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Crowdfunding platforms, ISPs and online brokers

Friday, October 10, 2014

In this blog post, Eoghan Doyle looks at recent caselaw relating to Internet Service Providers (ISPs) and how existing laws (pre-dating the explosion of global crowdfunding) can potentially impact crowdfunding platforms and their obligation to ensure that only authentic crowdfunding projects are used.

During the summer of 2014, news emerged that LVMH Moet Hennessey Louis Vuitton and eBay Inc. settled a case over the sale of counterfeit luxury goods sold on eBay’s website.

Previously, a number of brands under the LVMH umbrella had sued eBay for allowing counterfeit goods to be sold on its website. In 2008, the Paris Commercial Court ruled against eBay awarding nearly €40 million for the violation. On appeal, this amount was significantly reduced to €5.7 million – still a huge amount for any business to have to pay. In 2012, it was further appealed, partially overturning the 2008 appeal and ruling that the lower court did not have jurisdiction as to the US eBay website but upholding the €5.7 million in damages . News then emerged in June of this year that the parties had had settled the dispute, reminding us of the large sums of money involved in this case and the legal difficulties that websites face in facilitating sales of third party goods through their website.

The earlier French judgements found that eBay was more than just a passive host of information and had breached their duty of care in not providing adequate screening systems or general warnings – thereby not doing enough to prevent counterfeit goods to be marketed via the eBay website.

This case raises interesting issues for crowdfunding platforms as such platforms will often facilitate a campaign company to raise funds for the future sale of products. In such an instance, the platform, like eBay or Google, is acting as an ISP and will be subject to the EU E-Commerce Directive (2000/31/EC), which was at issue in the eBay case. The platform therefore needs to be wary of any illegal activity of campaigns that are promoted via their site – such as “ripping off” a third party’s intellectual property rights by the sale of counterfeit goods.

Interestingly, in the eBay case, the Paris Court of Appeal referred to the 2010 CJEU judgement in the Google AdWords case in which the judge, referring to the E-Commerce Directive, stated that the exemptions from liability for ISPs established in that directive cover only cases in which the activity of the ISP is “of a mere technical, automatic and passive nature” which implies that the service provider “has neither knowledge of nor control over information which is transmitted or stored”. In applying this decision, the French court determined that due to the services provided by eBay, it did not play a passive role but that it was acting as a broker.

This case highlights the issues that crowdfunding platforms face in coming to grips with their obligations to stay on the right side of the law. It is very difficult to see how a crowdfunding platform could be seen to be a passive ISP as crowdfunding platforms by their very nature tend do more than just host information. For example, they broker commercial transactions and they verify information on their site – as may be required by law depending on the jurisdiction of the platform, or because of a commercial incentive to ensure only quality campaigns make it on to their site. There are currently different standards for the verification or quality of information provided about campaigns on crowdfunding platforms. For example, in the UK, the Financial Conduct Authority has confirmed that crowdfunding platforms are required to “consider the nature and risks of the investment, and the information needs of their customers, and then to disclose relevant, accurate information to them”. Therefore, platforms are not obliged to carry out specific due diligence but must provide sufficient detail to give a balanced indication of the risks and benefits of the offer, including whether any due diligence has been carried out which gives the investor some level of comfort.

In New Zealand, platforms must have anti-fraud and fair dealing policies in place that enable them to assess issuers and their management and if needed, exclude a campaign from using the platform. In Canada, platforms will be required to conduct background checks on issuers, their directors, executive officers, promoters and control persons – including criminal and regulatory checks.

It would appear that crowdfunding platforms walk on somewhat of a tightrope balancing their legal obligations with their commercial objectives. On the one hand, platforms will not want to be responsible for the misconduct of campaign companies and some will argue they are merely a conduit and should not be obliged to check the information that campaigns display on their site.

If platforms sit back and allow campaigns to say or do what they like without taking an active role in the process they might have an argument to avail of the passive ISP exemption under the ECommerce Directive, but the commercial reality surely is that this is not a wise move as it will inevitably dilute the quality of their offering as not only are other successful sites vetting their campaigns, but such an approach is also likely to lead to disputes or bad publicity involving the platform itself.

Given the line of case law in this area, platforms also need to be wary of companies promoting counterfeit goods or goods that might prejudice the rights of brand owners on their site. To this end, platforms should ensure that the contracts they have with campaign companies provide adequate assurance on the authenticity of the goods on offer and provide suitable protection for the platform in the event of a breach. For now, platforms in Ireland do not have specific vetting obligations on the campaigns that are run on their sites. As the market matures, more and more countries are developing rules in this area meaning platforms know where they stand and investors get a degree of comfort that what they are considering investing in has been examined at least at a basic level, for example that the promoter is not a convicted criminal.

The eBay case reminds us of the potential exposure an ISP can face if it moves beyond the passive ISP role to a more involved broker relationship. In my view, for a crowdfunding platform to thrive it cannot afford to just take a passive role as the market will demand genuine quality projects, which will require some form of vetting on behalf of the platform – and in order to protect itself, the platform must (a) adhere to its local laws on due diligence or verification of project owners and their projects; and (b) ensure their terms and conditions provide robust protection to guard against infringement of third party intellectual property rights.

For more information, please contact Eoghan Doyle


Eoghan Doyle