Court Dismisses Yelp Shareholder Lawsuit Over Bogus Reviews, Inflated Stock Prices

yelpadfaqLast summer, some Yelp shareholders filed a class-action lawsuit against the online review site, alleging that Yelp misled them about the quality of user-generated reviews and the process Yelp uses to screen for bogus write-ups. This week, a federal court judge sided with Yelp and dismissed the complaint, saying that a reasonable investor would not believe that every review posted to an open and free online community would be genuine.

To go back a second, the original complaint [PDF] the shareholders argued that not all reviews on Yelp are “authentic ‘firsthand’ reviews, but instead included fraudulent reviews by reviewers who did not have first-hand experience with the business.”

The lawsuit also took issue with Yelp’s screening process, which allowed “unreliable reviews to remain prominent while the Company tried to sell services designed to suppress negative reviews or make them go away.”

The plaintiffs claimed that Yelp actively “engaged in a scheme to deceive the market” by talking up its business prospects and sending out press releases touting its user-generated reviews.

The company’s stock price was riding high at around $98/share in March 2014, but then took a tumble to around $66 the next month following a report that the Federal Trade Commission had received more than 2,000 complaints about the site. The value of the Yelp shares continued to sink for another month before rebounding. The price hit $80 in Sept. 2014, but has since returned to around $50/share.

In his order [PDF] dismissing the case, the judge writes that Yelp’s statements about the quality of their reviews “would not have deceived a reasonable investor into believing that all of the reviews hosted on the Yelp website at a given moment in time were authentic and reliable.”

The judge points out that it’s “widely understood” that Yelp reviews are user-generated and that “A reasonable investor would have understood that Yelp did not guarantee that no user would ever post an inauthentic or unreliable review to Yelp’s website.”

In spite of multiple anecdotal claims from businesses that Yelp tried to extort them into paying for better reviews or to have bad reviews removed, the judge found that the plaintiff failed to show this was an actual practice of the company.

And the mere fact that complaints were filed with the FTC doesn’t make them true.

“The FTC complaints in this case… did not reveal any fraud to the market,” explains the court. “[T]he FTC complaints merely added more voices to the chorus accusing Yelp of manipulating reviews to encourage businesses to advertise. These voices were not sufficiently numerous or corroborative to establish the veracity of the accusations they contained.”

“This is not to say the events alleged in any of the FTC complaints did not occur,” the judge clarifies. “But a reasonable investor during the class period was aware that some businesses maintained that Yelp tried to coerce businesses into advertising by manipulating reviews. To this day, Yelp continues to deny manipulating reviews in this manner, just as it did during the class period. The FTC complaints do not make liars out of Defendants, because they do not meaningfully alter the ‘total mix’ of information available to the marketplace on the issue of whether Yelp manipulates reviews of businesses in connection with advertising.”

This may not be the end of the road for this lawsuit, as the court has given the plaintiff 30 days to amend the complaint.

[via Eater]

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