Consumer Review Legislation, Litigation Appear On the Horizon

Gag Clauses

Unsurprisingly, the proliferation of such sites has created legal issues that are novel in some ways, but also redolent of decades-old disputes over free speech, false advertising, defamation and contract law. Rightly or wrongly, allegations that the reviews on its platform are fraudulent, or that it unlawfully favors businesses that participate in advertising programs, has plagued Yelp since its inception. In the same vein, Ripoff Report is regularly sued by businesses who claim reviews on its sites are defamatory. Finally, as discussed further below, Yelp has also been sued by its own shareholders on the theory that fake reviews could constitute securities fraud.

Elsewhere, some businesses invariably subjected to Yelp reviews have adopted a novel and controversial tactic. These businesses have inserted provisions into the agreements with their customers restricting a consumer's right to review their business. Also known as “gag clauses,” such non-negotiable provisions functionally prevent a consumer from reviewing the business, even if the statements in a review would be truthful. Violation of a “gag clause” can precipitate fines and other penalties. As an extreme example of this trend, a Utah couple was once charged $3,500 by an online retailer after they had run afoul of the “gag clause” in the relevant agreement by posting some unkind words about the retailer on the review site. Eventually, after the couple's refusal to pay these fines and years of litigation ensued, a federal judge in Utah awarded them in excess of $300,000 in compensatory and punitive damages, as well as attorney fees.

In response to this trend, Congress has begun to act. The Senate passed a bill in December 2015 via unanimous consent that is designed to forbid “gag clauses” in contracts between consumers and sellers. This article looks deeper into this legislation by analyzing the rationale behind it, its specific terms, and the reaction to its passage thus far. We will also summarize the recent shareholder litigation involving Yelp, in which a class of plaintiffs alleged that the company had proffered materially false statements to investors regarding the veracity of the reviews posted on its site, and its practices with respect to companies that advertised with Yelp versus those that did not, and had therefore engaged in actionable federal securities fraud.

The Consumer Review Freedom Act

On Dec. 14, 2015, the Consumer Review Freedom Act (CRFA) (S. 2044) passed the Senate with unanimous consent. Originally introduced by Sen. John Thune (R-SD), the CRFA declares void any contract provision that prohibits or penalizes consumers from reviewing a company's products or services.

The impetus for the CRFA is in part an acknowledgment that consumers have begun to increasingly rely on platforms that include reviews authored by other consumers , as such reviews possess the imprimatur of trustworthiness and reliability that a review purchased or written by the business in question would not. Therefore, according to documentation published in conjunction with the passage of the CRFA, any attempt to restrict the intrinsic candor of such reviews creates wide-ranging consequences. Such restrictions are manifested most frequently in the form of gag clauses, which often carry monetary penalties for violations. Notably, numerous iterations of such clauses have been drafted to bar not only defamatory comments about a business, but even honest ones as well. Such gag clauses have been utilized by landlords, wedding contractors and sellers of weight-loss products, just to name a few.

According to the Senate Commerce Committee Report that accompanied the bill, these “gag clauses,” also known more formally as non-disparagement provisions, “stifle the speech of consumers, and thus interstate commerce, by not permitting fair criticism of a business even when that feedback is an honest reflection of consumers' experiences.” S. Rept. 114-175. Though the same Report agreed that businesses' retained a valid interest in preventing a consumer from penning a defamatory review, it ultimately concluded that these clauses were a disproportionate response to such an interest.

Ultimately, the same Report concluded that the CRFA “would not have an adverse economic impact on the Nation,” and would instead “promote consumer protection by making certain non-disparagement clauses unlawful, thus allowing consumers to make better informed decisions when procuring goods and services.”

Reaction to the passage of the CRFA has been largely positive. On the more excited end of the spectrum, one law professor who practices and writes frequently in the area of technology and marketing law exclaimed “Amen!” upon its approval. Another newspaper noted that the CRFA gives consumers an “early Christmas present.” Finally, in a fitting testament to the ubiquity of consumer reviews, earlier versions of the CRFA have been discussed in forums on Yelp .

The CRFA could be a considerable benefit to lawyers around the country as well. The final version deleted earlier language that would have proscribed state attorneys general from hiring outside counsel on a contingency basis to assist in enforcing the non-disparagement clause ban.

Shareholder Litigation Arising from Public Statements About False Consumer Reviews

Although Yelp is considered by New York Attorney General Eric Schneiderman to utilize an algorithm that is the “most aggressive” at filtering out fake reviews, according to a 2014 study, fake reviews now amount to 20% of the site's content. Undoubtedly these reviews upset businesses and consumers, but even shareholders have begun to go to court to redress perceived problems stemming from what some believe is an epidemic of artificial reviews.

In Curry v. Yelp, No. 14-cv-03547-JST, 2015 WL 7454137 (N.D. Cal. Nov. 24, 2015), class action plaintiffs filed a first amended complaint against Yelp and a number of its officers alleging, inter alia , securities fraud in violation of the Securities Exchange Act. The claims were largely premised on the idea that Yelp, in financial documents disseminated as part of periodic updates to its stockholders, “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.” The plaintiffs' also averred that Yelp falsely denied manipulating “reviews in favor of advertising businesses and against non-advertising businesses.”

In order for the plaintiffs to succeed on these claims, they were required to prove that Yelp's statements or omissions were both: 1) false or misleading and 2) material. See, Berson v. Applied Signal Tech., 527 F.3d 982 (9th Cir. 2008). The court concluded that the plaintiffs' failed to prove either element. It credited Yelp's contention that it had acknowledged both explicitly and implicitly that some reviews on its site were inauthentic, and therefore, “no reasonable investor could have understood Defendants' statement to mean that all Yelp reviews were authentic.” See also, In re Lululemon Securities Litigation, 14 F. Supp. 3d 553 (S.D.N.Y. 2014) (holding that an apparel company that disclosed on its website that its products may be defective did not render assertion elsewhere that such products were of “high quality” actionably false under federal securities laws). In addition, the court concluded that investors could not be materially misled by such statements concerning the authenticity and “firsthand nature” of each and every review on Yelp's website, given the “common-sense understanding of what it means for a website to host user-generated content.”

The court similarly rejected the plaintiffs' claims that denials by Yelp officers and employees of manipulation of reviews in favor of advertisers and against non-advertisers constituted materially false statements. The evidence presented by plaintiffs, which amounted to examples of FTC complaints complaining of manipulation of Yelp reviews, were insufficient and lacking corroboration to prove that the company had engaged in “large-scale manipulation of customer reviews.” See also, In re Netflix Securities Litigation, 2005 WL 1562858 (N.D. Cal. June 28, 2005) (noting that a small number of customer complaints on their own do not establish that a company's contrary statements are false, since every large company is expected to have some customer complaints). Likewise, the court dismissed the evidence backing plaintiffs' claims regarding the purportedly false statements made by Yelp regarding manipulation of reviews as lacking causality and contradicted by Yelp's explicit acknowledgement of its fake review problem.

For this, and other reasons, the court dismissed plaintiffs' claims without leave to amend.

Conclusion

Enacting the CRFA is no certainty, although it seems like the number of bills passing through the Senate that have received unanimous support during 2015 could be counted on one hand. Bipartisan support for the CRFA appears to remain intact. Ultimately, the prospects for passage hinge on an identically named companion bill in the House of Representatives, H.R. 2110, which remains characterized on Congress.gov at press time as “Referred to the Subcommittee on Commerce, Manufacturing and Trade.”

The relative calm over the CRFA may not be a harbinger of things to come with respect to legal issues confronting customer review sites. A heretofore much more contentious debate has arisen over the conflict between allegedly defamatory reviews of businesses, and the free speech rights of the consumers to post harsh reviews that often straddle the line between highly critical and actionably defamatory. That will almost certainly be the main event in the ongoing legal debate involving consumer review sites.

Richard Raysman is a Partner at Holland & Knight. Peter Brown is the principal at Peter Brown & Associates and a member of this newsletter's Board of Editors. They are co-authors of Computer Law: Drafting and Negotiating Forms and Agreements (Law Journal Press).