What are the Five Legal Responsibilities of Platform Operators as Indicated by Precedents?

With the advancement of transactions using digital technology, users can now easily access various services. Today, there are digital platforms that are indispensable to our lives. However, there are also concerns about the transparency and fairness of transactions on these digital platforms.

In order to operate their businesses legally, platform operators must be familiar with not only general laws such as civil and criminal law, but also:

• Japanese Antique Dealings Act
• Japanese Act on Specified Commercial Transactions
• Japanese Intellectual Property Law (Trademark Law & Copyright Law)
• Japanese Provider Liability Limitation Act

It is necessary to be aware that various legal responsibilities may arise in addition to the above laws.

Here, we will explain the legal responsibilities that platform operators bear, based on actual court cases.

With the advancement of digital technology in transactions, users can now easily access various services. Today, there are digital platforms that are indispensable to our lives. However, there are also concerns about the transparency and fairness of transactions on digital platforms.

In order to operate their businesses legally, platform operators must be aware of not only general laws such as civil and criminal law, but also:

• Japanese Antique Business Law
• Japanese Specified Commercial Transactions Law
• Japanese Intellectual Property Law (Trademark Law & Copyright Law)
• Japanese Provider Liability Limitation Law

It is necessary to be aware that various legal responsibilities may arise in addition to the above laws.

Here, we will explain the legal responsibilities that platform operators bear, based on actual court cases.

Court Case Regarding Online Auctions

A total of 784 people who had won bids for items on Yahoo! Auctions, a service provided by Yahoo! JAPAN, and paid for them, but were unable to receive the items, became plaintiffs and filed a lawsuit against Yahoo! JAPAN.

The plaintiffs claimed that the system of Yahoo! Auctions had defects that violated the general obligation under contract and tort law to build a system that does not result in fraud, and that they had been victims of fraud as a result. They sought damages based on breach of contract, tort, and user liability.

Although this trial took place more than 10 years ago, it is a case that specifically questioned the legal responsibility of platform operators for troubles in CtoC (individual-to-individual) transactions. For example, it is a court case that should still be noted today, as it has been cited as a precedent in many reports and materials, such as the “Report of the Expert Study Group on the State of Transactions on Online Platforms” (Cabinet Office) announced in April 2019, and the “Guidelines and Final Revised Edition on E-commerce and Information Asset Transactions” (Ministry of Economy, Trade and Industry) announced in August 2020.

Nature of the Usage Agreement

In the court case, the first point of contention was what kind of contract was established between the online auction operator and the user.

The plaintiff, who is the user, argued that a contract similar to a brokerage contract was established between the defendant and the user through the “subject usage contract”. This contract aims to establish a sales contract between the seller and the successful bidder, and since the defendant collects a usage fee, they have obligations to the user such as the obligation to complete work derived from a contract (Japanese Civil Code Article 632) and the duty of care derived from a quasi-mandate contract (Japanese Civil Code Articles 656 and 644). The defendant is obliged to provide the service without defects.

In response to these obligations to complete work and duty of care, the court stated,

It is reasonable to consider that the securing of data area associated with listing, etc. for the listing system usage fee and the listing cancellation system usage fee, and the automatic sending of successful bid notifications by email for the successful bid system usage fee, are in a specific consideration relationship. Therefore, it can be recognized that the usage fee in question is nothing more than the consideration for the use of the system of the service in question.

Nagoya District Court, March 28, 2008 (2008) Judgment

The court concluded.

The court also stated that there is no evidence that the defendant actively intervened in the transactions between users, and it cannot be said that the subject usage contract has the nature of a brokerage, or that it is something that entrusts factual acts or undertakes the completion of the subject matter, or something similar to these.

However, this is a judgment made considering the fee setting in this case and the extent to which Yahoo! JAPAN was involved in the transaction. Depending on the method of setting fees and the extent to which the operator intervenes in transactions between users, there may be a possibility of being held responsible for violating the duty of care, etc. derived from a quasi-mandate contract, etc. It is necessary to be aware of this.

Obligations Imposed on Business Operators

The plaintiffs argued that, based on the same usage contract, the defendant has an obligation to provide the service in question without any defects.

In response, the court stated:

In the guidelines that form the content of the usage contract in question, it is stipulated that the defendant merely provides the opportunity for transactions between users. The defendant pointed this out and argued that they bear no responsibility whatsoever for transactions between users.

However, given that the usage of the system of the service in question is a natural prerequisite in the usage contract, it should be said that, based on the principle of good faith in the usage contract, the defendant has an obligation to build a defect-free system and provide the service to users, including the plaintiffs.

ibid

The court concluded that even if it is written that “since we only provide the opportunity for transactions between users, we bear no responsibility whatsoever for transactions between users”, as long as the service is being provided, there are obligations that naturally arise in accordance with the principle of good faith in the usage contract.

Five Criteria for Judgment

The court acknowledged the defendant’s obligation to build a flawless system and provide the service in question. However, it stated that the specific content of the obligation should be determined by considering the social circumstances surrounding internet auctions at the time of service provision, related laws and regulations, the technical level of the system, the cost of building and maintaining the system, the effects of system implementation, and the convenience of system users. The court then indicated whether the following five obligations should be recognized:

1. Alerting
2. Trustworthiness Evaluation System
3. Provision/Disclosure of Seller Information
4. Escrow Service
5. Compensation System

Regarding the first point, “Alerting”, given the circumstances at the time when fraudulent and criminal activities were occurring through online auctions, the court acknowledged the business operator’s obligation to take appropriate alert measures in a timely manner to prevent users from becoming victims of fraud, considering the content and methods of criminal activities and the number of cases.

Furthermore, the court recognized that the defendant had taken appropriate alert measures in a timely manner, such as setting up a page to introduce cases of user trouble and expanding efforts to prevent fraud.

Regarding the second point, “Trustworthiness Evaluation System”, the plaintiffs argued that a system where the winning bidder rates the satisfaction of the transaction is insufficient as a user evaluation system (as it is possible to create good evaluations through fictitious transactions among friends), and that a third-party trustworthiness evaluation system should be introduced. However, the court denied the obligation to introduce a trustworthiness evaluation system, stating that since there is currently no third-party organization in Japan that evaluates the trustworthiness of auction users, introducing a trustworthiness evaluation system by a third-party organization as the plaintiffs argue would impose considerable difficulties on the defendant.

Regarding the third point, “Provision/Disclosure of Seller Information”, the plaintiffs argued that information about the seller who committed fraud should be disclosed to the winning bidder. However, the court stated:

Those who intend to commit fraud using the service in question are likely to act in a way that makes it difficult to be pursued from the outset, such as by providing false information in the contract with the defendant. Therefore, even if the seller’s information is disclosed, it is not possible to expect a general preventive effect.

Furthermore, if the defendant discloses the seller’s information in response to a request from a winning bidder who claims to have been a victim of fraud, it would impose considerable difficulties on the defendant under the provisions of related laws and regulations (refer to Article 23 of the Personal Information Protection Law).

In addition, whether or not the seller possesses the item at the time of listing can be inquired by the winning bidder to the seller before payment after winning the bid on the service in question. Moreover, even if the defendant collects such information and provides it on the service in question, those who intend to commit fraud using the service in question are likely to counteract the defendant’s information collection by providing false information. Therefore, there are doubts about the effectiveness of this as a preventive measure against fraud, and if the defendant is required to verify the truth of the seller’s possession of the item, there is a high possibility that the service in question will not be viable as a profitable business.

Ibid.

And thus, did not acknowledge it.

Regarding the fourth point, “Escrow Service”, the defendant recommended the escrow service (a service where a professional intermediary actually handles the payment and delivery of goods between the seller and the winning bidder) as an optional service that can be used only when the seller agrees to use it and the winning bidder also agrees. However, the plaintiffs argued that the escrow service should be made mandatory in principle. But the court did not acknowledge this, stating that to make the escrow service mandatory, the defendant would need to recover the cost by adding the escrow service fee to the service fee, which could ignore the psychology of users who want to acquire the desired product at a low cost without going through a store, and making the escrow service mandatory for all transactions between users would impose difficulties on the operation of the service in question as a profitable business of the defendant.

Regarding the fifth point, “Compensation System”, the plaintiffs argued that the compensation system should be enhanced. However, the court did not acknowledge this, stating that the compensation system is a measure to compensate for damages after the fact, and it is hard to recognize that enhancing this system is related to the prevention of fraud in advance.

In fact, it seems unreasonable to impose a high compensation obligation on business operators that is not specified in the contract or law.

Taking these into account, the court dismissed the plaintiffs’ claim against the defendant Yahoo! JAPAN.

The appellate court also supported the conclusion of the first instance and dismissed the appeal (Nagoya High Court judgment of November 11, 2008).

Summary: Responsibilities of Platform Operators in Balancing Tech, Law, and Ethics: How Platform Operators Must Adapt to Changing Social Contexts and Legal Obligations

As indicated by the court, the specific content of the obligation of a platform operator to build a flawless system should be determined by considering the social circumstances at the time of service provision, related laws and regulations, the technical level of the system, the cost of building and maintaining the system, the effects of system implementation, and the convenience of system users.

Therefore, for example, if a method of entrusting the evaluation of the trustworthiness of auction users to a third-party organization becomes standard, not introducing such a method would be a violation of the obligation.

Most CtoC transactions, represented by online auctions and flea market services, are conducted through platforms, so the role of platform operators is significant. It is expected that they will operate their businesses legally and contribute to the expansion of CtoC transactions.

Introduction of Measures by Our Firm

Monolith Law Office is a law firm with high expertise in both IT, especially the Internet, and law. In recent years, troubles surrounding CtoC transactions have become a major issue, and the need for legal checks is increasing. Our firm analyzes the legal risks of businesses that have already started or are about to start, taking into account various legal regulations, and strives to legalize the business as much as possible without stopping it.