Legal Troubles for Platform Business Models

Platform Business Model

Author Bio: Manan Daga is a law student at West Bengal National University of Juridical Sciences, one of the most premier law institutes in India. You can connect with him on LinkedIn.

Platform business models have become an integral part of start-ups, established businesses, and every other business line. They are growing all around us, from Facebook to Uber to even Tinder.

The convenience it offers in setting up the business has made it an attractive option for many young, and even many experienced entrepreneurs.

It becomes pertinent to delve into the legal aspect associated with such platform business models. In this paper, a brief introduction of the platform business model is given. Then, the legal troubles existing for these businesses are addressed.

However, there are many kinds of platform business models, and it can be challenging to address each one’s legal troubles. So, a general analysis is given to cover all the platform business models. Apart from this, a detailed analysis of a few popular platform business models is addressed too. The analysis will mostly cover Indian and American issues.

Thereafter, some suggestions for overcoming or controlling these troubles are elaborated. Then the paper will be concluded with an overall analysis of the legal issues vis-à-vis the platform business models.

If you, don’t know what a business model is, then check out this comprehensive guide on business models.

What is a Platform Business Model?

A platform business model is a mechanism which creates an interaction or an exchange between two or more participants [Source]. These participants are usually interdependent and act traditionally as consumer and seller.

There is a common misconception that every technological platform is a platform business model. So, to clear this confusion, not every technological platform is a platform business model since the essence of the platform model is to function by enabling interactions.

Platform businesses are merely selling the access to software used for matching the algorithms which will instil a reputation and trust among the participants or users [Source].

Most platform models do not require any physical inventory except a computer, internet access and its maintenance requirements. In a platform model, the business organization creates an ecosystem for the said interaction to take place, rather than offering a product like a traditional linear business model [Source].

The network effect in a platform business model plays a vital role. There are two kinds of network effects; a direct network effect, and an indirect network effect.

In direct network effect, an effect on one side of the platform will affect the same side [Source].

For instance, on Twitter or WhatsApp, if there is an increase in the number of users, then its value as a network and its value to other users will rise. Since everyone is using Twitter or WhatsApp, then someone who is not will feel isolated and may be forced to join it. It is also known as same-side network effects. [Source]

In the indirect network effect, an effect on one side of the platform will affect the other side. For instance, passengers and drivers are on different sides in Uber.

If the number of driver increases, then it will affect the passengers as they will have less waiting time. Whereas, if the number of passenger increases, then it will affect the drivers as they will have more riders which means more money. It is also known as cross-side network effects and is a very innovative revenue model too.

Platform business model can be classified in multiple ways.

Classification of platform business models is important to find out the legal troubles that they face

Firstly, platforms based on interactions is one way of classification. They are subdivided into two categories; exchange platform and maker platform. They are further sub-subdivided into multiple categories.
In an exchange platform, the said interaction happens only on a one-to-one basis. These include;

  • Service Marketplace
  • Product Marketplace, like eBay
  • Payments Platform, like PayPal
  • Investment Platform
  • Social Networking Platform, like Facebook
  • Communication Platform, like WhatsApp
  • Social Gaming Platform, like Minecraft

In the maker platform, the said interaction happens on a one-to-many basis where a creator connects with her/his viewers or audience [Source]. These include;

  • Content Platform, like YouTube
  • Closed Development Platform, like Fitbit
  • Controlled Development Platform, like Android
  • Open Development Platform, like Linux

Secondly, platform business models based on relationships is another classification. It has been further classified into four categories; aggregation platforms, social platforms, mobilization platforms, and learning platforms.

In aggregation platforms, the participant is exposed to a multitude of resources and the participant is then helped by facilitating interaction with the most relevant resource. It is like a marketplace platform, such as eBay.

Social platforms support the engagement of participants with similar interests and create a network of social circle and relationships, such as Facebook. It does not focus on transaction or task but focuses on connections.

Mobilization platforms foster the participants to work together and develop long term bonds, which will help them achieve something which was not possible individually.

Learning platforms help in gaining knowledge by learning. This is done by participants sharing their experiences and their understanding of various topics. This instils a sense of trust among the participants.

Thirdly, platform business models based on functions is another classification. It is also classified into four categories; transaction platforms, innovation platforms, integrated platforms, and investment platforms.
In transaction platforms, the business organization acts as an intermediary between the buyer and seller, and assists in carrying out a transaction.

In innovation platforms, the organization develops advanced technology, service or product which complements to existing technology, service or product and enhances the output with an innovation.

The integrated platform is a combination of the transaction platform and innovation platform.
Investment platforms are organizations that act as a holding company, a platform investor, or both of the above.

Platform business models uniquely make a profit. They charge a transaction or a convenience fee for connecting both the participants to each other. They also charge the advertising agencies, who wish to advertise their products on the platforms.

Sometimes, platforms models may charge for the basic access to interact with other participants. They also charge for advanced access which provides better facilities and services, like on LinkedIn or Tinder.

This is a brief insight into the basics of platform business models. This model has become prevalent in contemporary times. Therefore, it becomes indispensable to deal with the legal troubles and other legal issues present in the path of platform business models.

Generic Legal Analysis of Platform Business Models

Platform business models can face several legal issues. This depends on the laws of the land where it operates or may want to start its operations.

Every platform business has to comply with all the regulations and laws of that local area. It is one of the most basic requirements of any business. Obviously, different places have different laws and regulations. This leads to diversity in legal issues for the platform businesses.

United States of America’s (hereinafter referred to as the USA) model of federalism allows the state governments to enjoy its separate existence whereas, Indian model is quasi-federal. Therefore, separate states in the USA can have different legal issues, and those, in turn, will differ from the issues faced in India.

The most basic legal complications appear too simple yet, are too complicated. All the platform businesses have a challenge of ensuring that their platform is not used for any criminal or civil wrong.

For example, a social networking site has to ensure that the platform is not used for criminal wrongs like stalking or voyeurism.

A marketplace platform has to ensure that fraud does not take place either with a buyer or a seller.

Otherwise, the platforms should draft in a contract, clearing out explicitly who will be liable in cases of the criminal or civil wrongs, also known as liability clauses. This clarity gives the participants a feeling of security and eases out the legal complications.

The general legal issues every platform may face are consumer protection laws, copyright laws, trademark laws, labour and employment laws, competition laws, and insurance laws. Along with this, many areas are mandating occupational licenses and professional certification now, like cab related services, food delivery-related services, social media services, etc.

After the current situation of a pandemic, anti-gouging laws will become relevant too. Any new platform business will have to prevent the price gouging. Additionally, there are new and revised restrictions on usage of cabs, lodging services, marketplaces, etc. These will have to be explicitly considered in each of their respective areas.

Moreover, platforms like Airbnb have a big hurdle of zoning laws. Zoning laws aim to separate the commercial areas from the residential areas. This ensures the safety of residential areas.

Many cities have varying zoning laws. A platform business model will have to evaluate the same for each location. Sometimes, zoning laws aim to stabilize rents or ensure affordable housing for students in some areas.

Therefore, these laws need to be followed meticulously.

A significant portion of legal troubles faced by the platform business is also with their independent contractors or employees like Uber was facing [Source].

Uber platform business model

This proves that the platform businesses have to prepare for legal issues concerning both sides of the users, i.e. buyers as well as sellers.

Further, many social media platforms and other content platforms monitor the usage through cookies for advertisement. This can trace back the steps of the user. It may then result in the collection of data and information of the user, along with her choices and preferences.

This can be used to infringe one’s privacy critically. Electronic Communications Privacy Act of 1986, the Computer Fraud and Abuse Act of 1986, and the Wiretap Act of 1968 are some legislations for data protection in the USA.

Universal Declaration of Human Rights of 1948, International Convent on Civil and Political Rights of 1966, and the Budapest Treaty on Cyber Crimes of 2001 are some of the international sources for data protection.

In India, data protection is majorly governed by the Information Technology Act of 2000 and the Indian Penal Code of 1860. However, a Data Protection Bill of 2019 is being deliberated upon in the Parliament [Source].

Check out this article on data privacy laws in India and its impact on businesses to know more about the Indian aspect and this article on GDPR’s impact on marketers to know more about the EU aspect.

Therefore, data protection and privacy in cyberspace is an important issue which platform businesses must ensure. With an increase in awareness and number of laws, any flouting of these laws may pose a severe obstacle for the businesses.

Furthermore, some argue that the right to be forgotten should be brought in vis-à-vis cyberspace. This may create complications for platforms in storing the basic data of its users post their usage.

This is a general understanding of the legal issues. Subsequently, a specific analysis is laid down.

Specific Legal Analysis of Platform Business Models

Platform businesses cover a vast area of services in today’s world. It becomes difficult to include each and every kind of platform business. However, in this paper, I have dealt with the popular platforms and the legal issues they faced.

This will give an idea as to how and in which aspects legal troubles occur.

Airbnb has become one of the widely used platforms for lodging. It faced some significant legal issues and fought through it to make its mark.

airbnb faced several legal issues in several states and cities due to it being a platform business model

Primarily, an issue arose regarding the taxing of platform businesses at the same level as its competing industries [Source – page 28]. Airbnb was exposed to this issue.

They are technically not a hotel since they are just an intermediary connecting the guest to the house owner. However, an issue of imposing hotel taxes on Airbnb occurred.

Therefore, Airbnb had to pay taxes in millions of dollars to cover their backward pay in San Francisco. Other cities in the USA have also done so, depending on their state laws.

This issue of taxation could have grown into a big hurdle, but quick and necessary measures curtailed it. The platforms should take responsibility for collection purposes rather than individuals. This motivates the individuals to participate since it excludes complicated responsibility off their shoulders.

Moreover, there are numerous zoning laws which Airbnb is required to follow. In February 2015, San Francisco had promulgated a new ordinance regulating vacation rentals in private homes.

This ordinance was aimed at zoning laws for businesses like Airbnb. It created certain restrictions which allowed short-term rentals but protected the property for permanent residents. It discouraged non-permanent residents from occupying the property. Soon after it was passed, many people were advocating for new amendments too.

They wanted to sue the private hosts who would break the law. Also, they advocated for new insurance regulations for tenants who used their house for rentals, which would remove the landlord’s liability.

These laws create severe difficulties for platforms. It mandates them to ensure zoning laws for each area, and this hinders a uniform policy.

Further, New York zoning laws prohibit short term rentals unless the owners are living in the property [Source – page 32]. As per some sources, many Airbnbs in New York were unlawful until 2015 due to these zoning laws.

Furthermore, New Orleans banned the short term rentals of the entire houses which are not occupied by the private owners [Source]. This puts Airbnb at a backfoot and mandates them to adhere to the said zoning laws.

Therefore, this example of Airbnb shows how complicated legal issues arise for a platform business. This is just one business in one kind of platform business model. However, it shows where and how legal issues arise and how to handle them.

Another bigshot platform business is Uber. In many states of the USA, Public Utilities Commission mandated licensing requirements, background checks, insurance coverage and other stringent requirements [Source – page 26].

Thereafter, in 2017, Colorado fined Uber around $8.9 million for driving license issues like allowing drivers with past criminal records to drive [Source]. This was a result of non-conformity to the revised requirements. It underlines the legal difficulties platforms like Uber have to face.

In India, there is no specific legislation for digital aggregators like Uber and Ola [Source].

However, the Motor Vehicles Act of 1988 regulates road transport vehicles, and there are several other regulations for these digital aggregators too. Information Technology Act of 2000 (in India) is another act which can be relevant for regulating technological aggregators like Uber.

Uber had a tussle with the Delhi authorities, who wanted Uber to have radio taxi licenses. However, Uber believes itself to be a technological aggregator rather than a radio taxi service provider. Therefore, this led to a month’s ban on Uber and a journey of lawsuits against Uber.

There are environmental laws that platforms like Uber have to follow mandatorily. If they flout these environmental laws or the background checks, it will lead to challenges which will be bad for their business.

Any crime committed by the driver will lead to a legal issue for the platform. Unless they have a proper and clear liability clause in the agreement, the platform will have the said issues. It will be supplemented with backlash from the people, and a concern for their safety.

Therefore, it is pertinent to ensure authentic background checks and to follow all the other licenses and regulations.

Another source of legal trouble for the platform business is the employment status [Source – page 36].

In the case of Uber, the drivers claim to be employees, whereas Uber claims them to be independent contractors. This led to a rift, which further led to multiple lawsuits against Uber in the USA.

Similarly, FedEx had faced a lawsuit from its drivers who claimed to be employees, whereas FedEx claimed them to be independent contractors [Source – Alexander v. FedEx Ground Package Serv., 765 F.3d 981, (9th Cir. 2014)].

There are several cases like this, where participants claim to be employees because being an employee makes them eligible to all the benefits under labour laws like wage and hour regulations.

In another instance, Handy (a cleaning service platform) was involved. It is a digital connector of customers and cleaners. However, the cleaners claimed to be employees, whereas Handy claimed they were independent contractors [Source].

Hence, a class-action lawsuit was filed against Handy for wage and overtime laws. In fact, the legal issue of wages and work hours are concerning all platforms which claim the participants to be independent contractors, rather than employees.

This highlights how necessary it is to maintain the status of employment simple and unambiguous. Otherwise, if someone is an employee and not an independent contractor, then she/he is entitled to wage laws, work hour regulations, and all other employment laws. Therefore, this issue of employment status can pose a serious legal inconvenience for platforms.

Most platforms businesses propel because of technological advancements. Therefore, any legal issues concerning technology become significant. This also leads to multiple lawsuits against various platform businesses alleging information privacy breaches [Source].

Since technology and the internet are the inherent features of most platform businesses, any regulation of the same affects all platform businesses. For instance, India has been planning to regulate social media [Source]. This will lead to new legal challenges for social media platforms.

Recently, many big companies like Verizon, Unilever, Starbucks, Coca-Cola, etc. have been boycotting Facebook by pulling back their advertisements on Facebook [Source].

These companies are making a stand against hate speech and calling for better efforts against hate speech and disinformation on social media posts.

This action will result in tightening of the hate speech laws on social media by any profit-making platform business.

Therefore, there is a rise in laws and regulations due to increasing exposure to cyberspace. All the platforms, existing and newer ones will have to learn to comply with these.

Lastly, an example of Aereo will help us understand the legal complications better in a platform business.

Aereo was a start-up established in 2012 and provided online streaming technology [Source]. It allowed the users to view live TV and record it through the usage of an antenna.

Aereo which is a platform business model was declared illegal due to its manner of operation

They assigned every user an antenna and took separate recording for each and every user, which resulted in full control to the user over their content [Source – page 9]. This measure was taken to cover the copyright challenges.

On June 25, 2014, the Supreme Court of USA held Aereo as an illegal service provider after it violated copyright laws.

Aereo basically allowed its subscribers to watch and record broadcast television without the payment of retransmission fees [Am. Broad. Companies, Inc. v. Aereo, Inc., 134 S. Ct. 2498 (2014)]. Aereo did not even have a license to transmit the programming [Source – page 40].

The issue, in this case, was whether Aereo’s business was a part of “public performance”, and would it need permission from the copyright owners for the programs it transmitted. The apex court then held that despite technological differences, Aereo’s business was similar to a cable television provider.

Therefore, Aereo acts as an example of the importance of various licenses and permissions. It also teaches us that all the laws and legal formalities need to be completed before the launching of such unique ideas. Aereo depended largely on internet services. Hence, it should have complied with copyright laws too. This underlines the gravity of copyright laws in cyberspace.

Recommendations for Controlling Legal Troubles in Platform Business models

Know what's legal and what's not for a platform business model

As per the analysis, the most basic measure would be to think of all the externalities and put a liability clause for each of them in the agreement. Along with this, keep the participants informed of every decision or terms and conditions or legal documents.

This will make them feel secure while accessing your platform. This security covers cyberspace safety, physical safety, and mental safety.

Moreover, the platform businesses must acknowledge their rights and responsibilities towards the users too [Source – page 48]. This move will decrease the number of lawsuits or conflicts which may arise due to lack of clarity.

They may also put their liability exemption clauses under the ‘terms and conditions’ or the ‘privacy policy’. For instance, Airbnb warns everyone to not break any laws in its ‘terms and conditions’ document. Along with this, they also put a liability exemption clause, exempting them from any liability and responsibility from the host’s non-compliance of laws.

Technological services like websites or applications are integral in running platform businesses. In the USA, there is a provision which grants immunity to internet computer services with user-generated content like Uber, Airbnb, Facebook, etc. (as per their definition of them being digital aggregators or online sites) [Source].

The aforesaid provision is Section 230 of the Communications Decency Act of 1996. However, this immunity is granted only in civil liability, and not in criminal liability or state regulations.

For availing this immunity, the websites have to be user-generated. It simply means, this immunity is granted to those websites which do not supplement or contribute in any way to the publication of the liability arousing content, where another information content provider publishes it.

Moreover, this provision does not apply to a website that contributes to or supplements any unlawful content.

This is an example of how the platform businesses can avail the benefit of such statutes. If the platform businesses opt to be a user-generated website and do not contribute to any publication of the disputed content, then they may protect oneself from such legal complications.

Social media platforms should try to refrain from using highly privacy-invasive technology, otherwise it may even deter the users from operating it [Source]. There can be a few ways of ensuring that the users understand privacy policies.

The World Wide Consortium (also known as W3C) has developed a Platform for Privacy Preference (also known as P3P) [Source]. P3P is a widely used method.

In P3P, a standardized set of questions is used for covering all the aspects of the website’s privacy policy. After combining all the questions, a privacy policy is drawn up, which can be found, read and understood easily. The user can compare her own privacy preferences and act as per her comparison.

This makes privacy policies more accessible than before. Hence, platform businesses can elaborate on their privacy invasion and other liability clauses under P3P method. Since it will be read and understood in a better way, it will lead to lesser complications and lesser legal issues.

The platform businesses can put up a legal team for each state or city which has its own set of laws and regulations. It can be considered a necessary investment, considering the rise in the number of legal issues in each state or city.

Further, it should be paramount that no ambiguity exists in the roles of the users and participants of the business. It is always safer to lay everything out in simple and understandable terms. If there is no ambiguity, then unnecessary legal issues will automatically be reduced.

Lastly, business policies should not be extremely rigid. If new laws or regulations are passed, or old ones are amended, then the business should be in a position to adapt to the revised or new laws and regulations. This seems trivial but, if ignored, it can become a vital cause of legal stress.

Wrapping it Up

Platform business model is a vast area, and currently, it cannot be limited to boundaries. It can become confusing in itself too, which underlines the vastness of this business model.

In this paper, an attempt has been made to analyze and cover some of the most important legal issues concerning platform business models. Explaining each and every one of them with intricate detail is extremely difficult since each city and state has its laws and regulations. It also becomes very tedious to read.

Therefore, in this paper, I tried to elaborate on the approach to find out legal issues and obstacles for any platform business, rather than individually putting them down. This method has its own benefits.

There are many undiscovered platform business models with a lot of potential. When some of it may be discovered, such an approach will be more helpful rather than individual legal issues.

Platform businesses have the potential of evolving, just like the evolving laws and regulations. Changing times call for change in laws and commerce. In the current period of a pandemic, times are changing faster than before.

Hence, the platforms must be prepared to comply with any such changes. The systematic approach addressed in this paper can be helpful in a long way to deal with numerous legal troubles.

However, any business is built upon trust. Wherever trust exists, there someone breaks it too. When trust is broken (either by the users or the business owners), then, the need for justice arises. This need for justice brings us to the legal system.

Therefore, it is crucial to understand the legal troubles, ways to mitigate them, and legal recourses for a platform business. Today, we are surrounded by commerce and law. Hence, it becomes indispensable to learn and understand them together.

Read Next:

author avatar
Adhip Ray
Adhip Ray is the founder of WinSavvy. He has a legal, finance and data analytics background and has provided marketing consultancy to startups for over 5 years. He has been featured at multiple publications in multiple niches including HubSpot, Addicted2Success, Manta, FitSmallBusiness, Databox, IndiaCorpLaw, Bar and Bench and more!

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top