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The SHOP SAFE Act Is a Terrible Bill That Will Eliminate Online Marketplaces

The SHOP SAFE Act Is a Terrible Bill That Will Eliminate Online Marketplaces

[Note: this blog post covers Rep. Nadler’s manager’s amendment for the SHOP SAFE Act, which I think will be the basis of a committee markup hearing tomorrow. If Congress were well-functioning, draft bills going into markup would be circulated a reasonable time before the hearing, so that we can properly analyze them on a non-rush basis, and clearly marked as the discussion version so that we’re not confused by which version is actually the current text.]

The SHOP SAFE Act seeks to curb harmful counterfeit items sold through online marketplaces. That’s a laudable goal that I expect everyone supports. However, this bill is itself a giant counterfeit. It claims to focus on “counterfeits” that could harm consumer “health and safety,” but those are both lies designed to make the bill seem narrower and more balanced than it actually is.

Instead of protecting consumers, this bill gives trademark owners absolute control over online marketplaces by overturning Tiffany v. eBay. It creates a new statutory species of contributory trademark liability that applies to online marketplaces (defined more broadly than you think) selling third-party items that bear counterfeit marks and implicate “health and safety” (defined more broadly than you think), unless the online marketplace operator does the impossible and successfully navigates over a dozen onerous and expensive compliance obligations.

Because the bill makes it impossible for online marketplaces to avoid contributory trademark liability, this bill will drive most or all online marketplaces out of the industry. (Another possibility is that Amazon will be the only player able to comply with the law, in which case the law entrenches an insurmountable competitive moat around Amazon’s marketplace). If you want online marketplaces gone, you might view this as a good outcome. For the rest of us, the SHOP SAFE Act will reduce our marketplace choices, and increase our costs, during a pandemic shutdown when online commerce has become even more crucial. In other words, the law will produce outcomes that are directly opposite to what we want from Congress.

In addition to destroying online marketplaces, this bill provides the template for how rightsowners want to reform the DMCA online safe harbor to make that functionally impossible to achieve as well. In this respect, the SHOP SAFE Act portends how Congress will accelerate the end of the Web 2.0 era of user-generated content.

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[The rest of this post is 4k+ words explaining what it does and why it sucks. You might stop reading here if you don’t want the gory/nerdy details.]

Who’s Covered by the Bill

The bill defines “electronic commerce platform” as “any electronically accessed platform that includes publicly interactive features that allow for arranging the sale or purchase of goods, or that enables a person other than an operator of the platform to sell or offer to sell physical goods to consumers located in the United States.”

Clearly, the second part of that definition targets Amazon and other major marketplaces, such as eBay, Walmart Marketplace, and Etsy. I presume it also includes print-on-demand vendors, such as CafePress, Zazzle, and Redbubble, that enable users to upload images (unless those vendors are considered to be retailers, not online marketplaces).

The first part of the definition includes services with “publicly interactive features that allow for arranging the sale or purchase of goods.” This is a bizarre way to describe any online marketplace, and it covers something other than enabling third-party sellers (that’s the second part of the definition), so what services does this describe? Read literally, all advertising “allow[s] for arranging the sale or purchase of goods,” so this law potentially obligates EVERY ad-supported publisher to undertake the content moderation obligations the bill imposes on online marketplaces. That doesn’t make sense because the bill uses the undefined term “listing” 11 times, and display advertising isn’t normally considered to be a listing. Still, this wording is unusual and broad–and you better believe trademark owners like its breadth. If the bill wasn’t meant to regulate all ads, the bill drafters should make that clear.

Like most Internet regulations nowadays, the bill distinguishes entities based on size. See my article with Jess Miers on how legislatures should do that properly. The bill applies to services that have “sales on the platform in the previous calendar year of not less than $500,000.” Some problems with this distinction:

  • the bill doesn’t define “platform,” so it’s unclear what revenues count. In Amazon’s case, is it only revenues from the marketplace or does it also include the revenues from Amazon’s retailing function? If the latter, then the definition will pick up smallish online retailers that have small marketplace components.
  • the bill also doesn’t distinguish between gross and net revenue. So, for example, assume a site takes a 10% commission on sales. If a service  has $500k in merchandise sales (gross revenue), but only keeps $50k in commissions (net revenue), is it covered by the law or not? I think the bill covers gross revenue, which means the bill reaches companies with small net revenues.
  • as usual, the bill doesn’t provide a phase-in period. A service may not know its revenues until some time after the calendar year closed, but it would be obligated to comply with the law from the beginning of the calendar year. As usual, then, this forces services below the revenue threshold to comply anticipatorily in case they clear the threshold. How hard is it for bills to include a phase-in period?

I’d fret more about the $500k threshold, but it’s likely to be irrelevant anyways. The bill also applies to smaller services once they receive 10 NOCIs over their lifetimes from all sources. (Unlike the other services, these services get a 6 month phase-in period).

To qualify as a NOCI, the notice must (1) refer to the SHOP SAFE Act, (2) “include an explicit notification of the 10-notice limit and the requirement of the platform to publish” the NOCI disclosures below [I have no idea what this element means], and (3) “identify a listing on the platform that reasonably could be determined to have used a counterfeit mark in connection with the sale, offering for sale, distribution, or advertising of goods that implicate health and safety.” [So, a NOCI counts against the 10 threshold if it “reasonably could be determined” that the listing was counterfeit, even if the NOCI is actually wrong.]

A month after getting its first NOCI, the service must publicly post an attestation that it has less than $500k in revenue and a running tally of the number of NOCIs received…I guess for shits and giggles so that trademark owners can compete to be the one to put the service over the 10 NOCI threshold? I mean, even tiny services will quickly accrue 10 NOCIs. Indeed, I imagine rightsowners will coordinate their NOCIs to ensure that small services clear this threshold and are obligated to comply with the law. Thus, the 10 lifetime NOCIs threshold is a ruse to mislead people that smaller services aren’t governed by the law, when of course they will be.

What’s Regulated?

The law applies to counterfeit “goods that implicate health and safety,” defined as “goods the use of which can lead to illness, disease, injury, serious adverse event, allergic reaction, or death if produced without compliance with all applicable Federal, State, and local health and safety regulations and industry-designated testing, safety, quality, certification, manufacturing, packaging, and labeling standards.” I mean, pretty much every physical product meets this definition, right? Virtually every misdesigned or nonconforming physical item has the capacity to cause personal injury. For example, electronic items that don’t comply with industry standards can cause physical harm from electrical charges, which means every electronic item is categorically within the bill’s scope even if the allegedly counterfeited item actually complies with industry standards. Now, replicate that analysis for other goods and tell me which categories of goods lack the capacity to cause harm. Once again, the “health and safety” framing is another deceptive ruse because the bill functionally applies to all goods, not just especially risky goods.

Overturning Tiffany v. eBay

In 2010, the Second Circuit issued a watershed decision about secondary trademark infringement. Essentially, the court held that eBay wasn’t liable for counterfeit sales of Tiffany items because eBay honored takedown notices and Tiffany’s claims sought to hold eBay accountable for generalized knowledge. That ruling has produced a kind of détente in the online secondary trademark infringement field, where we just don’t see broad counterfeiting lawsuits against online marketplaces any more.

The SHOP SAFE Act ends that détente. First, it creates a new statutory contributory trademark infringement claim for selling the regulated items. Second, the bill says that the new contributory claim doesn’t preempt other plaintiff claims, so trademark owners will still bring the standard statutory direct trademark infringement claim and common law contributory trademark claims (and dilution, false designation of origin, etc.). Third, online marketplaces nominally can try to “earn” a safe harbor from the new statutory contributory liability claim (but not from the other legal claims) by jumping through an onerous gauntlet of responsibilities. Those requirements will impose huge compliance costs, but those investments won’t prevent online marketplaces from being dragged into extraordinarily expensive and high-stakes litigation over eligibility for this defense. Fourth, the law imposes a proactive screening obligation, something that Tiffany v. eBay rejected. Fifth, unlike Tiffany v. eBay, generalized knowledge can create liability; and takedown notices aren’t required as a prerequisite to liability. Sixth, in litigation over direct trademark infringement and common law contributory trademark infringement claims, trademark owners can cite compliance/non-compliance with the defense factors against the online marketplace, putting the online marketplace in a worse legal position than they currently are in.

All told, the SHOP SAFE Act will functionally repeal the Tiffany v. eBay standard that has fostered the growth of online marketplaces for the last decade-plus, and usher in a new era of online shopping that will likely exclude online marketplaces entirely.

The “Safe Harbor” Preconditions

To earn protection from the newly created contributory trademark infringement doctrine, online marketplaces must perfectly implement all of the following 13 requirements:

1. Determine, and periodically confirm, that third-party sellers have a registered US agent for service or designated a “verified” US address for service. [Just wait until other countries require the equivalent from US-based online sellers on foreign marketplaces. A new frontier for a trade war.]

2. Verify the third-party seller’s identity, principal place of business, and contact information through “reliable documentation, including to the extent possible some form of government-issued identification.” [What is “reliable” documentation, and how much risk will online marketplaces be willing to take?]

3. Require the third-party seller to take reasonable steps to verify the authenticity of its goods and attest to those steps. This requirement doesn’t apply to sellers who sell less than $5k/yr and lists no more than 5/yr of the same items. [Is the online marketplace liable if the seller doesn’t actually take reasonable steps? How can the online marketplace “require” independent sellers to do this?]

4. Impose TOS terms that the third-party seller (1) won’t use counterfeit marks, (2) consents to US jurisdiction, and (3) designates a US agent for service or has a verified US address for service. [Note: can trademark owners take advantage of the US jurisdiction consent between the online marketplace and its third-party sellers? Normally trademark owners aren’t third-party beneficiaries of that contract. Also, that consent isn’t limited to jurisdiction over counterfeit claims–it’s over everything the TOS might govern.]

5. Conspicuously display on the platform:

  • the third-party seller’s verified principal place of business,
  • contact information,
  • identity of the third-party seller, and
  • the country from which the goods were originally shipped from the third-party seller

But the online marketplace isn’t required to display “the personal identity of an individual, a residential street address, or personal contact information of an individual, and in such cases shall instead provide alternative, verified means of contacting the third-party seller.”

6. Conspicuously display “in each listing the country of origin and manufacture of the goods as identified by the third-party seller, unless such information was not reasonably available to the third-party seller and the third-party seller has identified to the platform the steps it undertook to identify the country of origin and manufacture of the goods and the reasons it was unable to identify the same.” This requirement doesn’t apply to sellers who sell less than $5k/yr and lists no more than 5/yr of the same items.

7. Require third-party sellers to “use images that accurately depict the goods sold, offered for sale, distributed, or advertised on the platform.” [Does this create an affirmative obligation to include images? While rare, I believe that some marketplace sellers sometimes currently sell their items without including any photo.]

[Also, product shots have been a constant source of copyright litigation. The manufacturer can sue the seller for copying its shots; the manufacturer can sue for false advertising if non-official shots aren’t “accurate,” and freelancers love to sue over product shots they took and ones they think are too similar to the ones they took.]

8. Undertake “reasonable proactive measures for screening goods before displaying the goods to the public to prevent the use by any third-party seller of a counterfeit mark in connection with the sale, offering for sale, distribution, or advertising of goods on the platform. The determination of whether proactive measures are reasonable shall consider the size and resources of a platform, the available technological and non-technological solutions at the time of screening, the information provided by the registrant to the platform, and any other factor considered relevant by a court.” [This is the most coveted payload for trademark owners. Every rightsowner wants UGC services to engage in proactive screening. The screening won’t be limited to harmful counterfeit goods, and consider how courts will punish online marketplaces for undertaking this proactive screening in their analysis of direct and contributory trademark infringement.]

9. Provide “reasonably accessible electronic means by which a registrant and consumer can notify the platform of suspected use of a counterfeit mark.” [What are the odds that the consumer notifications will be made in good faith? Consider, in particular, how a dissatisfied buyer could weaponize this provision for reasons having nothing to do with counterfeiting. Note also how buyer complaints of counterfeiting, when not accurate (and buyers won’t necessarily know), could create scienter on the online marketplace’s part–and the countermoves by the marketplace could work to the detriment of the marketplace, the seller, AND the manufacturer by reducing their online marketplace sales.]

10. Implement “a program to expeditiously disable or remove from the platform any listing for which a platform has reasonable awareness of use of a counterfeit mark in connection with the sale, offering for sale, distribution, or advertising of goods.” The online marketplace’s scienter may be inferred from:

  • information regarding the use of a counterfeit mark on the platform generally,
  • general information about the third-party seller,
  • identifying characteristics of a particular listing, or
  • other circumstances as appropriate.

[This differs from the DMCA online safe harbor in many ways. The most obvious is that online marketplaces can be liable for the new statutory contributory trademark claim even if trademark owners never send them takedown notices. Among other things, this factor also emboldens trademark owners to send notices like “there are counterfeits on your site–find and remove them” without identifying any specific infringing listing. It seems those generalized notices would confer scienter sufficient to impose contributory trademark infringement. This, of course, directly rejects the Tiffany v. eBay precedent, which said such generalized knowledge wasn’t enough.]

An online marketplace can restore a listing “if, after an investigation, the platform reasonably determines that a counterfeit mark was not used in the listing.” [How many services will want to do the investigation, and how confident will the service be that the trademark owner will agree that they “reasonably” determined the listing wasn’t counterfeit? In practice, once a listing is down, it ain’t going back up.]

11. Implement “a publicly available, written policy that requires termination of a third-party seller that reasonably has been determined to have engaged in repeated use of a counterfeit mark.” [Note how this combines several parts of the DMCA online safe harbor, including the obligation to adopt a repeat infringer policy, to publish the repeat infringer policy, and to reasonably implement the repeat infringer policy.]

Apparently online marketplaces are free to create their own repeat termination policy, but the bill says “Use of a counterfeit mark by a third-party seller in 3 separate listings within 1 year typically shall be considered repeated use.” [This sidesteps the obvious question of how services “know” that a seller used the counterfeit mark. Remember, in obligation #10, online marketplaces must terminate listings when the service has a “reasonable awareness,” which isn’t conclusive proof that counterfeiting actually took place. So does each removal based on that lowered scienter count as one of the 3 strikes?]

Online marketplaces can reinstate terminated sellers in some circumstances, none of which have any realistic chance of happening.

12. Take reasonable measures to ensure terminated sellers don’t reregister on the service. [Another coveted item by rightsowner: a permanent staydown.]

13. Provide “a verified basis to contact a third-party seller upon request by a registrant that has a bona fide belief that the seller has used a counterfeit mark.” [I didn’t understand this provision because the trademark owners should already have all of the information they need to blast counterfeiters from obligation #5].

Whew! Could trademark owners ask for anything more? These obligations are pretty much their dream wishlist.

Liability for Bogus NOCIs

The bill creates a new cause of action for bogus takedown notices sent to online marketplaces. I’m going to dig into this cause of action, but no need to master the details: Congress has learned absolutely nothing from the failure of 17 USC 512(f), so there’s no possible way for any plaintiff to benefit from this provision.

The cause of action: “Any person who knowingly makes any material misrepresentation in a notice to an electronic commerce platform that a counterfeit mark was used in a listing by a third party seller for goods that implicate health and safety shall be liable in a civil action for damages by the third-party seller that is injured by such misrepresentation, as the result of the electronic commerce platform relying upon such misrepresentation to remove or disable access to the listing, including temporary removal or disablement.” If the third-party seller declines to sue the trademark owner, the online marketplace can sue (with the third-party seller’s consent) if the trademark owner sent 10+ bogus notices. The bill provides statutory damages that range between $2,500-$75,000 per notice.

That sounds swell, but it’s useless for two reasons.

First, the bill doesn’t require trademark owners to send takedown notices in the first place. Trademark owners can sue online marketplaces for contributory trademark infringement without ever sending a takedown notice. So if trademark owners face potential liability for sending bogus takedown notices, why send them at all? Or trademark owners will send very generalized notices that don’t trigger liability for them but will trigger liability for the online marketplace.

Second, and more importantly, the cause of action requires a scienter that plaintiffs can’t prove. How can a third-party seller or online marketplace show the trademark owner *knowingly* made a material misrepresentation in their takedown notices? They can’t–unless they find smoking-gun evidence in discovery, but their complaints won’t survive a motion to dismiss sufficient to get to discovery. So there’s no way to win.

The “knowingly makes any material misrepresentation” standard is virtually identical to the 512(f) standard (“knowingly materially misrepresents”), so I expect courts will interpret the scienter standards the same. The Ninth Circuit killed 512(f) claims when it concluded in the Rossi case that the copyright owner’s subjective belief of infringement was good enough to defeat liability. As a result, over the past 20+ years, there has been only a small handful of 512(f) cases that have led to damages, and those few mostly involve default judgments. If trademark owners similarly can defend against this claim based on their subjective belief that counterfeiting is taking place, plaintiffs cannot win.

This provision is yet another ruse. It’s designed to make people think there’s a disincentive against trademark owner overclaims; but anyone who knows the 512(f) caselaw knows that this cause of action is completely worthless and a waste of everyone’s time.

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Selected Problems with the Bill

What is “Counterfeiting”? The bill defines “counterfeit mark” as “a counterfeit of a mark” (I can’t make this up). But there’s actually a lot of confusion about what constitutes counterfeiting. See, e.g., my post about the trademark enforcements involving the “EMOJI” word mark, where they take the position that a marketplace item using the term “emoji” in the product name or description “counterfeits” their mark (seriously, look at the example from their exhibit and tell them that’s not bogus). A similar issue arises with print-on-demand services, where trademark owners take the position that any variation of their mark being manufactured onto a good constitutes counterfeiting, even if it’s parodic or an obvious joke. Thus, the bill’s grammar restricting the “use of counterfeit marks” potentially covers a much wider range of activity than classic piratical counterfeiting. Trademark owners will weaponize that ambiguity.

Lack of State Preemption. The Lanham Act doesn’t preempt state trademark laws, so this law isn’t likely to preempt any state law equivalents. It also would leave in place laws like the Arkansas Online Marketplace Consumer Inform Act, which has overlapping but different requirements than the SHOP SAFE Act. That overlap jacks up compliance costs and risks even more. While the SHOP SAFE Act is terrible and should never pass, it is even more terrible without a preemption provision.

Country of Origin Problems. The mandatory reporting of products’ country of origin is a liability trap. The bill excludes the smallest sellers from making this disclosure, but plenty of small-scale sellers will be obligated nonetheless, and they (and even bigger players) are sure to botch this because the law is confusing and the information won’t always be available to resellers. Any error on country-of-origin disclosures sets up the third-party sellers for false advertising claims. (Per Malwarebytes, the online marketplace should qualify for Section 230 protection for the Lanham Act false advertising claims). This gives trademark owners a second way of targeting third-party sellers; even if those sellers aren’t engaging in counterfeiting or any trademark infringement at all, country-of-origin false advertising claims can still be weaponized to drive them out of the marketplace.

Repudiation of the 512 Deal. The DMCA online safe harbor struck a grand bargain: online copyright enforcement responsibility would be a shared responsibility. Copyright owners would identify infringing items; service providers would then remove those items. There has never been a trademark equivalent of the DMCA, but the Tiffany v. eBay case has de facto created a similar balance. Unsurprisingly, copyright owners hate the DMCA shared responsibility, and they have tried to undermine that deal through lawfare in courts. Trademark owners similarly want a different deal.

This bill, as Congress’ first trademark complement to the DMCA, emphatically repudiates the DMCA deal. It gives trademark owners everything they could possibly want: turning online marketplaces into their trademark enforcement deputies, getting them to proactively screen for infringing items, making them wipe out listings without having to send listing-by-listing notices, upfront disclosure of the information needed to sue the sellers (rather than going through the 512(h) subpoena process), and permanent staydown of allegedly recidivist sellers.

Not only does this represent terrible trademark policy, but it’s a preview of how copyright owners will force DMCA safe harbor reform. They will want all of the same things: proactive monitoring of infringement, no need to send item-specific notices, authentication of users before they can upload, and staydown requirements. The SHOP SAFE Act isn’t just about counterfeits; it’s a proxy war for the next round of online copyright reform, and the open Internet doesn’t have a chance of surviving either reform.

“Reasonableness” Isn’t Reasonable to Online Marketplaces. I’ve blogged many times about how a “reasonableness” standard of liability in the online context is a fast-track to the end of UGC. As a legal standard, “reasonableness” often can’t be resolved on motions to dismiss because it’s fact-intensive and defendants can’t tell their side of the story at that procedural stage. As a result, “reasonableness” standards substantially increase the odds that lawsuits survive the motion to dismiss and get into discovery, which raises the defense costs by a factor of 10x or more.

The bill contains 21 instances of the term “reasonable” or variations. Each and every one of those is a fight the defendants can’t cost-justify. That means defendants will give up at the earliest opportunity; or more likely, self “censor” to avoid any potential courtroom battle over their “reasonableness.”

Too Many Defense Factors Makes the Defenses Unwinnable. More generally, to avoid the new cause of action, online marketplaces must win each and every one of the 13 preconditions (many of which have subparts). In other words, they must do everything perfectly AND prove all 13 elements to the court’s satisfaction. Safe harbors with that many prerequisites are extraordinarily costly because the plaintiffs can contest each element and engage in expensive discovery related to them. The DMCA online safe harbor has functionally failed for this reason; it’s too expensive for startups to prove they qualify, and copyright owners can weaponize those costs intentionally to drive entities out of the industry. This has turned the DMCA online safe harbor into a sport of kings; so only larger companies can afford it, which has exacerbated the concerns about “Big Tech” market consolidation. The SHOP SAFE Act replicates the structure that failed in the DMCA online safe harbor, so it’s predictable that the SHOP SAFE defenses also will fail to help out online marketplaces, leaving them highly vulnerable to the new cause of action.

Goodbye, Scalability. The Internet enables scalable operations in new and important ways. That scalability has created new functionality that never existed in the offline world–like online marketplaces. The SHOP SAFE Act blows scaling apart. Not only do the “reasonableness” requirements require careful attention to the facts, but the bill makes it impossible to have truly self-service signups of third-party sellers. Instead, there will need to be several levels of human review of new signups to satisfy the various authentication requirements. Furthermore, the proactive screening requirement will also require substantial human monitoring because determining “counterfeits” cannot be delegated solely to the machines. The absence of scalability and the need for substantial human labor will reward services that are really small, like a one-person operation, or really large, like a market-dominant player. Thus, SHOP SAFE’s elimination of scalability will exacerbate competition problems in the online retailing world.

Who Cares About Privacy? Trademark owners demanded the WHOIS system to make it easier for them to sue domain name registrants. The WHOIS system has collapsed due to the GDPR, which exposed how the WHOIS system was highly privacy-invasive. The SHOP SAFE Act doubles down on privacy invasions in two ways.

First, it requires online marketplaces to collect lots of sensitive information they don’t want, such as government-issued IDs. Those databases are honeypots for law enforcement and hackers.

Second, it requires publication of some information that sellers might consider private, especially if they are small operations with close identity between their professional and personal lives. (The bill’s exclusion of some private information incompletely addresses this concern). For example, that information can be highly sensitive for sellers of controversial items who can be targeted by trolls and haters for local ostracism or physical attacks like swatting; and competitors can use this information too to engage in anti-competitive harassment.

Just like WHOIS struck a lopsided balance between trademark owners’ interests and registrant privacy, the SHOP SAFE Act similarly tosses privacy concerns under the trademark owners’ bus.

Why Would Anyone Support This Bill? This bill will kill online marketplaces and make markets less efficient. Where the online marketplace owner has a retailing function, like Amazon and Walmart, they can shut down the marketplace and subsume some items into their standard retailing function. That transition cuts off the long tail of items consumers expect to find online, and it burns hundreds of thousands of independent businesses that currently thrive in the marketplace system but become irrelevant in a retailing model. Meanwhile, standalone online marketplaces, like eBay and Etsy, have to revamp their entire business or exit the industry entirely, which further reduces competition for online retailing. The net competitive effects, then, are that consumers will pay higher prices, consumers will lose their ability to find long-tail items and incur higher search costs to do so, existing market leaders will consolidate their dominant positions, and hundreds of thousands of people will lose their jobs.

In contrast, who wins in this situation? The only winners are trademark owners, some of whom hate online marketplaces because they are tired of seeing their goods leak out of official distribution channels into more price-discounted online marketplaces, because they hate competing against used items of the goods they sell, and because some counterfeiting does take place there (as it does in the offline world too). To address those concerns, they are willing to burn down the entire online marketplace industry. What I can’t understand is why any members of Congress would be so willing to give trademark owners their wishlist when the results would be so disadvantageous for their constituents. The trademark owner lobby is strong, but our governance systems should be strong enough to resist terrible and selfish legislation like this.

Prior Blog Posts on the 117th Congress’ Efforts to Kill the Internet

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