Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—9th Cir.: Yelp! did not extort small business owners through advertising packages, (Sep 3, 2014)

By Greg Hammond, J.D.

A group of small business owners were unable to demonstrate that Yelp!, Inc.—the operator of a business review website—extorted or attempted to extort advertising payments from them by allegedly manipulating user reviews and authoring negative reviews about their businesses. In affirming the lower court’s decision to dismiss the complaint, the U.S. Court of Appeals in San Francisco determined that the business owners failed to state a claim for extortionate or unfair business practices under California’s Unfair Competition law (UCL) (Levitt v. Yelp! Inc., September 2, 2014, Berzon, M.).

Background. Yelp’s website, www.yelp.com, is an online forum and directory where users can post reviews and opinions on a range of businesses and services, including restaurants, dog walkers, and more. The company also provides businesses with advertising opportunities, costing $300 to $1,200 per month. According to the court, the purchase of advertising through Yelp allows businesses to appear in advertisements on Yelp search results and business pages; prevent competitors’ advertisements from appearing on their own Yelp page listing; post photos on their page listing; and promote a favorite review to the top of their listing.

The instant case was filed by a group of small business owners, including furniture restoration business owner Boris Levitt, automobile body repair shop owner John Mercurio, Dr. Tracy Chan, and Cats and Dogs Animal Hospital, Inc. They alleged that Yelp created negative reviews of their businesses and manipulated review and ratings content to induce them to purchase advertising through Yelp. Specifically, they argued that the company’s actions amounted to extortion, or attempted extortion, in violation of the UCL. All of the named business owners asserted that Yelp removed five-star reviews, re-posted negative reviews, or moved negative reviews to the top of their Yelp page after declining advertising pitches by company sales representatives. Dr. Chan declined advertising services at first, but agreed to a contract after Yelp allegedly removed nine five-star reviews, dropping her overall rating from five to three stars. The district court dismissed the claims for failure to state a claim, and the business owners appealed.

Unlawful (extortionate) business practices. The court first considered whether the small business owners stated a claim of extortionate, unlawful business practices under the UCL. It noted that to state a valid claim under both federal and California law, the business owners were required to demonstrate: (1) they had a pre-existing right to be free from the threatened harm, or (2) Yelp had no right to seek payment for the service offered.

The court concluded that the business owners failed to allege that Yelp threatened economic loss by manipulating user reviews, because: (1) there was no evidence that Yelp directly threatened economic harm if the business owners refused to purchase advertising packages; (2) any implicit threat to remove positive reviews was not wrongful under the extortion statutes; and (3) it is not independently wrongful for Yelp to post and arrange actual user reviews on its website. “As Yelp has the right to charge for legitimate advertising services, the threat of economic harm that Yelp leveraged is, at most, hard bargaining,” the court stated.

Negative reviews. Next, the court considered whether the business owners adequately alleged a claim for extortion, resulting from Yelp’s purported authoring of negative reviews. It concluded that the business owners failed to allege sufficient facts to support their claim, as no facts were alleged demonstrating that specific reviews were authored by Yelp. Further, the court determined that inaccuracies found in the alleged negative reviews do not “make it plausible that it was Yelp – as opposed to a competitor, or a disgruntled customer hiding behind an alias, or an angry neighbor.”

Unfair prong of UCL. Finally, the court had to determine whether the alleged unfairness was tethered to a legislatively declared policy or some actual or threatened impact on competition. The small business owners only alleged extortion as a violation of a legislatively declared policy, which was already found inadequate. The general allegation that Yelp’s conduct “harms competition by favoring businesses that submit to Yelp’s manipulative conduct and purchase advertising to the detriment of competing businesses that decline to purchase advertising,” did not demonstrate that Yelp actually violated any antitrust law or significantly threatened or harmed competition. Consequently, the court of appeals determined that the business owners failed to state a claim upon which relief could be granted, and the lower court’s decision dismissing the case was affirmed.

The case number is 11-17676.

Attorneys: Lawrence D. Murray, John Henning III, and Robert C. Strickland (Murray & Associates) for Plaintiffs-Appellants. S. Ashlie Beringer, Molly Cutler, Gail Ellen Lees (Gibson Dunn & Crutcher), and Aaron Schur for Yelp! Inc.

Companies: Yelp! Inc.; Cats and Dogs Animal Hospital, Inc.

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