Court Won't Revive Claims Against Yelp Over Phony Reviews

Siding with Yelp, a federal appellate court has refused to revive a lawsuit accusing the company of duping investors by misleading them about whether reviews on the site are authentic.

In a decision issued last week, a three-judge panel of the 9th Circuit Court of Appeals ruled that the investors' complaint did not spell out how Yelp allegedly caused investors to lose money. "Loss causation cannot be adequately made out merely by resting on a number of customer complaints and asserting that where there is smoke, there must be fire," the appellate judges wrote.

The suit dates to April of 2014, shortly after the Federal Trade Commission said it had received more than 2,000 complaints about Yelp. Some of those complaints accused Yelp of attempting to “extort” ad buys from small businesses by manipulating customer reviews.

Yelp's stock dropped from around $80 a share at the beginning of April 2014 to around $66 a share on April 4 -- shortly after the FTC's public statements. As of Monday, the stock was trading at around $47 a share.

The FTC closed its investigation without bringing a complaint. Yelp has always denied allegations that it manipulates reviews.

In 2015, U.S. District Court Judge Jon Tigar in the Northern District of California dismissed the lawsuit. He ruled that the investors could not proceed because they didn't adequately allege that Yelp made "materially false" statements about the authenticity of reviews on the site.

The shareholders then appealed the dismissal to the 9th Circuit. Among other arguments, the investors contended that the number of complaints shows that Yelp's reviews weren't authentic.

"The volume of such complaints and their consistency across multiple sources revealed the falsity of defendants’ representations that reviews were firsthand, authentic and that there was no relationship -- zero relationship -- between advertising and reviews," the investors argued in their appeal. "The sheer number of different sales representatives identified in these complaints making similar sales pitches strongly suggests that the use of manipulation to compel businesses to buy advertising was a widespread business practice."

Yelp countered that the investors should not be able to proceed with a securities fraud suit based on "unverified and unadjudicated" complaints submitted to the FTC by consumers.

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