetChoice Litigation Center.
"If California is serious about addressing problems in the Golden State, it must get serious about the constitutional limits on its authority. Unconstitutional laws do not - and cannot - fix the issues facing Californians."
The lawsuit landed in federal court earlier this year, as NetChoice and its members, including online marketplace operators Amazon, Facebook parent company Meta, Ebay, Etsy, NextDoor and OfferUp, challenged the changes to the INFORM Act passed by California's Democratic legislative supermajority in 2024.
In California, the INFORM Act itself dates to 2022, when California lawmakers passed the law in a bid to address online retail crime and the fencing of stolen goods through third-party marketplaces, such as Facebook Marketplace, OfferUp and Ebay.
The measure was strongly backed by the California Retailers Association, which lobbies for the interests and legislative goals of retailers in Sacramento and elsewhere.
The law, which took effect in 2023, required online marketplaces to collect and "periodically verify" key information about "high-volume sellers," including their identification, contact information, and banking information. The law at the time defined "high-volume sellers" as those "making a minimum number of sales meeting certain criteria that are processed through the online marketplace."
Online marketplace operators were required by law to close their marketplaces to any sellers who refused to provide the information.
Online marketplace operators could face the risk of lawsuits and regulatory actions from state officials.
Just months after California enacted its law, the federal government has also passed its own version of the INFORM Act, reportedly in response to calls for a nationwide framework for such infomation collection from online sellers to prevent states from enacting a patchwork of varying regulations, complicating compliance.
Under the federal law, online marketplace operators are "only ... required to to count sales or transactions made through the online marketplace and for which payment was processed by the online marketplace, either directly or through its payment processor.”
In August 2024, California, however, moved to alter its version of the law and increase its reach. Among other changes, the revised version of the law included a provision redefining "high-volume sellers" to now count sales made by sellers "'utilizing' the online marketplace, whether processed through the online marketplace or conducted off-platform in direct transactions between buyers and sellers."
The new version of the law also now threatened online marketplace operators with state action if they fail "to alert law enforcement 'if it knows or should know that a third-party seller is selling or attempting to sell stolen goods to a California resident.'"
The law further requires online marketplace operators to dedicate staff and create systems "to monitor listings in order to affirmatively prevent and detect organized retail crime."
The law also would require online marketplace operators to explicitly provide people a way to directly report potential stolen goods being sold on their site.
After the measure was signed into law and as it took effect, NetChoice filed suit, seeking to block enforcement.
They argued the changes to the law violate the constitutional rights of online marketplace operators and sellers and directly conflict with federal laws, including the federal INFORM Act and the Section 230 provision of the Communications Decency Act.
Section 230 generally insulates social media companies and operators of other online platforms from being held legally responsible for content posted by others.
Judge Freeman agreed the amendments to the California INFORM Act likely run afoul of Section 230, by requiring online marketplace operators to actively monitor material posted by others and holding them legally responsible if stolen goods are sold through ads or other content posted on their sites.
And the judge agreed the state law provision requiring marketplace providers to track and count "both transactions made through the online marketplace and transactions made outside of the online marketplace when determining who is a high-volume third-party seller" conflicts with the overriding federal law, making the state law "in opposition and incompatible."
The judge issued an order blocking the state from enforcing the revised law, so far as it changes the definition of "high volume seller" and as it conflicts with Section 230.
NetChoice's lawsuit challenging the law remains pending, as it seeks a final order potentially declaring California's law illegal and unconstitutional.
