Judge set to stall California's online stolen goods statute

SAN JOSE, Calif. (CN) — A federal judge on Thursday said she would likely block the enforcement of a new California law governing stolen goods sales online, stating that the statute conflicts with federal regulations.

At a hearing, U.S. District Judge Beth Labson Freeman told attorneys that Senate Bill 1144 was likely trumped by Section 230 of the Communications Decency Act, which shields online businesses and social media platforms from liability for content posted by users.

But despite urging from the plaintiffs at NetChoice, a powerful tech lobbying group that represents companies like Amazon, Google, Lyft, Meta, PayPal, Snap, Waymo and X, the judge said she wouldn’t bring any First Amendment elements into her ruling.

“Courts are loath to jump into constitutional questions where they are not required to,” the Barack Obama appointee told attorneys.

The judge said the conflict with federal law was enough to grant a preliminary injunction barring the California Attorney General from enforcing the statute, but also admitted she was still deciding whether her order would block the entire law or just specific sections.

“It may be my role to apply Section 230 narrowly and only to the sections of the law that are preempted by federal law,” Freeman stated.

Freeman also said that a related ruling in NetChoice’s favor, filed in the Northern District of Georgia, guided her thinking on the preliminary injunction, remarking that the judge in that case “nailed it.”

In court, NetChoice argued that California was essentially forcing a law enforcement role upon their member companies by requiring them to set up entire systems to monitor their platforms and report stolen goods under the threat of significant penalties — up to $10,000 for each violation.

“It commandeers these online platforms to act as if they are law enforcement,” Joseph John DeMott of Clement and Murphy, who represented NetChoice, told the court.

NetChoice expressed concern that even in good-faith enforcement of the law, it could be liable for violations that slip through the cracks.

However, California disagreed that its law would be as draconian as the tech lobbyists portrayed it.

“This enforcement mechanism of finding stolen goods and prosecuting for slips in the cracks alleged by NetChoice is just not true,” said Robert Leslie Meyerhoff of the California Attorney General’s Office, who represented the state.

California also raised questions of ripeness, calling the lawsuit “premature.”

Freeman ultimately agreed that the new law proposed “very significant obligations” on the part of NetChoice’s members and expressed her intent to issue a preliminary injunction.

Even with the judge’s ruling tentatively laid out, timing seemed to be a point of contention between the parties. Without a court order barring its enforcement, the law will take effect in less than a week.

“This law goes into effect in a few days. You’re not going to have my order in a few days,” Freeman told attorneys.

The judge said the injunction would take her between six and eight weeks to issue but added that if California didn’t agree to stay its enforcement before then, she would have “no choice” but to issue a one-page court order before the law takes effect, which she would modify later to include her reasoning.The judge directed the state to report back by Monday, June 30, as to whether it would agree to stay its enforcement while she wrote her order.

“I would appreciate a stay until my order is out, but I have no authority to ask for that,” Freeman said.

Paul Taske, NetChoice’s associate director of litigation, said he thought the hearing went “extremely well.”

“It sounds pretty clear that Judge Freeman will endeavor to give us the relief we need. So, we’re excited to see it,” Taske told Courthouse News in an interview.

An attorney for the California Attorney General’s Office declined to comment.

NetChoice is a trade association that represents some of the largest interests in the tech world. Founded in 2001, the group has steadily gained influence over the past decade and currently has multiple active lawsuits over state-level internet regulations.

The tech lobbyists filed a lawsuit against California in April, claiming that the new regulations “blatantly violate” federal law, contradict the federal INFORM Consumers Act and impose an “unreasonable” burden on its member companies.

The trade organization also claims the new law will hurt online marketplaces and disproportionately affect small businesses, putting them at a competitive disadvantage against the rest of the nation.

SB 1144, passed in August 2024 and set to take effect on July 1, 2025, was intended to make it more difficult to sell stolen goods online by expanding the number of parties that platforms are required to verify information from. It was proposed after lawmakers expressed concern that gaps in the existing law were allowing certain large online platforms to avoid these requirements.

Existing law instructs online marketplaces to collect certain information from “high-volume third-party sellers” — like their identification, contact and payment information — to safeguard against fraud. Businesses are obligated to suspend sellers who do not comply.

Although the law currently only applies to transactions made through an online marketplace’s payment processor, SB 1144 would expand that scope, requiring businesses to collect information from any transactions made “utilizing” an online marketplace. This would include online services, like Facebook Marketplace, Craigslist and OfferUp, that operate in the space once dominated by classified advertisements in print newspapers.

The new law also expands the number of people who can hold companies accountable. Past lawsuits were limited to civil actions brought by the attorney general, but the new law permits any district attorney or city attorney statewide to bring civil suits of up to $10,000 for each violation.

The new law also requires online marketplaces to report suspected stolen goods to law enforcement.

NetChoice argued that it would be “extremely burdensome,” or even “virtually impossible,” for its companies to gather accurate information about which third-party listings lead to offline* * transactions between two private parties, where payment is often made in cash.

This is the third active lawsuit NetChoice has filed against California. The other two concern laws over social media addiction and collecting the information of minors.

“Well, these cases are never-ending, aren’t they?” BLF remarked at the hearing’s start.

The tech lobbyists took a thrashing from the Ninth Circuit in a similar lawsuit in April when a judge compared them to tobacco companies.

This case was filed in the Northern District of California and heard at the Robert F. Peckham Federal Courthouse in San Jose, California.