22 May 2023

A Non-Binary Approach to Platform-to-Business Transactions

Social media is a disruptive technology. It has not only transformed political discourse and social interactions, but has also shaped the market economy, by disintermediating traditional players and creating new dominant powers. This transformation is challenging fundamental distinctions in contract law, between an employee contract and independent contractor agreement, or between consumer and business transactions, to name a few.

In this commentary, we demonstrate how contract law may evolve to address such challenges. Contract law legal doctrines are applied with great sensitivity to contract classification because different types of contractual relations invoke different values and trade-offs. New classifications might be introduced when a pattern of typical features make these contractual relations sufficiently different from existing categories. By recognizing the unique features of platform-to-business relations, courts can better posit them in the spectrum between business and consumer contracts, while securing business users’ unique interests.

Business Users on Social Media

Social media has introduced new opportunities for individuals to launch their own small business and establish direct communication with suppliers and prospective customers. Users can now profit from promoting their art and music, and commercializing their proficiencies, from selling homemade cookies to offering online private lessons. Users may add a business page to their personal profile, often interconnected through various channels, such as Facebook, Instagram and WhatsApp in the case of Meta. This new business-to-user-through-platform model is disrupting the traditional value chain, converging functions previously performed by manufacturers, wholesalers, retailers and consumers.

Intermediation by social media platforms has some key unique features, which shape the role of those engaging in market transactions. First, digital platforms operate in a two-sided market, where services are provided for “free” in one market, only to be leveraged and attract suppliers and advertisers in the other market. Second, platforms intermediate among the different stakeholders by controlling data on both the demand side  – what users like to watch and read or how fast they make purchase decisions – and on the supply side – how much of a certain product was sold and at what price, or how many views a video received and at what times. This provides platforms with unprecedented information on the market as a whole, and enables them to not only respond but also to anticipate and shape market trends and preferences. Finally, blurring private/social/business boundaries, digital platforms dominate multiple areas of everyday life. For instance, META channels may facilitate intimate exchange and business transactions (WhatsApp), community building (WhatsApp groups), promotion and marketing (Instagram), and political protest (Facebook). Users on digital platforms, therefore, may play multiple roles on social media: one may use a single platform as a worker, friend, creator, student, and political activist, with the distinction between these roles often obscured by design.

Users are providing platforms with meaningful considerations. As forcefully argued by numerous scholars, users are “paying” with their attention (“eyeball”) to advertisements and by their personal data, which is then sold by platforms to third parties. Moreover, users are often the producers of content – original music shared on YouTube, photos uploaded to Instagram, and posting on Facebook – which is the main draw for other users, thereby strengthening the leverage of (already dominant) platforms. Similarly, small businesses and social entrepreneurs build communities of followers, which also invoke multiple interests and expectations.

Consequently, in a platform economy, the question who is a consumer and what is a consumer transaction becomes increasingly complex.

Contract Classifications Re-Examined

Contract law often distinguishes between business transactions and consumer transactions. In business transactions both parties presumably entertain equal knowledge, sophistication and bargaining power, and are therefore considered formally equal agents, free to fashion their transaction however they see fit. A consumer contract, by contrast, is usually a short-term, one-time transaction, involving the transfer of assets or services in exchange for payment between a sophisticated and legally savvy business and a non-sophisticated individual. Accordingly, consumer protection laws would typically apply disclosure obligations, prohibit misleading actions and offer a right to revoke the contract in case of unfair or deceptive practices. Indeed, the distinction is so entrenched that some contract scholars consider the law of consumer contracts as separate and distinct from the law of (business) contracts, and for the American Law Institute to draft a Restatement of Consumer Contracts alongside its Restatement of Contract.

This classification, however, does not neatly fit the contractual relationship of small and midsize enterprises (SMEs) and platforms. The dominant market power of digital platforms and their multiple functions create new vulnerabilities in business users, which are not adequately addressed when viewed as simply a business-to-business transaction.

The typical example of a business-platform dispute regarding account blocking may illustrate this misfit. Buffie Purselle, an influencer and former TV reality star was kicked out of her Instagram account, causing her to lose over 130,000 followers and associated profits. She is not alone. A report recently published by the Israeli Internet Association, describes a pattern of online hijacking and fraud targeting the META accounts of small businesses. Though accounts may be blocked for various reasons, including platforms’ arbitrary or opportunistic ones, financially-driven hackers pose a distinct and significant threat to business users. Often, the objective of the attacker is to obtain exclusive control over the victim’s digital property, most importantly the advertising accounts linked to his or her credit cards. Attackers, however, might also be competitors or other adversaries, who maliciously exploit the platforms’ automated content moderation systems, by posting unlawful content for a system to automatically detect as a violation of its terms of service (ToS), and to subsequently block the account. Similarly, political activists and human rights organisations have been silenced, as strategic players, such as governments, have sent notices to social media at massive scale, claiming that the human rights postings were illegal content.

Platforms rarely offer any procedural or substantive remedies for unwarranted account suspensions, relying on their ToS to retain unlimited discretion to suspend or terminate accounts. In the US, most lawsuits brought against platforms for termination in breach of contract were dismissed.

The disputes around business account blocking thus demonstrate the shortcomings of applying the standard consumer-business classifications to such disputes.

Digital platforms govern all communication channels of business users; not only with their friends and family, but also with suppliers, customers, and future customers. While the automated systems of content moderation were designed to protect users from harm caused by unlawful content, these systems make it difficult for victims, erroneously identified as offenders, to report and flag the attack and receive remedy. Moreover, in addition to the loss of intimate contacts and connection with social acquaintances, business users incur severe and sometimes-irreversible commercial harms – elimination of their businesses’ transaction histories, the disruption of their order tracking, both from suppliers and to customers, and their ability to use payment services. These harms to the day-to-day operation of their business may also lead to reputational harms, and to the loss of a community of followers. Small businesses, which pay the platform for business promotion and invest in sustaining a customer base, experience another layer of sunk cost.

However, consumer protection law offers only limited remedies to affected users, typically providing them only with the right to revoke the contract, which is hardly relevant to account suspension scenarios, and to receive limited damages.

The platform to businesses (P2B) transaction may also not fit the underlying assumptions and contractual expectations of a simple business transaction, as personal uses and business practices are often converged. Sometimes, personal content is posted to generate a community of followers (as in the case of influencers for instance) and other times, relationships with potential customers may intertwine  with social or political engagement. The P2B transaction is often long-term, and success (for both the business and the platform) may depend on collaboration in developing and sustaining a community of followers. The boundaries between the personal, communal, market and political practices are often blurred. Moreover, in P2B relations, there are often significant gaps in knowledge, sophistication and bargaining powers. Business users tend to be completely dependent on the platform for running their business, lacking any independent offline management, and are themselves a user in the ecosystem created and controlled by the platform.

At the same time, when viewed as a business transaction, contracting parties are often held to a higher standard, and are expected to incur the risks associated with the bargain (including the risk of suspension/termination), and to ensure the contract fits their desirable risk allocation. Thus, neither categorization provides business users with helpful remedies for their predicament, leaving them entirely dependent on the platforms’ goodwill.

Moving Beyond Binary Classifications

In a forthcoming paper we show how the principles of contract law were applied by courts in Israel to construe P2B transactions. These courts have extended the classification of consumer contracts to apply in some circumstances also to businesses. Based on the analysis of this body of cases, we propose to move away from the binary classifiers of business/consumer, and to adopt a spectrum approach, where P2B transactions might be located between B2C and B2B depending on the particular circumstances.

In recent years, Israeli courts have been called upon to construe the contract between business users and digital platforms in the context of Meta ToS, providing that “any disputes concerning a Consumer” will be litigated in the jurisdiction where he or she resides and according to the local law, while all other disputes involving Meta will be resolved by courts in California and will be governed by the laws of the State of California. Meta has routinely filed a motion to dismiss, claiming that pursuant to its ToS the court lacks any jurisdiction over suits filled by business users. In a series of decisions discussed below, courts have dismissed this claim, thus developing a more flexible broad definition of a consumer in digital platforms.

A consumer is commonly understood as a person who buys property or receives a service for personal, domestic or family consumption. That is, as opposed to business actors, who purchase assets and services used for the production of products, rather than for their self-consumption.

In Necht v. Facebook (TLV 2020), the district court addressed a lawsuit concerning the alleged unlawful termination of both a personal profile and the linked business pages used by the plaintiff to promote some online courses. The court denied a motion to dismiss, holding that the plaintiff should be considered a Consumer, since the mixture of personal use and business affairs was generated by-design. The court further held that disparities of power between Facebook and the plaintiff were so significant that they blur any distinction between business and consumptive uses of the platform.

The issue of contract classification was further addressed by the Israeli Supreme Court in two recent decisions. Gal v. Facebook (2022), involved the purchase of advertising services. The plaintiff argued that Facebook failed to ensure that the advertising met its standards, contrary to its obligations under the ToS, and consequently it was removed and the account was blocked. In denying Facebook motion to dismiss, the Supreme Court determined that the plaintiff should be classified as a consumer under the contract, reasoning that even though the advertiser was a “business-commercial” actor, he was not necessarily a sophisticated enough player to remedy the disparity of bargaining power with Facebook. Interestingly,  the court explained that SMEs are often more similar in their bargaining power to consumers, and are even inferior to consumers since they are completely dependent upon Facebook for advertising services.

An important milestone in developing the flexible notion of Consumer for P2B transactions, was Troym Miller Ltd. v. Facebook Ireland Ltd. (2022). The case involved the owners of  fashion fairs and lifestyle business, which used Facebook’s advertising services as their main advertising platform. In a lawsuit filed against Facebook, they alleged that it was negligent  in combining their separate business accounts, causing Troym Miller severe damages. Both lower instances had accepted Facebook’s claim that the dispute does not pertain to a consumer, and therefore, per the ToS, should be adjudicated according to the laws of California. In denying Facebook’s motion to dismiss, the Supreme Court held that the definition of a consumer is not a static one. Instead, the scope of the definition may depend on the purpose for which the law seeks to protect consumers, primarily on information gaps and disparities in bargaining power. Accordingly, a consumer in Facebook ToS may include SMEs that have purchased advertising services, if there are immense disparities in bargaining power and information gaps. At the same time, the court excluded SMEs from the definition of consumer, when they are large sophisticated businesses, with financial power, relevant experience and expertise.

The Israeli Supreme Court decisions are particularly striking, considering Israel Standard Contract Law, which applies to all types of transactions and allows courts to invalidate terms which accord drafters with an unfair advantage. In other words, the Court found commercially-orientated users to constitute consumers despite having available legal tools to address bargaining inequalities in P2B transactions.

In other P2B disputes, courts have also acknowledged that SMEs may have some additional duties, which do not otherwise apply to consumers. These include, for instance, a duty to examine the contractual environment where a business is a sophisticated repeat player (Viva Media v. Google), or duties to inquire and avoid any injury or violation of the rights of others, such as intellectual property rights (Zohar v. Facebook). In both cases, the court also found the user to constitute a business.

It is only by looking beyond any particular decision, then, that the emerging notion of P2B contracts expands the definition of a consumer beyond self-consumption, and conceives P2B contracts as a spectrum, which is not entirely classified as B2C, but at the same time not quite B2B. It is this non-binary approach that would enable courts to secure users interests under the ToS, which are standard form contracts, drafted unilaterally by platforms who exercise dominant market power, and at the same time, leave room to hold businesses accountable to some obligations depending on the circumstances.

P2B contractual lens

Europe has taken a regulatory approach to P2B contracts. A new P2B Regulation came into force in 2020, defining platform obligations towards business users. Enforcement is mostly at the hands of the authorities or business representative organisations. Moreover, the Digital Service Act, which entered into force in November 2022, provides an additional layer of protection to users’ rights, such as securing some procedural safeguards that require a warning before blocking and a right of appeal.

These two strategies for addressing the rights of businesses in P2B transactions – regulation and contracts – are not mutually exclusive. Our research demonstrates the advantages of the contractual approach, which could offer a complementary solution to the obligations of platforms imposed by regulation. Contract law offers several advantages in this respect. Regulation may suffer from an enforcement failure where authorities do not have sufficient incentives or resources for effective enforcement. A related issue is regulatory capture, and state co-optation, especially as governments become more dependent on digital platforms for implementing policy and law enforcement. A contractual strategy may help overcome such failure.

Finally, and most importantly, the contractual lens enables a more careful and nuanced evolution of the legal norms pertaining to P2B. Unlike regulation, it does not assume ex ante the desirable norm, but instead develops it on a case-by-case basis. This may enable a nuanced consideration of the reasonable expectations of different stakeholders and a more gradual development of legal norms.