Backpage Executives Must Face Money Laundering Charges Despite Section 230–People v. Ferrer

Yesterday, a California superior court judge dismissed pimping charge (due to Section 230) but did not dismiss money laundering charges against three Backpage executives. This ruling has potentially significant consequences for Backpage and its executives, the pending Congressional bills to amend Section 230 (the Stop Enabling Sex Traffickers Act of 2017 (SESTA) and the Allow States and Victims to Fight Online Sex Trafficking Act of 2017, and Section 230 generally.

Background

Backpage has been the subject of numerous civil and criminal enforcement actions over the years due to its publication of online prostitution ads. Most of those lawsuits have been immunized by Section 230, which says that websites aren’t liable for third party content. In 2013, the California Attorney General (now-Senator Kamala Harris) joined a letter to Congress complaining that Section 230 prevented state AGs from prosecuting Backpage. Despite this admission, last year Harris’ office prosecuted Backpage’s executives anyway, saying that Backpage engaged in criminal pimping. Completely unsurprisingly given Harris’ concessions, the court dismissed the complaint due to Section 230.

Instead of appealing the dismissal, the California AG’s office prosecuted the Backpage executives a second time, again alleging pimping (only against Ferrer) and this time adding money laundering charges against all three executives. The court partially granted the executives’ motion to dismiss (what’s called a “demurrer” in California state courts).

The Ruling

Among other procedural matters, the court addresses the double jeopardy issue. It says that when criminal demurrers are granted based on legal grounds (such as Section 230’s immunity), the state can file the charges again. Thus, this case isn’t double jeopardy. The court sidesteps Backpage’s malicious prosecution assertions.

The Pimping Charges

The court says the pimping charges require the state to prove that “Defendant Ferrer knowingly lived and derived support from prostitution earnings.” The court says Section 230 facially applies: “to hold Defendant responsible for the content of the advertisement would require holding a publisher liable as if he was the speaker of the content. Contrary to the People’s claim, doing so directly triggers, not defeats, the immunity provision of the CDA.”

The court continues:

Immunity may be removed if Defendants’ conduct went beyond those of a publisher and constituted content creation. This may happen when a provider crosses the line from providing a neutral interactive service that simply replicates offending third party matter and instead takes active control of the content of a web posting.

This active/passive distinction is a bastardization of the Roommates.com case, which talked about Section 230’s application to “neutral tools” and how a site might lose immunity if they actively edited content to change its meaning (i.e., dropping the “not” from “Joe is not a thief”). Normally when a court twists the test to the active/passive distinction, it’s bad news for the defendant. Not so here. The court correctly continues “if a provider’s acts ‘materially contribute’ to the illegality of the material, immunity will be lost,” a much higher and more precise legal standard than “active control of the content of a web posting.”

The state argued that Backpage “edited” user advertisements because of its keyword filters, which advertisers could bypass by editing the blocked keywords into different words. Even if the filter drove users to adopt coded terms, Backpage’s use of the keyword filter was a protected editorial function, not a material contribution to the ads’ illegality (cites to Doe v. Backpage and Fields v. Twitter).

The state alleged that Backpage knowingly profited from prostitution ads. The court says that Backpage’s knowledge is irrelevant; “courts have refrained from presuming to know a publisher’s motivations for editorial decisions” (cites to Lycos, Doe II v. MySpace and Doe v. Backpage). The court also discussed the Backpage v. McKenna ruling’s discussion on scienter:

the court recognized the difficulty in assigning knowledge of a third-party’s intent to a publisher when that third party places an ad with Backpage. The court acknowledged that the pimp who publishes the advertisement certainly knows whether his offer is implicitly for sex, but expressed serious doubt that one could assign such knowledge to a publisher as to whether an advertisement “implicitly” offered sex. If an online service provider publishes advertisements that employ coded language, a reasonable person could be misled to believe that facts exist when they do not: an advertisement for escort services may be just that. Moreover, if the offer is “implicit,” a third party cannot ascertain that which is being offered before the transaction is actually consummated – a fact not likely to be known by a publisher

The court then turns to the state’s allegations that Backpage syndicated user information to create unauthorized user profiles on other websites it operated (BigCity.com or EvilEmpire.com). The state claimed the unauthorized user profiles misappropriated publicity rights. While the state’s effort to enforce publicity rights is puzzling on many fronts–including the fact that Section 230 can apply to publicity rights claims in the Ninth Circuit–the court doesn’t really engage with the publicity rights underpinning at all. Instead, the court distinguishes Anthony v. Yahoo because the syndicated data wasn’t fabricated. The court continued:

There is no allegation that in taking the data from the Backpage ads, Defendants created the injurious nature of the material. Moreover, the People’s allegation that the purpose of these “new” posts was to direct web traffic back to Backpage demonstrates that if a person was interested in the reposted profile, the person was redirected to the ad on Backpage. While additional advertisement revenue may have been a byproduct of this redirection, the original poster gained increased visibility of his ad. Increased visibility to the classified ads posted by third parties permissibly leads to search engine optimization in an effort to increase the visibility of the information provided by the third party [cite to Asia Economic Institute v. Xcentric and MA v. Village Voice].

Finally, the state tried a general argument that we all know what’s going on: “Defendants sought to structure their business to obtain maximum profits from the illegal sex trade,” citing J.S. v. Village Voice. The court finds the citation unpersuasive (emphasis added):

the factual allegations fall short of those alleged in J.S.. There is no allegation that Defendants required information essential to the illegal trafficking of underage girls. Instead, the People’s allegations attempt to assign criminal liability to Defendants who offered an online forum, on which other people posted advertisements that led to prostitution, and that Defendants realized profits instead of “actively preventing” the sale of sex. These allegations confuse moral obligations with legal ones and have been rejected in other jurisdictions….As alleged here, the prostitution took place as a result of an advertisement placed by a third party. Thus, the only “manipulation” would be in the act of extracting the content from the original ad and/or from the act of physically posting the extracted content on a new site. Backpage’s decision to charge money to allow a third party to post content, as well as any decisions regarding posting rules, search engines and information on how a user can increase ad visibility, are all traditional publishing decisions and are generally immunized under the CDA. In short, the victimization resulted from the third party’s placement of the ad, not because Backpage profited from the ad placement (cites to Doe v. Backpage and Cohen v. Facebook).

I think the bolded line hits at the heart of the matter. Backpage made different choices than I would make personally. Still, the standards for criminal prosecution are exacting, and “making immoral choices” does not satisfy those standards.

The Money Laundering Charges

The court summarizes the state’s allegations:

the People now allege that Defendants conspired to orchestrate a bank fraud by misrepresenting to credit payment processors that they were not processing transactions from Backpage, and this misrepresentation would trigger a release of funds from banks. The overt acts alleged clarify that Defendants created multiple classified websites, and when applying for (at least one) merchant account, Defendant Ferrer omitted any reference to Backpage, despite intending to process Backpage transactions through the account. The People allege that credit payment processors, along with American Express, would not have knowingly processed the payments for Backpage and the banks would not have released funds absent Defendants’ trickery.

I’m not an expert in money laundering, or the underlying predicate illegal act of bank or wire fraud, so I can’t tell how much of a reach this is. The court wrestles with a variety of interesting doctrinal dilemmas created by this charge, all of which is new to me. However, the court does seem to establish a high bar for successful prosecution, saying that the state will eventually have to prove that the defendants “either invest[ed] money into the underlying criminal scheme, or conduct[ed] transaction with profits from the scheme and the People must show that the profits came solely from that underlying criminal activity.” I don’t know strictly the court will interpret this standard.

The court dismisses the money laundering charges predicated on pimping because Section 230 preempts the pimping predicate.

Implications

This is an unusually thoughtful and well-constructed opinion by a California superior court judge. Combined with the other judge’s Section 230-based dismissal in the earlier People v. Ferrer case, there is even more reason to believe that the state’s prosecution is preempted by Section 230. In an apparent nod to the pending bills, the judge does make a couple of references that Congress can change this result.

This ruling has potentially important consequences for the pending bills to amend Section 230. Much of the rhetoric about the bills has specifically targeted and called out Backpage–and only Backpage. A key assumption for the bills is that Backpage needs to be crushed and existing law isn’t getting the job done because of Section 230. As this ruling shows, existing law may in fact be sufficient to crush Backpage irrespective of Section 230. As a result, there is no need–and certainly no urgency–to rush through amendments to Section 230, with potentially major consequences for the entire Internet, while courts are still resolving the matter. (Indeed, that would be true even without this ruling because of the pending grand jury investigation into Backpage in Phoenix that may use the SAVE Act, the anti-Backpage law Congress just enacted in 2015).

However, it’s possible that, despite the anti-Backpage rhetoric, the advocates supporting the pending bills aren’t really targeting just Backpage but have larger objectives to undermine or eviscerate Section 230. I expect this ruling will expose the advocates’ true agendas. Because a state prosecution of Backpage is making progress without any changes to Section 230, those advocates should be willing to acknowledge that amendments to Section 230 aren’t essential to achieve their anti-Backpage goal. More likely, I expect the bill supporters to shift the rhetoric about the need for the bills to deemphasize Backpage as the target. If so, this would highlight that Backpage was only a surrogate target–and other Internet entities are also in the bills’ target sights. Once that rhetorical shift occurs, I think we deserve clear answers about who else the proponents expect will be affected by the bills–and how.

Case citation: People v. Ferrer, 16FE024013 (Cal. Superior Ct. Aug. 23, 2017)

Case Library

* Ruling on Demurrer of the second prosecution. Blog post.
* Defendants’ Continued Demurrer to Dismiss the State’s Third Complaint
* Defendant’s motion to enforce dismissal and alternative demurrer; prosecutors’ opposition.
* Complaint for the second set of felony criminal charges
* Trial court’s final ruling granting the demurrer. Blog post.
* California’s Supplemental Brief in Opposition to Defendants’ Demurrer to Felony Complaint and defendants’ response
* Trial court’s tentative ruling dismissing the charges
* Reply to the opposition to the demurrer
* California’s opposition to the demurrer
* Demurrer, statement of Lacey and Larkin, and letter to AG Harris
* Criminal Complaint
* Declaration in support of arrest warrant and warrant
* Press Release, Attorney General Kamala D. Harris Announces Criminal Charges Against Senior Corporate Officers of Backpage.com for Profiting from Prostitution and Arrest of Carl Ferrer, CEO
* Press Release, AG Paxton: Arrest of Backpage.com CEO Shows Texas Doesn’t Tolerate Human Trafficking
* My blog post: Some Comments on the CA/TX Attorneys’ General Prosecution of Backpage’s Executives

SESTA-Related Links

* How Section 230 Helps Sex Trafficking Victims (and SESTA Would Hurt Them)
* Sen. Portman Says SESTA Doesn’t Affect the Good Samaritan Defense. He’s Wrong
* Senate’s “Stop Enabling Sex Traffickers Act of 2017”–and Section 230’s Imminent Evisceration
* The “Allow States and Victims to Fight Online Sex Trafficking Act of 2017” Bill Would Be Bad News for Section 230
* WARNING: Draft “No Immunity for Sex Traffickers Online Act” Bill Poses Major Threat to Section 230
* The Implications of Excluding State Crimes from 47 U.S.C. § 230’s Immunity