Stratton Oakmont v. Prodigy Services: The Case that Spawned Section 230

By: Mark Stepanyuk

The United States led the world in internet usage throughout the 1990s and “[a]t the time of the Dot-com-crash less than 7% of the world was online.” Traversing this previously uncharted territory en masse necessitated a promulgation of rules that would govern the new frontier. Naturally, those rules emerged to conform with existing legal standards. Wrapped up in this context is a story about how the firm started by “The Wolf of Wall Street”, also known as Jordan Belfort, would have a hand in bringing about the existence of arguably the most influential legal rule shaping the internet to this day. 

Enter Stratton Oakmont v. Prodigy Services

Jordan Belfort founded Stratton Oakmont in 1986 as a brokerage firm specializing in trading “over-the-counter” securities. The world became familiar with this story when Leonardo DiCaprio portrayed a lecherous and drug-addled Belfort in the 2013 academy-award nominated film The Wolf of Wall Street

Prodigy Services was an early online service network that provided its subscribers access to various information services such as bulletin boards where third parties exchanged information. In the early-to-mid-1990s, Prodigy was considered one of the major players in the  information services space providers alongside CompuServe

Prodigy, unlike CompuServe, had “held itself out” as exercising editorial control over the content of its computer bulletin boards. One of Prodigy’s bulletin boards was called Money Talk, a popular forum where members would post and discuss financial matters. Prodigy contracted with Board Leaders (or moderators or mods in today’s parlance) to, among other things, oversee and participate in board discussions.

On October 23rd and 25th in 1994, an unidentified individual posted to the Money Talk bulletin board claiming that Stratton Oakmont committed criminal and fraudulent acts in connection with an IPO that it was involved in. The anonymous poster made statements claiming that the offering was “major criminal fraud” and “100% criminal fraud.” The individual also posted that Stratton Oakmont was a “cult of brokers who either lie for a living or get fired.” 

Stratton Oakmont and Daniel Porush—the individual that Jonah Hill’s character in The Wolf of Wall Street film was loosely based on—filed suit against Prodigy in the New York Supreme Court, the state trial court, alleging libel, among other things.

On a partial summary judgment motion brought by Stratton, the court considered Prodigy’s own statements and went through the classical libel analysis to determine whether Prodigy was a “publisher” or “distributor,” where if Prodigy was deemed a ‘publisher,’ then it would be as if they themselves had posted the allegedly libelous statements. By the way, those statements later turned out to be true

The court concluded that Prodigy was indeed a “publisher.” Reasoning that Prodigy “held itself out to the public and its members as controlling the content of [Money Talk] …,” and, by contracting with the mods, “actively utilize[ed] technology and manpower to delete notes from its computer bulletin boards on the basis of offensiveness and ‘bad taste[.]’” 

The court distinguished this holding from a 1991 case involving CompuServe four years earlier. There, the United States District Court for the Southern District of New York dismissed a libel case on the basis that CompuServe was a “distributor” (where they would only be liable if they knew or had reason to know of the libel) Unlike Prodigy, CompuServe did not review any content before it was posted to its bulletin boards. The court reasoned that, without knowledge of the libel, CompuServe would not be liable. 

Legislative Reaction to the Stratton Oakmont Case

Some legislators thought the results in Stratton Oakmont and the CompuServe case were backwards. Chris Cox (R-CA) stated that the “[t]he perverse incentive this case created was clear: any provider of interactive computer services should avoid even modest efforts to moderate the content on its site.” After seeing a Wall Street Journal article about the case, Cox reached out to Ron Wyden (D-OR) to work on the bill that would later become Section 230 in an effort to address these “perverse incentives.” This effort initially culminated in the Internet Freedom and Family Empowerment Act. The bill was enacted as part of the “Communications Decency Act,” (CDA) but when the rest of the CDA was struck down on first amendment grounds, section 230 survived. It can be found here

What does Stratton Oakmont Teach Us About Section 230 today?

Section 230 was passed largely to address those “perverse incentives” regarding moderation by online service providers. In 1990, Prodigy’s Director of Market Programs and Communications stated that “[Prodigy] make[s] no apology for pursuing a value system that reflects the culture of millions of American families we aspire to serve.” In the same NYT article, “social responsibility” was given as a reason to exercise editorial discretion—does that sound familiar? These seemingly recurring themes lead experts to opine that the current discourse about Section 230 is a bit phony—that it’s really a proxy for a conversation about the first amendment. The legal differences between a publisher and distributor are First Amendment distinctions, and since the enactment of Section 230, “that’s not really been an issue for the internet.” So functionally, those underlying First Amendment issues haven’t mattered as much in light of Section 230.

In the United States, we are still figuring out the rules of this relatively new frontier. Some folks argue that Section 230 helped make the digital economy what it is in the United States. Globally, the United States comes third in the total number of internet users with around 250 million, behind China (over 750 million) and India (over 390 million). Though here in the U.S., we will continue to arbitrate what speech should and should not be protected in light of the first amendment, it’s likely that the reasonability of how we approach an equilibrium will be a function of global influence and time. The internet rules of the future are certain to be impacted by technology (even more new frontiers) and the continued influence of globalization (i.e., different value systems, standards, and interpretations). 

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