Posted by: Patricia Salkin | January 10, 2019

Fed. Dist Court in CA Dismisses Sharing Economy Housing Provider Claims Against City Regulation

This post was authored by Edward Sullivan, Esq., Inc. v. City of Santa Monica, 2018 WL 3013245
(C.D. Cal., 2018) were challenges by two short-term rental housing platforms to Defendant City’s regulation of that industry, which pairs providers willing to share their homes with guests willing to purchase accommodations.

In 2015, Defendant prohibited “Vacation Rentals,” which were defined as rentals of residential property for thirty consecutive days or less, where residents do not remain within their units to host guests or obtained a city business license. The Original Ordinance also regulated “Hosting Platforms” like Plaintiffs, by barring them from “advertising” or “facilitating” rentals that violated the City’s short-term rental laws. It also required them to (1) collect and remit to the City applicable Transient Occupancy Tax revenue and (2) disclose certain information about listings to the City, including the names of the persons responsible for each listing, the address, the length of stay, and the price paid for each stay.

Plaintiffs challenged the ordinances in 2016, but the litigation was stayed while the parties negotiated. Defendant revised the ordinance to remove restrictions on publication of available rentals or verification of their accuracy. Rather, the Ordinance prohibits Hosting Platforms from completing any booking transaction for any residential property or unit unless it is listed on the City’s registry of licensed home-sharing hosts when the platform receives a fee for the booking transaction. Further, the Ordinance permits the City to “issue and serve administrative subpoenas as necessary to obtain specific information regarding home-sharing and vacation rental listings located in the City. The ordinance provided for penalties and stated it would not apply if were determined by the City to be in violation of, or preempted by state or federal laws.

Plaintiffs then amended their complaint to allege the Ordinance violates the Communications Decency Act (“CDA”), 47 U.S.C. § 230, the First, Fourth, and Fourteenth Amendments of the U.S. Constitution, the Stored Communications Act, 18 U.S.C.§ 2701 et seq., and California statutes. The City moved to dismiss the complaint under Fed. R. Civ. P. 12(b)(6) for failure to allege facially plausible claims for which relief may be granted.

Under the CDA, Plaintiffs alleged that the statutory exemption from liability of providers or users of interactive computer services from being treated as the publishers of information provided by others meant that their hosting platform activities cannot be required to verify whether a listing is included on a city registry before completing a booking, the challenged ordinance imposes liability on them based on third party content (i.e. information provided by the host). However, the City argues that Plaintiffs’ CDA claims must be dismissed because the Ordinance targets unlawful conduct that is unrelated to publishing activities. In considering the City’s previous motion for an injunction, the court found that the Ordinance does not penalize Plaintiffs’ publishing activities; rather, it seeks to keep them from facilitating business transactions on their sites that violate the law, following a decision in a similar case from the Northern District of California in Airbnb, Inc. v. City and County of San Francisco, 217 F. Supp. 3d 1066, 1072 (N.D. Cal. 2016) and adhered to that position here, finding no imposition of liability for publishing activities. This claim was dismissed with prejudice.

Plaintiffs also alleged violations of their First Amendment rights, contending that the Ordinance is a content-based restriction that burdens and impermissibly chills their protected commercial speech, arguments which also failed in Plaintiffs’ initial request for a preliminary injunction in this case, in which the Court found that the Ordinance regulates conduct, not speech, and that the conduct banned by the Ordinance—booking transactions for residential properties not listed on the City’s registry—did not have such a “significant expressive element” for First Amendment protection purposes. Because the Ordinance did not regulate speech, the Court found it need not determine a level of scrutiny under First Amendment principles. Moreover, because short-term rentals without a license were unlawful, it was not unlawful for the City to require divulging that information as provided in the Ordinance. The First Amendment claim was also dismissed with prejudice.

Plaintiffs also contended that the lack of a mens rea standard in the Ordinance violated their Due Process rights under the Fourteenth Amendment. The City responded that it “will accept the imputation of a requirement for scienter” and “nothing in the . . . Ordinance’s legislative record suggests that the City Council intended to dispense with mens rea as an element.” The City also argued that the absence of a specified mens rea does not invalidate a criminal statute; instead, scienter is an implied element for proving criminal liability. On the basis of relevant state and federal case law, the Court agreed and dismissed these claims with prejudice.

Plaintiffs allege that the Ordinance’s requirement that they regularly disclose private user information to the City, without any subpoena or other form of legal process, violates the Stored Communications Act (“SCA”) and the Fourth Amendment. However, the Ordinance provides that its disclosure obligations are subject to “applicable laws,” which include compliance with the Fourth Amendment, its code provisions and the SCA, under which the contents communications protected by the Act may be disclosed if the governmental entity obtains a warrant, an administrative subpoena, or a court order. Because the provisions of the Ordinance can be applied constitutionally in some cases, a facial attack is not warranted and Plaintiffs did not bring a valid as-applied claim. Thus this claim too was dismissed with prejudice.

The Court also declined to exercise pendent jurisdiction over Plaintiffs’ state law claims under the California Coastal Act and, because there were no valid federal claims before it, declined to undertake Plaintiffs’ claim for summary judgment. The case was thus dismissed.
This is another case in which efforts to regulate short-term rentals has been opposed with federal constitutional and statutory defenses. This case has been appealed to the Ninth Circuit and may be the subject of Supreme Court review. However, the decision in this case seems to have considered these claims thoughtfully and it is likely, in the absence of Congressional action, that state and local governments will be able to regulate this industry., Inc. v. City of Santa Monica, 2018 WL 3013245 (C.D. Cal., 2018).

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