Home > Enforcement > Unintended Consequences? The Multistate Case Against Craigslist

Unintended Consequences? The Multistate Case Against Craigslist

Yesterday’s news about a Connecticut subpoena issued to Craigslist reminds us that sometimes, actions may have unintended consequences.

In November 2008, Craigslist negotiated a groundbreaking settlement with 43 states led by Connecticut AG Dick Blumenthal, concerning illegal use of its online listing services.  Specifically, Craigslist agreed to wall off the “erotic services” or adult ads section of its site and implement the appropriate age-verification procedures (via credit card).  Then, going a very charitable step further, Craigslist also agreed to donate 100% of its net revenue from the adult area of its site to charity, (and have that net revenue verified by an external auditor as part of the process).

Fast forward to May 2010, and it’s déjà vu all over again. Led by Connecticut, a group of 39 states is investigating the prevalence of prostitution ads on Craigslist, claiming that the site is earning “huge profits” from the sale of such ads.   According to a detailed subpoena issued to Craigslist yesterday the multistate group is “seeking evidence that the company is fulfilling its public promise to fight advertisements for prostitution and other illegal activity.”

Ironically, the age and credit card verification procedures Craiglist was required to implement for its adult only section in 2008 has boosted growth of this section.  According to the multistate group, Craiglist now makes over $36 million from hosting “adult and possibly illegal ads.”

The allegations – that the company may be withholding substantial amounts of money from charities – seem a bit disjointed.  This is Craigslist – a company that has always emphasized free over profit and has yet to fully exploit its enormous streams of traffic. Even though he knows that an IPO would make him a billionaire, Craiglist founder Craig Newmark refuses to take the company public.  Remember that unflattering article in Wired last August?  Clearly, this is a company that appears indifferent to income.

And yet, reading the subpoena requests (some of which are reproduced in the CT AGO’s press release) it is clear that the States are pursuing a theory that Craigslist is reneging on its settlement promise, and not donating all of the profits from its adult ad sales to charity.  I hope their allegations do not have an unintended consequence.  The damage to Craigslist reputation within its ecosystem – especially if these allegations are proven false – could prove particularly costly.

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