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Backpage.Com, LLC v. Dart

United States District Court, N.D. Illinois, Eastern Division

September 2, 2015


Page 920

          For, LLC, Plaintiff: James C. Grant, LEAD ATTORNEY, Ambika K. Doran, PRO HAC VICE, Davis Wright Tremaine LLP, Seattle, WA; Christopher Francis Allen, Paul Hastings LLP, Chicago, IL; Gerald Stuart Sachs, PRO HAC VICE, Paul Hastings LLP, Washington, DC; Janey Henze Cook, Tom E Henze, PRO HAC VICE, Henze Cook Murphy, Pllc, Phoenix, AZ; Lisa Beth Zycherman, Ronald Gary London, PRO HAC VICE, Davis Wright Tremaine LLP, Washington, DC; Robert Corn-Revere, Davis Wright Tremaine LLP, Washington, DC.

         For Thomas J. Dart, Defendant: Barack S. Echols, LEAD ATTORNEY, Zachary D Holmstead, Kirkland & Ellis LLP, Chicago, IL; Daniel Francis Gallagher, Cook County State's Attorney, LEAD ATTORNEY, Chicago, IL; Hariklia Carrie Karis, LEAD ATTORNEY, PRO HAC VICE, Kirkland & Ellis LLP, Chicago, IL; Jill Vosicky Ferrara, LEAD ATTORNEY, Cook County State's Attorneys Office (50 W), Chicago, IL; Sisavanh Baccam Baker, Cook County States Attorney's Office Daley Ctr., Chicago, IL.

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         John J. Tharp, Jr., United States District Judge.

         In its order of August 21, 2015, the Court denied plaintiff's motion for a preliminary injunction and allowed the temporary restraining order to expire, absent any agreement between the parties to voluntarily extend it. This opinion summarizes the Court's preliminary factual findings and its reasons for the ruling.

         I. BACKGROUND
 (" Backpage" ), which operates a website devoted to online classified advertising, seeks an injunction against Cook County Sheriff Thomas Dart requiring him to notify credit card companies Visa and MasterCard of any ruling by this Court that it was likely unlawful for him to exhort them in a June 29 letter and follow-up communications thereafter to " cease and desist" allowing their cards to be used to process payments to Backpage. (Backpage no longer asks for a mandatory injunction requiring Dart to " retract" the letters.)

         Last month, this Court entered a temporary restraining order prohibiting Sherriff Dart from further efforts to persuade others to " defund" Backpage, pending an evidentiary hearing on Backpage's claim that Dart's actions violated the First Amendment. The Court ruled that Backpage was entitled to a TRO because it had a better than negligible chance of prevailing on its claim based on the record at the time. In particular, the Court concluded that Backpage might be able to demonstrate that Sheriff Dart's letter constituted the kind of informal prior restraint that the Supreme Court prohibited

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in Bantam Books, Inc. v. Sullivan, 372 U.S. 58, 83 S.Ct. 631, 9 L.Ed.2d 584 (1963). In that seminal case, the Court enjoined the Rhode Island Commission to Encourage Morality in Youth from its de facto censorship campaign of sending threatening letters to distributors of books it deemed obscene, followed up with visits from police officers. Rejecting the argument that the Commission, which lacked any direct investigative or prosecutorial authority, was simply " exhorting booksellers and advis[ing] them of their legal rights," the Court held that the Commission had effected a prior restraint because its " notices, phrased virtually as orders, reasonably understood to be such by the distributor, invariably followed up by police visitations, in fact stopped the circulation of the listed publications." Id. at 67, 68.

         At the TRO stage, the Court also rejected Dart's challenge to's standing to challenge Dart's actions vis-à-vis the credit card companies, which, Dart argued, affected the expressive rights of users but not the forum itself. The Court rejected the argument that lacked an injury-in-fact, but it expressly reserved for further consideration the questions whether Dart's actions, rather than the credit card companies' voluntary decision to dissociate themselves from the content published by Backpage, caused that injury and whether injunctive relief could redress's alleged injuries.

         Since the TRO issued, the parties have engaged in expedited discovery, including a limited number of depositions permitted by the Court. The parties submitted further briefs, and the Court held an evidentiary hearing on August 20, 2015, at which the parties presented additional documentary evidence and testimony through live witnesses and declarations. Based on the evidence of record, the Court preliminarily finds the facts as set forth below.

         II. FACTS
's adult services section overwhelmingly contains advertisements for prostitution, including the prostitution of minors. Backpage uses filters that prevent certain words and phrases from being posted, but many of the advertisements nevertheless clearly solicit payments for sex. Symbols, photographs, and videos depict what words cannot. In over 800 sting operations responding to Backpage ads since 2009, Dart's officers have made arrests for prostitution, child trafficking, or a related crime 100% of the time. Evidence submitted by Dart from other law enforcement agencies and non-profit anti-trafficking groups, as well as evidence from a lawsuit by a trafficking victim against Backpage, establish that's adult section is the leading forum for unlawful sexual commerce on the Internet and that the majority of the advertisements there are for sex.[1] Backpage maintains that there is legitimate commerce

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advertised in the adult section, but it has adduced no evidence of what, if any, percentage of ads in the adult section relates to non-criminal " escort" or other legal " adult" activity.

         A. Sheriff Dart's Letters

         Sheriff Dart has long worked against human trafficking, including prostitution and the sexual exploitation of women and children, in his capacity as Sheriff of Cook County. His efforts comprise law enforcement measures, attempts to curtail online trafficking through civil legal action,[2] assistance programs for trafficking victims, and vocal advocacy on this issue. As part of this initiative, Dart tried in several communications over a period of years to persuade Backpage to take measures to prevent the use of the " adult" section of its website for advertisements for prostitution (and the attendant human trafficking and exploitation). Frustrated with what he perceived as Backpage's lip service to his concerns, and hamstrung from taking legal action by statutory protections for forum websites such as Backpage,[3] Dart sought more creative ways to curtail the selling of sex on Backpage.

         Dart had multiple employees working on trafficking issues in general and Backpage advertising in particular. In early 2015 he hired Stephanie Zugschwert as Assistant General Counsel for Policy and tasked her with working on sex trafficking issues. She reported to Director of Policy Joseph Ryan, who in turn reported to Cara Smith, a direct report of Sheriff Dart. Shortly into her tenure, Zugschwert drafted a strategy document entitled " Approach Major Financial Institutions." The memo is addressed to Dart, Smith, and Ryan, and is dated May 7, 2015.

         The memorandum sets forth a strategy of using the " National Day of Johns" [4] as a

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" launching pad to exert national pressure on the financial institutions," which are identified as " Visa, MasterCard, American Express, and Discover." The memorandum described a media event where the sheriff's office would partner with other law enforcement agencies to show the financial institutions how Backpage was being used " as a front for adult and minor prostitution." According to Zugschwert, " The goal would be to ultimately present this information in a streamlined media digestible form, with our National Day of Johns partners signing on and to release it with the National Day of Johns media effort."

         The memorandum goes on to provide " context" for approaching the credit card companies. It notes the " self-serving concern of financial institutions [about] their own potential liability for allowing suspected illegal transactions to take place" as well as the concern of " banks" for " their business reputations and that of their investors." The memorandum then sets forth in more detail the financial institutions' " legal/moral and reputational responsibility" to disaffiliate with Backpage. It refers to the legal obligations of financial institutions to file suspicious activity reports if illegal activity is suspected, and concludes that " banks" that knowingly allow illegal transactions " are susceptible to money laundering prosecutions, reputational damage and/or hefty fines." The document next posits that use of Visa or MasterCard to purchase advertising on Backpage violates the companies' user rules governing illegal activity. Finally, the memorandum collects examples of " similar situations" in which financial institutions, in some cases in response to government pressure, have dissociated themselves from " high-risk" industries.

         Although Dart did not necessarily read or " approve" every aspect of the memorandum, he did green-light the idea of sending letters to the credit card companies about Backpage, and he signed the two letters that had been appended to the strategy memorandum with only minimal changes (likely made by Smith). Much of the content from the strategy memorandum is reproduced in the letters, including the discussion of the legal duties of " financial institutions" to report suspicious activity and the citation to the federal money laundering statute. The letters are dated June 29, 2015. One is addressed to the Chief Executive Officer of Visa, Inc. and all of the members of its Board of Directors, and is cc'd to the CEOs of the top five institutional investors in Visa. The other is addressed to the same personnel at, or affiliated with, MasterCard. The entire text of the otherwise identical letters is reproduced in the Appendix to this opinion.

         The letters, which were distributed by email attachment, were sent to numerous personnel within Visa and MasterCard other than the nominal addressees; for example, lawyers and public relations officers. Despite the letters' closing request that each institution respond " in one week" with the identity of a person that Dart could work with, the sheriff's team followed up with various people at Visa and MasterCard almost immediately by email and telephone. Visa and MasterCard were informed that Dart would hold a press conference on July 1 to announce his campaign of pressure on the credit card companies.

         American Express did not receive a June 29 letter from Dart because, as the letters to Visa and MasterCard note, it already had terminated the use of American Express credit cards for payments to place ads in Backpage's " adult" section. American Express based its decision on the reputational harm that would inure from being associated with the distasteful and/or illegal content in that portion of the

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website. It withdrew from Backpage in April 2015, without having received any request or other communications from Dart.[5] Dart later sent a thank-you letter to American Express.

         B. Actions by the Credit Card Companies

         Unbeknownst to Dart, MasterCard had already taken steps to disaffiliate with Backpage. Indeed, the record shows that MasterCard had been discussing internally the propriety of authorizing payments using the card for ads in Backpage's adult services section since at least March of 2015, when it received communications from " stockholders, law enforcement and lawyers" prior to its annual shareholders' meeting.[6] Def. Hearing Exs. 77, 87. In response to MasterCard's concerns about complaints from investors and negative media reports about Backpage, Bank Frick, one of Backpage's Lichtenstein-based acquiring banks,[7] decided on June 23, 2015, to terminate its relationship with Backpage, effective July 31, 2015. A communication between a MasterCard " Franchise Integrity" executive and the acquiring bank on June 2, 2015, is listed in a summary of " concerns," with negative press reports attached. In a follow-up discussion on June 10 the same executive states that " negative media" could render association with " brand damaging." Other communications followed, and a June 23, 2015, email from the same acquiring bank confirms for MasterCard that " the Bank's management has taken the decision to close down the account for [Backpage]--for reason of the concerns that you raised and in a best-practice approach to demonstrate cooperation." The email proposed giving " regular" notice and terminating effective July 31.

         Nevertheless, MasterCard acted more quickly after receiving Dart's letter. After the letter went out, Cara Smith, Dart's aide, communicated with persons in MasterCard's legal department, and she was informed by midday on June 30 that the acquiring bank had terminated its relationship with Backpage. A MasterCard lawyer told Smith, " We were already fairly advanced with an investigation here." On July 1 an email from the acquiring bank that had terminated Backpage noted that it was " hoping that the other acquirers processing [Backpage] will cooperate as adequately and as quickly as well." All of the Backpage acquirers for MasterCard did in fact terminate in short order.

         Visa took only a little longer. Dart's aide Cara Smith emailed Visa Inc. on June 30 to flag the ...

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