Stockholders Can't Sue Yelp Because Of Fake Reviews (Forbes Cross-Post)

Stockholders Can’t Sue Yelp Because Of Fake Reviews (Forbes Cross-Post)

yelp logoAre there fake user reviews on Yelp? Sure–Yelp freely admits it. Nevertheless, plaintiffs have attempted a variety of legal theories to hold Yelp legally responsible for those fake reviews. Recently, a federal court shut down one of those lawsuits, holding that the presence of fake reviews on the site didn’t create securities fraud.

The Case

The judge initially dismissed the plaintiffs’ complaint in April but gave the plaintiffs a chance to try again, which they did. The plaintiffs claimed that Yelp “falsely stated that the reviews on [Yelp’s] website were authentic and that the contributors to the website provided high-quality, firsthand information about local businesses.” This claim didn’t persuade the court, which responded (emphasis addeed): “Defendants both explicitly and implicitly acknowledged that some Yelp reviews were inauthentic. Those acknowledgements, along with a common-sense understanding of what it means for a website to host user-generated content, demonstrates that no reasonable investor could have understood Defendants’ statements to mean that all Yelp reviews were authentic.” It’s tough to fight common sense.

The plaintiffs also alleged that Yelp falsely denied manipulating “reviews in favor of advertising businesses and against non-advertising businesses.” The court rejected this argument for several reasons, including the anecdotal nature of the evidence (“Especially when compared to the tens of millions of reviews hosted by Yelp, a dozen relevant but unsubstantiated and divergent consumer complaints over at least five years” doesn’t prove falsity), the dubious causality of public disclosures about Yelp’s behavior on Yelp’s stock drop, Yelp’s explicit public acknowledgements of its fake review problems, and the lack of managerial knowledge of the problem’s scope even though “Yelp employed community managers, scouts, and ambassadors to write and curate posts.”

Based on the failure of the plaintiffs’ allegations, the court again dismissed the lawsuit, this time permanently. This makes the case ready for an appeal, which seems likely irrespective of its merit.

A Yelp spokesperson informed me: “Yelp has said from the beginning that this lawsuit–like others asserting similar theories–was without merit, and once again the court has agreed with us. Yelp has repeatedly stated that it does not manipulate reviews in favor of advertisers or against non-advertisers, and the court saw through plaintiffs’ attempts to cast these statements as false.”

Implications

* Allegations against Yelp won’t die. Review websites are under constant legal attack for fake user reviews and alleged pay-for-play review manipulations. However, few review websites have attracted such broad and vitriolic attacks as Yelp. For going on a decade, Yelp has been a favorite target of gripers and plaintiffs. Will Yelp ever be able to quiet this storm?

* Securities fraud lawsuits are hard to win. This particular legal challenge to Yelp’s alleged misbehavior, a stockholder lawsuit, seemed like an especially long shot for the plaintiffs. Stockholder lawsuits are an indirect and orthogonal way to redress any purported problems with fake reviews and pay-to-play. Furthermore, the pleading requirements of securities fraud lawsuits are quite stringent: the plaintiffs have to show the underlying bad actions, that those actions caused a reduction in the stock price, and that the company leaders knew about it. Especially in cases fundamentally about managerial practices, stockholder-plaintiffs have a difficult time marshaling the necessary evidence.

* Other theories remain available to plaintiffs. Although the securities fraud lawsuit failed, other legal theories may be more availing to plaintiffs. Indeed, Yelp suffered a surprise preliminary loss in a false advertising case. At this point, it’s almost impossible for review websites to publicly say anything remotely laudatory about their users’ reviews without stirring up a hornet’s nest of plaintiffs. Most of those lawsuits won’t get any traction, but it seems like plaintiffs intend to explore every legal angle.

* Lawsuits over fake reviews are generally bogus. I find the constant litigation against review websites tiresome. Everyone knows that there are fake reviews on every review website, and review websites’ efforts to tout the legitimacy of their reviews still has zero chance of inducing consumers to think all reviews are legit. Suing over the prospect that some of those consumers got duped is a bogus waste of time.

Meanwhile, it’s totally legitimate to sue a review website for falsely advertising that it doesn’t engage in pay-to-play…but only if the plaintiff can prove it, not just invoke innuendo and some unreliable anecdotes, which is all the plaintiffs could do in this case. When a plaintiff has concrete proof that Yelp or any other review website engages in pay-to-play, I hope they go to court and win. Otherwise, without airtight evidence, those lawsuits look more parasitical than socially beneficial.

Case citation: Curry v. Yelp, No. 14-cv-03547-JST (N.D. Cal. Nov. 24, 2015)