Airbnb Inc. and Expedia Group Inc.’s HomeAway failed to persuade a U.S. court of appeals to strike down a Santa Monica law that makes the companies liable for illicit rentals in the Southern California beach city.

The ruling Wednesday by a three-judge panel of the Ninth Circuit is a setback for the home-sharing platforms in their effort to avoid regulation by cities that blame the rapid proliferation of short-term rentals for a shortage of affordable housing and a disintegration of residential communities.

The Santa Monica ordinance holds the companies responsible for booking rentals of residences that aren’t licensed by the city. The appellate panel agreed with the city that the restriction doesn’t violate the U.S. Communications Decency Act of 1996, which shields online services from liability for the content that their users post on their sites.

San Francisco-based Airbnb is the largest home-rental platform with more than 6 million listings around the world. The company is gearing up to be ready to go public by the end of the year, but is still fighting various cities in court over efforts to curtail its operation. In January, Airbnb and other home-sharing sites won a ruling granting a temporary reprieve from a New York City law that would compel them to turn over renter data, a requirement that threatens to cut their bookings in the city by half.

“Airbnb has seen setbacks like this over the years,” Bloomberg Intelligence analyst Mandeep Singh said. “They will continue to work with the regulators on tax collection and other fees but it should not have much of an impact on its IPO.”

Airbnb is also fighting Paris where it faces as much as 12.5 million-euro ($14 million) in fines for allegedly posting illegal advertisements, and in November it sued Boston over a new ordinance that it says would limit short-term home rentals and impose unfair restrictions and financial penalties on the company.

The courts’ interpretation of the 1996 law and the protection it affords interactive online businesses has become a central theme in legal challenges to Airbnb and its rivals. Federal judges in San Francisco and Los Angeles have found that cities can hold the companies liable for processing transactions, as opposed to simply listing information from users. Yet in a separate case in Los Angeles, a judge concluded that Airbnb can’t be made responsible for renters breaking their leases when they list their apartments on the site.

Airbnb and HomeAway argued that the Santa Monica ordinance makes it impossible for them to operate, particularly if other municipalities adopt similar laws, because it would require them to monitor and remove listings for unregistered residences. If they don’t, users would be stuck looking at listings that they won’t be able to book, according to the companies.

The Ninth Circuit panel concluded the city’s statute only puts an “incidental” burden on the companies’ constitutional right to free speech.

“Even assuming that the ordinance would lead the platforms to voluntarily remove some advertisements for lawful rentals, there would not be a ‘severe limitation on the public’s access’ to lawful advertisements, especially considering the existence of alternative channels like Craigslist,” the judges said in the ruling.

Representatives of Airbnb and Expedia didn’t immediately respond to requests for comment.

The case is HomeAway.com Inc. v. City of Santa Monica, 18-55367, U.S. Court of Appeals, Ninth Circuit.

–With assistance from Eric Newcomer and Olivia Carville.

©2019 Bloomberg L.P. This article was written by Edvard Pettersson from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

Photo Credit: A view of Santa Monica, California, where Airbnb and HomeAway have lost a major legal battle involving the city's short-term rental law. Patrick T. Fallon / Bloomberg