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Lawsuits, Regulators Target Allegedly Deceptive Online Conduct by California Businesses

skotan_Thumbs_up_smiley.pngThe internet offers a seemingly infinite number of ways for businesses to connect with current and potential customers, including directly via their own websites and various social media sites, as well as indirectly through customer review sites. This wealth of possibilities comes at the potential cost, however, of customers being deceived by fraudulent or misleading information, or by a failure to disclose conflicts of interests. Businesses who market their products and services online, people who write online reviews or endorsements of products, and companies that operate review websites all have obligations to present information honestly. This applies to the public and to a company’s own shareholders. Two recent cases involving well-known internet companies based in Northern California demonstrate the risks and obligations that businesses may face.

A shareholder in Yelp, the San Francisco-based company that allows users to post reviews of businesses, filed a putative class action lawsuit against the company, alleging that it misled shareholders about its review policies in order to sell certain services to business and boost its stock price. Curry, et al v. Yelp, Inc., et al, No. 3:14-cv-03547, complaint (N.D. Cal., Aug. 6, 2014). According to the complaint, Yelp users have written about 52.8 million reviews of businesses around the world. The company derives most of its revenue by selling advertising on its website. It identifies three “key constituencies”: “the communities of contributors who write reviews, the consumers who read them and the local businesses.” Id. at 2. The “contributors” were described as “provid[ing] rich, firsthand information about local businesses.” Id.

The plaintiff alleges that Yelp misled shareholders and investors about its contributor review policies. The company claimed to have algorithms that screened out unreliable reviews, ensuring that only “authentic firsthand reviews” appeared on the site. Id. at 3. These algorithms allegedly did not work as the company claimed and allowed unreliable negative reviews to remain on the site. The lawsuit claims that the company did this in order to sell advertising services to local businesses, based on the representation that paid advertising would supersede negative contributor reviews, and to inflate the company’s stock price. It asserts a cause of action against the company under § 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 (the “Act”) and a cause of action against several Yelp executives under § 20(a) of the Act, 15 U.S.C. § 78t(a).

Another Bay Area internet company, Yahoo, was the subject of an FTC investigation over alleged violations of Sec. 5 of the Federal Trade Commission Act, 15 U.S.C. § 45. The company was accused of having its own employees post positive reviews of its apps in the iTunes Store without disclosing that they were Yahoo employees. This type of conflict of interest typically requires disclosure under FTC regulations. The FTC decided not to pursue enforcement action against Yahoo, finding that only a small number of employees were involved, that they did not receive any incentive to write the reviews, and that Yahoo did not profit from the reviews because the apps themselves were free.

If you or your business is involved in a contract dispute or another legal matter, a knowledgeable and experienced business and commercial lawyer can advise you of your rights and help you prepare your case. James G. Schwartz has represented individuals and businesses throughout Northern California since 1976. To schedule a free and confidential consultation to discuss your case, please contact us today online or at (925) 463-1073.

More Blog Posts:

Judge Rules that NCAA Rules Restricting Football and Basketball Players’ Compensation Violate Antitrust Law, Pleasanton Business & Commercial Law Blog, September 15, 2014

Why Businesses Should Resist Any Temptation to Create Fake Online Reviews, Pleasanton Business & Commercial Law Blog, August 29, 2014

Ninth Circuit Rules in Favor of Video-Rental Company in Lawsuit Alleging Violations of California Privacy Law, Pleasanton Business & Commercial Law Blog, July 31, 2014

Photo credit: skotan [Public domain, CC0 1.0], via Openclipart.