When Are Social Media Platforms Liable for Fraudulent Online Sales?

Introduction

Social media platforms increasingly function as digital marketplaces where merchants advertise products, communicate with buyers, and complete sales. When a transaction turns out to be fraudulent, the online merchant is generally the first party responsible. However, a platform may also incur financial liability when it fails to perform statutory duties imposed on e-marketplaces and other digital platforms.

The governing statute is the Internet Transactions Act of 2023, which distinguishes among the liability of the online merchant, the subsidiary liability of the platform, and the solidary liability of a platform that fails to remove or disable access to prohibited or dangerous goods and services after notice.

What Transactions Are Covered?

The Internet Transactions Act applies to business-to-business and business-to-consumer internet transactions within the mandate of the Department of Trade and Industry when at least one party is situated in the Philippines, or when the digital platform, e-retailer, or online merchant avails of the Philippine market and has minimum contacts in the country. Consumer-to-consumer transactions and online media content are excluded from the Act’s coverage. (R.A. No. 11967, Section 3.)

A foreign platform may still be subject to Philippine law if it establishes minimum contacts in the Philippines by availing of the Philippine market. Lack of a Philippine office or formal legal presence does not, by itself, avoid liability under the Act. (R.A. No. 11967, Section 5.)

Who Is Primarily Liable?

The online merchant or e-retailer is primarily liable for indemnifying the consumer in civil actions or administrative complaints arising from the internet transaction. This includes claims involving fraudulent representations, defective goods, non-delivery, or other unlawful conduct connected with the sale.

The platform and the merchant are treated as one entity when they are, in fact, the same entity. Otherwise, the platform’s liability is generally separate and arises only under the statutory circumstances governing subsidiary or solidary liability. (R.A. No. 11967, Section 25.)

When Does Subsidiary Liability Arise?

An e-marketplace or digital platform that facilitated the transaction may be held subsidiarily liable to the consumer when any of the following circumstances is established:

First, the platform failed to exercise ordinary diligence. The failure must relate to the platform’s obligations under Sections 21 or 22 of the Internet Transactions Act, and that failure must have resulted in loss or damage to the consumer.

Second, the platform failed to act after notice. The platform may be liable when, after receiving notice, it did not act expeditiously to remove or disable access to goods or services that infringe intellectual property rights or are subject to a takedown order issued by an appropriate government agency.

Third, the merchant lacks Philippine legal presence and the platform withheld contact details. This applies when the online merchant has no legal presence in the Philippines and the platform failed, despite notice, to provide the merchant’s contact details to the consumer or appropriate complainant.

The platform’s subsidiary liability is limited to the damages suffered by the consumer as a direct result of the transaction. This liability is without prejudice to other liabilities under the Internet Transactions Act or other applicable laws. (R.A. No. 11967, Section 26.)

What Does Ordinary Diligence Require?

The Act requires e-marketplaces to exercise ordinary diligence in performing their statutory duties. Depending on the nature of the platform, these duties may include:

Merchant identification. E-marketplaces must maintain a list of registered online merchants containing the information required by law and must regularly update and verify that information.

Product disclosure. Online offers must clearly indicate the name and brand of the goods or services, price, description, and condition.

Regulated goods controls. Platforms must prohibit the sale of regulated goods unless the merchant provides the necessary permits and license information and complies with applicable sale procedures and limitations.

Consumer redress. Platforms must provide an effective and responsive mechanism through which consumers and merchants may report users or information that violate relevant laws.

Data protection. Platforms must take necessary precautions to protect consumer data and comply with the Data Privacy Act of 2012 and applicable standards and issuances of the National Privacy Commission.

Information disclosure to authorities. Upon a proper subpoena issued by a competent authority in an investigation based on a sworn complaint, the platform may be required to provide identifying information when the platform is allegedly being used to commit a crime or a malicious, fraudulent, or unlawful act and the complainant cannot ascertain the perpetrator’s identity. (R.A. No. 11967, Sections 21 and 22.)

When Is the Platform Solidarily Liable?

Solidary liability is more serious than subsidiary liability. An e-marketplace or digital platform becomes solidarily liable when, after notice, it fails to act expeditiously to remove or disable access to goods or services appearing on its platform that are:

prohibited by law;

imminently injurious;

unsafe; or

dangerous.

Solidary liability means that the consumer may proceed against the platform for the obligation covered by the law, without being limited to the subsidiary character of the platform’s liability. The statutory liability remains without prejudice to penalties under the Internet Transactions Act or other laws. (R.A. No. 11967, Section 27.)

Can a Platform Rely on Merchant Information?

A platform is not automatically liable merely because a merchant submitted inaccurate, false, or untrue registration documents. The platform is protected when it relied in good faith on the merchant’s representations, warranties, or submitted documents.

To invoke this protection, however, the platform must show both good faith and the exertion of reasonable effort to ascertain and maintain the accuracy, authenticity, and truthfulness of the information or documents submitted by the merchant. A platform that conducts no meaningful verification may be unable to rely on this protection. (R.A. No. 11967, Section 26.)

How Do These Rules Apply to Fraudulent Sales?

Consider a merchant that uses a social media marketplace to advertise a high-value electronic device, receives payment, and then disappears. The merchant is primarily liable because the fraud arose from the online transaction.

The platform will not automatically be liable simply because the fraud occurred through its service. The consumer must generally show a statutory basis, such as the platform’s failure to exercise ordinary diligence, failure to provide merchant contact information after notice, or failure to remove unlawful or dangerous listings after receiving notice.

For example, subsidiary liability may become relevant if the platform failed to maintain or verify required merchant information and that failure directly contributed to the consumer’s loss. The platform may also face solidary liability if it was notified that the listing involved prohibited or dangerous goods but failed to remove or disable access to the listing expeditiously.

What Evidence Should Consumers Preserve?

A consumer asserting a claim should preserve evidence showing both the transaction and the platform’s conduct. Useful records include:

the merchant’s profile and registration information;

screenshots of the product listing, price, representations, and account details;

proof of payment, delivery instructions, and communications with the merchant;

complaints or notices submitted to the platform;

the platform’s response, or failure to respond; and

evidence of other complaints or warnings concerning the same listing or merchant.

The notice to the platform is especially important where liability depends on the platform’s failure to remove, disable, or otherwise address the listing after notice.

What Should Platforms Do?

Platforms should maintain documented procedures for merchant verification, regulated-goods screening, consumer complaints, takedown requests, and escalation of potentially fraudulent or dangerous listings.

They should also preserve records showing the date and substance of a complaint, the investigation conducted, the action taken, and the reason for retaining or removing a listing. These records may help establish ordinary diligence and good-faith reliance on merchant-submitted information.

Platforms should not treat every complaint as automatically requiring removal. They should, however, respond promptly and consistently when the complaint concerns unlawful, dangerous, unsafe, or government-prohibited goods or services, or when the platform receives a valid takedown order.

Relationship With Other Philippine Laws

The Internet Transactions Act does not displace other laws that may apply to the transaction or the platform’s conduct. Consumer protection rules may apply to deceptive or fraudulent sales practices, while the Data Privacy Act governs the processing and disclosure of personal information.

The Supreme Court has recognized in Disini, Jr. v. The Secretary of Justice that regulation of online activity must remain consistent with constitutional rights, particularly freedom of expression, privacy, and due process. (Disini, Jr. v. The Secretary of Justice, G.R. No. 203335, 11 February 2014.)

That constitutional principle does not prevent lawful platform regulation. It means that takedown mechanisms, disclosure requirements, and enforcement measures must be applied pursuant to law and with the safeguards required by the applicable statute and legal process.

Summary of Platform Liability

Primary liability: The online merchant is primarily liable for indemnifying the consumer for loss arising from the transaction.

Subsidiary liability: The platform may be liable when its failure to exercise ordinary diligence, failure to act after notice, or failure to provide merchant information causes direct consumer damage.

Solidary liability: The platform may be solidarily liable when, after notice, it fails to act expeditiously against goods or services that are unlawful, imminently injurious, unsafe, or dangerous.

Good-faith protection: A platform may avoid liability for reliance on inaccurate merchant documents if it proves good faith and reasonable efforts to verify and maintain the accuracy of the information.

Conclusion

Social media platforms are not automatically responsible for every fraudulent sale conducted through their services. Under the Internet Transactions Act, liability depends on the platform’s legal classification, the duties applicable to it, the existence of notice, the platform’s response, and the direct connection between the platform’s omission and the consumer’s loss.

Consumers should promptly preserve transaction records and notify the platform in writing. Platforms should maintain reliable merchant-verification, complaint-handling, and takedown systems, while documenting their response to every material report. The decisive issue is usually not merely whether fraud occurred, but whether the platform complied with its statutory duties before and after receiving notice.

About Nicolas and De Vega Law Offices

 Nicolas and de Vega Law Offices is a full-service law firm in the Philippines.  You may visit us at the 16th Flr., Suite 1607 AIC Burgundy Empire Tower, ADB Ave., Ortigas Center, 1605 Pasig City, Metro Manila, Philippines.  You may also call us at +632 84706126, +632 84706130, +632 84016392 or e-mail us at [email protected]. Visit our website https://ndvlaw.com.