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Is Yelp an Extortionist Racket?

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The Court’s published opinion: “any implicit threat by Yelp to remove positive reviews absent payment for advertising was not wrongful within the meaning of the extortion statutes.”

The U.S. Court of Appeals for the Ninth Circuit in California last week upheld a previous ruling, which stated that there’s nothing illegal about Yelp! Inc.’s alleged practice of suppressing good reviews, or even writing bad reviews and otherwise manipulating ratings in exchange for purchasing advertising on its site.

Unsurprisingly, the internet has reacted quite negatively to the ruling, with mainstream commentators openly framing Yelp as an extortion racket.

What the court found, however, is not so much a legal victory for Yelp as an admission that legally proving extortion is exceedingly difficult in California under that state’s Unfair Competition Law (UCL).

The court ruling has resulted in a lot of internet bile, much of it spilling over onto Yelp’s own review page on Yelp.com (2.5 stars!).

While the legal procedure is kind of interesting itself in an abstract way, the real world stakes are very high for actual businesses, given that a one-star increase has been shown to increase revenues by as much as 9%. Yelp is particularly significant for mom-and-pop sole proprietor businesses, as it has also been demonstrated that Yelp doesn’t much affect the revenues of large chain retailers.

What’s surprising about the rage over the Yelp ruling is that anyone has ever regarded Yelp as some kind of public service or government agency bound by the kind of laws that are supposed to enforce impartiality.

The United States Federal Trade Commission helpfully publishes a guide pertaining to “the use of endorsements and testimonials in advertising”. And Yelp is basically a form of advertising. The FTC states that any self-interested rigging of the game, like the publishing of reviews by family members of the business owner or similarly biased testimonials are prohibited, unless the connection is disclosed.

It says nothing, though, about the interests of the delivery platform on which the reviews appear. This is one way that the FTC shows its 20th century roots, blissfully unaware of the new landscape created by the digital reputation economy and the effect of crowdsourced opinion offered by online “communities” (a.k.a. individual citizens who supply Yelp with its product in the form of user information). The FTC supposes that the delivery platforms that supply reviews strive for objectivity, which is adorably old-school of them.

The plaintiffs in the Yelp case, a group of San Francisco business owners, allege “that Yelp Inc. extorted or attempted to extort advertising payments from them by manipulating user reviews and penning negative reviews of their businesses in violation of California state law.”

The ruling determined that because the plaintiffs furnished mainly anecdotal, rather than smoking gun, evidence, “there were insufficient facts from which to infer that Yelp authored or manipulated the negative reviews and ratings; and there were insufficient factual allegations from which to infer communication of an extortionate threat.”

On the one hand, case closed. Yelp is being persecuted by several business owners with a case of sour grapes over the fact that their businesses have been adversely affected by negative ratings on Yelp.

But the court’s opinion doesn’t say that Yelp did nothing wrong and that an action couldn’t be brought against the company “if adequately pled.” It is saying that this particular group of people have brought insufficient evidence, and a whole lot of unsavory anecdotal evidence, to the table to support their case, and that that evidence simply wasn’t enough to prove extortion under the UCL.

In setting out ground rules that “extortion is an exceedingly narrow concept as applied to fundamentally economic behavior,” the court’s published opinion makes it clear that it finds no reason to find in favour of the plaintiffs given that Yelp has played entirely within existing laws, which allow a very wide perimeter for owners of a website to publish what they like and to use their website for purposes that suit their needs.

And what Yelp needs is to make money.

Privately held for a decade before going public in March 2012, Yelp has famously never earned a profit, until the most recent quarter just passed. The company launched versions of its website in Japan and Argentina this year, and plans to open a European office based in Dublin.

Where companies like Facebook have turned the trading of information about its users to a very healthy profit, Yelp is still grappling with how to spin a little gold out of its business model.

In assessing an allegation by dental clinic owner Tracy Chan, who “asserts that she was deprived of the benefit of positive reviews Yelp users posted”, the court found that “Chan had no pre-existing right to have positive reviews appear on Yelp’s website.”

Therefore, “any implicit threat by Yelp to remove positive reviews absent payment for advertising was not wrongful within the meaning of the extortion statutes.”

Similarly, evaluating Chan’s co-plaintiffs John Mercurio of Wheel Techniques and the Cats and Dogs Animal Hospital, Inc., the court found that as “Yelp has the right to charge for legitimate advertising services, the threat of economic harm that Yelp leveraged is, at most, hard bargaining.”

Hard bargaining, indeed.

In setting out ground rules that “extortion is an exceedingly narrow concept as applied to fundamentally economic behavior,” the court’s opinion doesn’t say that Yelp did nothing wrong and that an action couldn’t be brought against the company “if adequately pled.”

The final section of the court’s published opinion looks into Mercurio and Cats and Dogs’ serious allegation that Yelp “or individuals acting on behalf of Yelp have written reviews of business on Yelp”. Mercurio relates a story in which, while speaking to a member of Yelp’s sales team about his own advertising on Yelp’s site, he was told that Yelp had just fired several employees who were running a review scam inside the company.

But since all we have is Mercurio’s word, the story remains a colourful anecdote and not credible evidence.

A Harvard Business School report last year, called “Fake It Till You Make It: Reputation, Competition, and Yelp Review Fraud” by Michael Luca and Georgios Zervas, highlighted the extent of review fraud on Yelp, looking at the extent of fraud perpetrated not by Yelp, but by business owners. The report found that 16% of Yelp reviews were deemed fraudulent and were flagged by Yelp’s algorithm.

Yelp has held this report up as proof that it operates in good faith, with the onus mainly on the fraudulent behaviour of business owners who find it necessary to try and game Yelp’s system. But the report’s authors write that their study “casts light on the economic incentives that lead organizations to violate ethical norms,” without assuming that these incentives apply equally to Yelp itself.

A Reddit thread the other day featured testimonials from both business owners who claim to have been solicited (not to say extorted) by Yelp’s advertising team and several others who claim that purchasing advertising through Yelp has either helped their business or that they could detect no effect for good or ill from the practice. Another said that he had seen a boost in his rating since taking out advertising with the company, albeit perhaps because “the ads brought more traffic to my site”.

For at least the short term, Yelp is under a microscope. Although a court has cleared its name and essentially said that its treatment of these plaintiffs is perfectly lawful, the eyes of the internet will be upon Yelp for at least a little while, to ensure that its rhetoric about “trust” and “community” matches its actions. But you can’t help but think that the California ruling has emboldened Yelp to pursue business as usual, and that they’ll likely expand on that behaviour just as they expand internationally.

Publishing fraudulent reviews is a serious enough charge. Obviously, there’s a difference between idiot reviewers who leave a one-star review for an oyster restaurant that begins, “I hate oysters,” and the organized labour of astroturfers (freelance writers who are often paid as little as 25 cents per review to help manipulate ratings without getting weeded out by Yelp’s algorithm).

For all the internet anger against the court ruling, Yelp quite rightly points out that the court system has repeatedly dismissed cases which allege that Yelp regularly extorts businesses via advertising or that it otherwise manipulates ratings.

But where the mask was only slipping before, now it’s off. Yelp, like every internet business whose product is information, relies on leveraging its user-supplied information for advertising purposes in order to survive. In fact, Yelp is advertising, full stop. Why anyone ever thought otherwise is a mystery.

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