Communications Decency Act Provides No Safe Harbor Against Antifraud Liability for Hyperlinks to Third-party Content Under the Securities and Exchange Act

• Jurisdiction: United States,Federal
• Publication year: 2010
• Citation: Vol. 6 No. 1

Washington Journal of Law, Technology and Arts Volume 6, Issue 1 Summer 2010

Sheri Wardwell.(fn*)

Abstract

In 2008, the U.S. Securities and Exchange Commission (SEC) released interpretive guidelines regarding antifraud liability for statements and disclosures made on company Web sites. The SEC noted that a company may incur both criminal and civil liability under section 10(b) of the Securities Exchange Act and Rule 10b'5 for hyperlinks to third-party content. However, the Communications Decency Act, 4 7 U.S.C. § 230(c), expressly preempts civil liability for interactive computer service providers that post hyperlinks to third-party content on their Web sites. This Article examines whether section 230 immunizes companies from civil liability for hyperlinks to third-party content despite the SEC's interpretive guidelines imposing antifraud liability. This Article concludes that companies would likely be considered information content providers under section 230 and therefore outside the scope of the safe harbor provision for interactive computer service providers.

Table of Contents

Introduction......................................................................................50

I. sec Guidelines Impose Liability on Companies Hyperlinking to Third-party Content To Protect Investors.....52

II. Safe Harbor Under Section 230 Does Not Immunize Companies From Liability Under Section 10(b) of the '34 Act and Rule 10b-5....................................................................55

A. The Congressional Intent of Section 230 Indicates that Company Liability Under the '34 Act is Outside the Scope of Safe Harbor.........................................................56

B. The Plain Meaning of Section 230 Indicates that Companies Liable Under the '34 Act are Outside the Scope of Safe Harbor.........................................................58

C. The Judicial Interpretation of Section 230 Indicates that Companies Liable Under the '34 Act are Outside the Scope of Safe Harbor.........................................................59

1. Contribution to the Creation or Development of Content.......................................................................60

2. Provider as Publisher or Speaker of Content............64

Conclusion........................................................................................65

Practice Pointers................................................................................66

INTRODUCTION

In response to rapidly expanding Internet use, the U.S. Securities and Exchange Commission (SEC) has increasingly recognized the advantage of having issuers of securities publish company communications, statements, and reports on company Web sites.(fn1) SEC guidelines released since 1995 detail a trend towards not only greater acceptance of the Internet as an efficient means for fulfilling disclosure requirements of the Securities Act ('33 Act) and the Securities and Exchange Act ('34 Act),(fn2) but also increased regulation of company disclosures online.(fn3) In the 2008 Commission Guidance on the Use of Company Web Sites (Guidelines), the SEC clarified its position of imposing liability for communications, statements, and reports published on company Web sites.(fn4) To protect investors from misleading hyperlinked content on company Web sites, section 10(b) of the '34 Act and Rule 10b-5(fn5) impose civil liability for hyperlinked third-party content containing a material misstatement or omission that is attributable to the company.(fn6)

Section 230 of the Communications Decency Act provides a safe harbor for interactive computer service providers by preempting liability for publishing third-party content.(fn7) If section 230 preempts antifraud liability under the '34 Act, a company would be immunized from civil liability.(fn8) However, a company's antifraud liability for hyperlinks to third-party content under the '34 Act appears to be outside the scope of the section 230 safe harbor for interactive computer service providers. This Article examines (1) the nature of the SEC's Guidelines regarding liability for hyperlinks to third-party information under the Securities and Exchange Act and (2) whether section 230 can immunize a company from antifraud liability described in the Guidelines for hyperlinks to third-party content.

I. SEC GUIDELINES IMPOSE LIABILITY ON COMPANIES HYPERLINKING TO THIRD-PARTY CONTENT TO PROTECT INVESTORS

According to the SEC's interpretive releases on the use of company Web sites, companies are responsible for statements that may "reasonably be expected to reach investors or the securities markets regardless of the medium through which the statements are made, including the Internet."(fn9) Because of the widespread use of the Internet amongst investors, any online content attributed to a company can reasonably be expected to reach investors. Liability not only extends to communications made by or on behalf of a company on Web sites, blogs, or forums, but may also extend to hyperlinked content of third parties, such as reports made by financial analysts embedded on a company Web site that can be attributed to that company.(fn10) A private cause of action may be brought against a company for hyperlinked content under section 10(b) of the '34 Act and Rule 10b-5 when the hyperlinked content can be attributed to the company and the hyperlink creates a material misstatement or omission in connection with the sale or purchase of the company's securities.(fn11)

The sec considers hyperlinked content embedded on a company's Web site attributable to that company when the company has either entangled itself in the preparation of the information or adopted the information.(fn12) Under the entanglement theory, third-party content is attributable to a company when the company was involved in the preparation of the information.(fn13) For instance, a company may be entangled if its activity suggests an implied representation that the third-party content was reviewed and is in accordance with the company's views.(fn14)

Under the adoption theory, the content is attributable to the company if the company either "explicitly or implicitly endorsed or approved the information" regardless of whether the company was involved in the preparation of the content.(fn15) A company is presumed to have implicitly adopted information when it includes a hyperlink within a report that must be filed pursuant to federal securities laws.(fn16)However, when hyperlinks are used, for example, on a company Web site, the circumstances surrounding the use of the hyperlinks must be considered to determine whether the hyperlinked content should be implicitly attributed to a company.(fn17) In general, providing a link to third-party content indicates a company's belief that "the information on the third-party website may be of interest to the users of its website."(fn18)

To avoid the attribution of hyperlinked content, a company may use disclaimers, intermediary screens explaining why the link was provided, or exit notices between the company's Web site and the third-party's Web site.(fn19) However, no single tactic immunizes a company from attribution of content under the adoption theory.(fn20) Ultimately, adoption of content is determined by examining whether there is a reasonable inference that the company endorsed or approved the content.(fn21)

II. SAFE HARBOR UNDER SECTION 230 DOES NOT IMMUNIZE COMPANIES FROM LIABILITY UNDER SECTION 10(B) OF THE '34 ACT AND RULE 10B-5

Section 230(c) of the Communication Decency Act (CDA) is generally understood to immunize interactive computer service providers (service providers) from civil liability for state and federal claims regarding third-party content published on their Web site.(fn22) It has been suggested that section 230 may immunize a company that violated section 10(b) of the '34 Act and Rule 10b-5 by hyperlinking from the company Web site to third-party content.(fn23) However, section 230 cannot preempt antifraud liability under section 10(b) of the '34 Act and Rule 10b-5 when the section 230 safe harbor can be harmonized with the SEC's imposition of liability under the Guidelines and there is no conflict between the two rules.(fn24) Because companies that have adopted third-party content, or participated in its preparation, appear to be outside the intended, apparent, and judicially interpreted scope of section 230 safe harbor for service providers, the rules are not in conflict and section 230 cannot be used as an affirmative defense to a section 10(b) of the '34 Act and Rule 10b-5 violation.

A. The Congressional Intent of Section 230 Indicates that Company Liability Under the '34 Act is Outside the Scope of Safe Harhor

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