New Study Shows Section 230 Protects Small Businesses Much More Than Big Businesses
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We have tried to make this point many times before. A few months ago, I wrote an in-depth post in response to a famous economist who kept insisting that repealing Section 230 would hurt Facebook, that the reality is the opposite. If you understand the mechanisms by which Article 230 Actually works, the key is that frivolous and unnecessary lawsuits are kicked out of court much sooner – when the costs are still intense, but more bearable. Without Section 230, the end result of the court case might be the same – where the company wins – but the costs would be much, much higher. For Facebook and Google, it won’t make a huge difference. But for small businesses, it can mean the difference between life and death.
Fortunately, there is a new study that goes very in depth on this point and comes to the same conclusion. This new report Understanding Section 230 and the Impact of Litigation on Small Suppliers, from Elizabeth Banker to the Chamber of Progress is really, really good. It opens with a quick case study that brings out the key point:
Take the story of Allnurses.com for example: In 2014, a company offering test prep classes for nursing students sued an online forum called Allnurses.com (allnurses®) for allegedly defamatory posts by students discussing the merits of nursing test prep options.
In 2020, after six years of litigation, the Eighth Circuit Court of Appeals upheld Allnurses’ Section 230 immunity. Is it a victory? In a blog post announcing the Second Circuit’s decision, Allnurses.com wrote, “Even though we won (successfully defended) the case, this long, drawn-out, groundless lawsuit resulted in enormous mental anguish and enormous legal costs.”
There are many cases like this. We talked about Veoh, an early YouTube competitor that was funded and founded by Hollywood insiders, but was killed by lengthy lawsuits, which it eventually won, but the company was already dead by the time where it 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 immunity under section 230 for some parts of the trial (other parts were protected by 230). In the (very, very) long term, the housemates actually won the case. The same was true for another infamous Section 230 case, involving Malwarebytes. For some stupid reason, Malwarebytes wasn’t allowed to use Section 230 to get the case kicked out early, so it just went on and on… and eventually Malwarebytes won. But only after eating a ridiculous amount of time and money.
At least these companies survived. Many others are not so lucky. As this new report notes:
Most small businesses or individuals experience a lawsuit brought against them as an existential threat with profound emotional, financial, and opportunity costs. This can lead to worry about losing one’s livelihood and ability to support dependents or continue to pay employees. Small suppliers and individuals may face tough choices, such as getting a second mortgage or dipping into their savings to pay legal bills. Even getting a loan can be difficult, as being a party to a lawsuit must be disclosed on personal and business loan applications and can result in a loan being denied due to concerns about repayment capacity. A small business owner or individual must worry not only about funding a defense against a lawsuit, but also about the risk of compensation for damages against them, which could put assets like a home at risk. , cars, funds for children’s colleges and other savings accounts.
While defending a lawsuit, a business also misses important opportunities such as business expansion; the purchase of the necessary infrastructure; and attract investment, new customers, employees or partnerships with other organizations. Defending the suit will also take a long time
consulting lawyers, appearing in court and gathering information – all of which distracts from business as well as family and other obligations. In other words, when the business needs revenue and leadership the most, they may be the scarcest.
Most small businesses are uninsured because liability insurance is not a realistic option. Beyond an initial price that may be out of reach for small providers, insurance is likely to have a high deductible that must be paid out of pocket (in addition to premiums) before insurance coverage does not apply. Even with insurance, there is a risk that the insurance company will dispute a specific claim if, for example, it was submitted improperly. And finally, if the company has already been sued once, it may not be possible to get insurance or the conditions may be so bad that it’s almost as if you weren’t covered by insurance at all. .
As someone who has unfortunately been the victim of multiple lawsuits, all of the above is both true and hardly ever spoken anywhere (apart from the times when small business owners sympathize over drinks). As the report notes, large companies do not face the same risks at all.
On the other hand, large companies are less affected by lawsuits. The business may already have: 1) lawyers ready to deal with litigation (allowing the business to continue with minimal disruption); 2) insurance coverage that can offset the cost of a defense, settlement, or compensation for damages; and 3) sufficient revenue and cash reserves for most cases to be considered a cost of business rather than a cataclysmic event.
Fortunately (and helpfully!), the report lays out some of the costs for small businesses facing these lawsuits. In the United States (unlike many other countries!), our legal system operates where everyone pays as they please. That is, if you bring a frivolous case, you are still going to cost the defendant a lot of money to defend that case. This is what we are talking about when discussing SLAPP suits where the goal is simply to cost the defendant money (and mental energy), rather than winning the actual case. Removing section 230 would make SLAPP suits much more effective because they would cost much more.
Of course, a good thing about some applicable anti-SLAPP laws some states is that some of them allow a defendant in a SLAPP to demand that the plaintiff pay his legal costs. But, even then, it covers only part of the actual costs, and the 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 costs associated with the discovery, but the court only awarded $18,000 saying they could have done cheaper discovery.
The costs of these lawsuits add up extremely quickly, with no chance of recovery.
The document also examines ways to solve some of these problems – obviously starting with keeping article 230 in place because of how much it helps protect against those frivolous lawsuits dragged to the point of destroying small businesses.
Other suggestions are to make the courts more open to the idea of imposing penalties on those who sue abusively – something that judges have in their power but use very, very rarely, and when they use it, it’s usually only in the most extreme circumstances. (and often after several warnings).
But the paper also rightly notes that the best solution is to couple section 230 with strong and robust anti-SLAPP laws because the combination of the two protects small businesses and free speech from abusive and tax-based litigation.
These are issues we have written about here for years, and who often seem extremely misunderstood by critics of big tech companies. For some reason, they seem to think that because Section 230 provides certain benefits to large corporations, the way to punish those corporations is to remove Section 230. However, as this report (and so many other things), the real victims will be small businesses, which will be the target of abusive litigation.
Filed Under: abusive litigation, anti-slapp, free speech, litigation, section 230, botched lawsuits