Federal judge blocks California law targeting online marketplaces

A federal judge has enjoined a California law regulating online marketplaces to curb retail theft.

SB 1144 is the latest in a series of California laws targeting the technology industry that have been struck down by federal courts. But these setbacks have not deterred state lawmakers from advancing additional bills aimed at regulating social media and artificial intelligence amid perceived federal inaction.

The law blocked Friday by U.S. District Judge Beth Labson Freeman differed from most recent tech-related measures. Democratic lawmakers advanced SB 1144 last year as part of a broader crime-fighting package intended as an alternative to Proposition 36, which voters ultimately passed by a wide margin. It established a new classification for "high-volume third-party sellers" and required these vendors to track and disclose various information to deter the sale of stolen goods online.

But the legal challenge to SB 1144 resembled lawsuits filed against social media and artificial intelligence regulations. The trade association NetChoice LLC argued SB 1144 was preempted by federal law and violated the First Amendment. Freeman agreed with the first argument but declined to address the second.

"The Court finds that NetChoice has shown that it is likely to succeed on the merits of its claim that Section 3 of SB 1144 is preempted by the INFORM Act," Freeman wrote in NetChoice v. Bonta, 5:25-cv-03178-BLF (N.D. Cal., filed April 9, 2025).

The INFORM Act -- Integrity, Notification, and Fairness in the Online Retail Marketplace for Consumers Act -- is a 2022 federal law that requires online retailers to track information about high volume sellers and allow customers to report suspicious activity. It contains enforcement provisions that can be used by the Federal Trade Commission and state attorneys general.

But Freeman also noted the federal law contains an explicit preemption clause that has already been cited to block a similar law in Georgia. She also wrote, "SB 1144 likely is preempted by Section 230" of the federal Communications Decency Act of 1996. This states that online platforms cannot be held liable for content posted by third parties. Freeman conceded that SB 1144 contains a severability clause and that portions of the law might survive but issued a preliminary injunction anyway.

"NetChoice also has demonstrated a likelihood that it will suffer irreparable harm absent preliminary injunctive relief, and that the merged factors - the balance of hardships and the public interest - weigh in its favor," she wrote.

The ruling came three days after a contentious hearing over a California bill to regulate artificial intelligence chatbots. SB 243 would require companies offering "companion chatbot platforms" to make annual reports to the state's Office of Suicide Prevention and submit to regular audits. The bill's author, Sen. Steve Padilla, D-San Diego, told the Assembly Privacy and Consumer Protection Committee that such bots are "marketed as a cure to loneliness" but can instead become "a dangerous catalyst." The lead witness arguing in favor was a woman who described how her 14-year-old son died by suicide after a months-long interaction with such a bot.

"We have serious concerns that the definitions of the bill are far too broad, and we're sweeping in a wide array of general-purpose AI systems," Robert Boykin, TechNet's executive director for California and the Southwest, told the committee.

The Computer & Communications Industry Association has also been fighting SB 243, arguing its provisions are so broad it could be applied to educational software.

"While we share many of the goals, we would encourage lawmakers to work with stakeholders on solutions that don't violate federal law or raise constitutional concerns," the association's state director, Megan Stokes, said in an email. "Pushing measures that are likely to run into state and federal legal challenges has proven to be a costly, losing strategy that risks delaying workable solutions."

Like TechNet and NetChoice, the industry association has sued red and blue states over technology restrictions. It joined with NetChoice to block laws in Florida and Texas requiring online platforms to disclose moderation policies and post content disclaimers. In March, a federal judge in Florida blocked the organization's efforts to stop a law restricting minors' access to social media.

In California, it has also taken aim at SB 771. This bill would allow lawsuits against social media companies if their algorithms amplify harmful content against protected groups. In June, the industry association told the Assembly Privacy Committee that the bill violates the First Amendment.