Airbnb logo. Photo: Shutterstock

A federal appeals court has turned back a legal challenge that short-term rental websites Airbnb Inc. and HomeAway.com brought against a Santa Monica ordinance forcing them to collect local taxes and refrain from booking stays in properties not licensed and listed in the Southern California beach city's registry.

The companies' lawyers at Munger, Tolles & Olson and Davis Wright Tremaine had argued that the ordinance was pre-empted by the Communications Decency Act, which offers websites broad immunities from liability for content generated by third parties. They also argued that the ordinance restricted their commercial speech in violation of the First Amendment.

But on Wednesday a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit upheld a lower court ruling that found the short-term rental companies didn't have a valid claim under Section 230 or the First Amendment.

In particular, Ninth Circuit Judge Jacqueline Nguyen found that the city ordinance didn't directly force the companies to monitor user activity and posts on their sites, but was limited to the “distinct, internal, and nonpublic” of booking transactions on the site.

“Like their brick-and-mortar counterparts, internet companies must also comply with any number of local regulations concerning, for example, employment, tax, or zoning,” Nguyen wrote. “Because the ordinance would not pose an obstacle to Congress's aim to encourage self-monitoring of third-party content, we hold that obstacle preemption does not preclude Santa Monica from enforcing the ordinance,” she wrote.

The court also held that the underlying conduct—booking transactions—was “nonexpressive” and not protectable speech under the First Amendment.

Santa Monica City Attorney Lane Dilg said in a statement that the ordinance will protect affordable housing in the city and prevent homes from being converted into “de facto hotels.”

“As the Ninth Circuit itself has said, the Communications Decency Act does not 'create a lawless no-man's land on the internet,'” Dilg said. “We look forward to collaborating and cooperating with technology companies to advance the community's best interests, but the platforms' broad assertions of immunity in this case simply go too far.”

Munger's lead counsel, former U.S. Solicitor General Donald Verrilli Jr., who argued the case at the Ninth Circuit, didn't immediately respond to an email message Wednesday. Neither did Davis Wright Tremaine's Stephen Rummage, who represented HomeAway.

Airbnb spokesperson Molly Weedn said in an email statement that the company had worked with Santa Monica on “a solution that ensures working and middle class families who want to visit the coast can find an affordable place to stay.”

“Despite our efforts, the city insisted on an approach that was out of step with progress across the country,” she said. “Since this lawsuit was first filed, Airbnb has made great strides around the world, working with dozens of cities to develop more than 500 partnerships including fair, reasonable regulations, tax collection agreements, and data sharing that balance the needs of communities, allow hosts to share their homes in order to pay the bills and provides guests the opportunity to affordably visit places like the California Coast.”

The case drew wide interest from amici, including former Congressman Chris Cox and NetChoice, represented by Morgan, Lewis & Bockius; a group of prominent internet companies including Ebay Inc., Lyft Inc. and Uber Inc., represented by Greenberg Traurig, and city attorneys from across the state and country.

Wednesday's ruling comes almost exactly one year after U.S. District Judge Otis Wright II of the Central District of California declined the companies' request to block the law. The companies reached a settlement with the city of San Francisco in 2017 after a federal judge there turned back their argument that a similar ordinance there violated the First Amendment as well as Section 230 of the Communications Decency Act.

Correction: An earlier version of this story misidentified the district that U.S. District Judge Otis Wright II sits in.