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October 2, 2014
  Boris Y. Levitt v. Yelp!
Headline: 9th Cir. Affirms the Dismissal of an Action Alleging that Yelp! Inc. Extorted Advertising Payments by Manipulating User Reviews in Violation of California State Law.

Area of Law: Civil Extortion; California's Unfair Competition Law

Issue(s) Presented: Whether, under California law, the small business owners in this case stated a claim on which relief can be granted.

Brief Summary: Appellees, a class of small business owners, appealed the district court's dismissal of their lawsuit against Yelp for their failure to state a claim. The Ninth Circuit reviewed the dismissal de novo to determine if the facts and legal theories set forth by the appellees were or were not sufficient to state a claim against Yelp.

Under California's Unfair Competition Law, the litigants must prove the act was wrongful. Thus, the Court first defined the term "wrongful" as it applies in the extortion context to mean the extortionist must have no lawful claim to the property in question. This effectively creates a claim-of-right defense that applies to threats of economic harm as exists in this case.

The specific allegations in this case revolve around the accusation that Yelp manipulated user reviews and created negative user reviews in order to pressure small business owners into paying a fee for additional positive advertising.

The Court emphasized that the business owners failed to allege and state facts showing Yelp directly threatened economic harm if the business owners declined to pay for the additional advertising. Further, the court emphasized that none of the business owners who are party to this lawsuit had an existing right to have positive reviews on their Yelp pages. Thus, Yelp was not acting "wrongful" when they removed positive reviews because Yelp is allowed to maintain and control their website in whatever manner they so chose.

The primary concern of the Court is the lack of specific facts establishing a plausible claim for any of these business owners. The arrangement of the reviews and potentially fabricated reviews may be conduct that would be seen as "wrongful" for economic extortion, however, based on the facts alleged in the third amended complaint, the Court was not convinced of the plausibility of these claims.

The Court also found the small business owners failed with respect to the "unfair" prong of the UCL because their allegations against Yelp were too general in nature. The standard under this portion of the rule requires that the conduct be in violation of an existing anti-trust law or significantly threaten or harm competition. Thus, the facts of this case did not support a finding that Yelp's conduct rose to the level required under this prong.

The Ninth Circuit concluded the alleged manipulation and creation of user reviews by Yelp, if true, would not be "wrongful" under the extortion statute, and secondly, the business owners did not allege sufficient facts or legal theories to establish a plausible claim against Yelp - and, thus, affirmed the district court's dismissal of plaintiffs' claims against Yelp for failure to state a claim.

Extended Summary: Several small business owners (the appellees), namely Boris Levitt, Cats and Dogs Animal Hospital, Inc., John Mercurio, and Dr. Tray Chan claimed Yelp extorted or attempted to extort advertising payments from them by threatening to either alter consumer reviews or create negative reviews. The claim was brought by the small business owners as a class-action, alleging Yelp violated California's Unfair Competition Law ("UCL"), California Business & Professions Code 17200 et seq., committing civil extortion, and attempting to commit civil extortion.

First, the Court established the type of service Yelp provides giving background to the circumstances involved in this lawsuit. Yelp is a company that runs a forum for individuals to rate and review businesses. This results in an advertising service for businesses, specifically those that receive high ratings and positive reviews. The author of the particular review and Yelp both are able to remove reviews. Yelp has a filtering system that is designed to protect the businesses along with the public from fraudulent reviews potentially planted by a competitor or an individual with malicious intentions. The filtering system is automated and therefore without human bias. For a monthly fee, Yelp also offers additional advertising opportunities for businesses, i.e. display advertisements on the Yelp webpage, additional photos, or promotion of a positive review to the top of the particular business' page.

The Court begins by setting forth California's Unfair Competition Law (herein after referred to as "UCL"), which "prohibits any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising." The UCL makes already unlawful conduct independently actionable in a business context. Here, the unlawful conduct involved is Yelp's alleged extortion and attempted extortion.

The Court moves on to determine if the small business owners did adequately state a claim for extortion. Beginning with the definition of "wrongful" and whether the claimed conduct meets this requirement. Under The Hobbs Act, extortion is "the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color of official right." In United States v. Emmons, the court established the term "wrongful" to be a limitation on the types of instances to which the statute applies. The limitation requires that the extortionist have no lawful claim to the property in question. Emmons further provides it would not be wrongful "to use force to achieve legitimate . . . ends." This is effectively a claim-of-right defense for the extortionist. Even more specifically, the claim-of-right defense is applicable in situations where the "extortion involve[es] threats of economic harm."

After surveying the applicable case law, the Court concluded an individual is required, under federal and California law, to show one of the following circumstances in order to state a claim of economic extortion: (1) he or she "had a pre-existing right to be free from the threatened harm, or (2) that the defendant had no right to seek payment for the service offered." The policy is to promote business dealings and not turn widely accepted "hard bargaining" into extortion.

The Court emphasized that the business owners failed to allege and state facts showing Yelp directly threatened economic harm if the business owners declined to pay for the additional advertising. The Court noted that the absence of a direct threat is not dispositive, but the small business owners had the burden of alleging facts sufficient to support an inference of such a threat.

Next, the court breaks down the various allegations set forth in the third amended complaint by each of the small businesses.

Beginning first with Chan, the court noted that her only complaint was with respect to the removal of positive Yelp reviews from her business' page. However, the court plainly states that Ms. Chan did not have a pre-existing right to have positive reviews on her Yelp page. Thus, the benefits of the positive reviews are not something she is entitled to, but rather a benefit made possible and maintained by Yelp. The court concludes Chan failed to state a claim for economic extortion since she was unable to show Yelp's removing some of her good reviews to be "wrongful" conduct.

The Court next evaluated both Levitt and Mercurio's claims. The Court started out by defeating their claim regarding the removal of positive reviews under the same reasoning as discussed above with respect to Chan.

The Court then moved on to discuss the allegations made by Cats and Dogs and Mercurio that Yelp not only removed positive reviews but re-posted negative reviews and moved them to the top of the individual business's Yelp pages. The Court concludes Yelp is legally allowed to charge for their advertising services, and any threat of monetary harm constitutes the widely accepted business tactic of "hard bargaining."

The same business owners, Cats and Dogs and Mercurio, are the only two litigants to allege Yelp created and fabricated new negative reviews as another form of extortion. The Court ultimately determines that under the plausibility standard, the business owners failed to allege sufficient facts to support their claim that Yelp created and posted negative reviews on their website.

Lastly the Court examined the "unfair" prong of the UCL, which requires that "the alleged unfairness [ ] 'be tethered to some legislatively declared policy or proof of some actual or threatened impact on competition." The allegation under this prong is not that Yelp is in competition with the small business owners, but Yelp's actions unfairly injure the small business owners to the benefit of competitors who too have Yelp pages. The Court concluded this allegation is to general to meet the requirement that Yelp's actions must rise to the level of a violation of an antitrust law "or otherwise significantly threaten[ ] or harm[ ] competition."

Based on the above discussion, the Ninth Circuit concluded the alleged manipulation of user reviews by Yelp, if true, would not be "wrongful" under the extortion statute, and secondly, the business owners did not allege sufficient facts or legal theories to establish a plausible claim against Yelp - and, thus, affirmed the district court's dismissal of plaintiffs' claims against Yelp for failure to state a claim.

For the full opinion:

Panel: Richard A. Paez, Marsha S. Berzon, and Richard C. Tallman, Circuit Judges.

Date of Issued Opinion: September 2, 2014

Docket Number: 11-17676

Decided: Affirmed.

Case Alert Author: Kaitlyn E. Daley

Counsel: Lawrence Dale Murray (argued), John Henning III, and Robert C. Strickland, Murray & Associates, San Francisco, California, for Plaintiffs-Appellants; S. Ashlie Beringer (argued) and Molly Cutler, Gibson Dunn & Crutcher, Palo Alto, California; Gail Ellen Lees, Gibson Dunn & Crutcher, Los Angeles, California; and Aaron Schur, Yelp Inc., San Francisco, California, for Defendant-Appellee.

Author of Opinion: M. Berzon, Circuit Judge.

Case Alert Circuit Supervisor: Professor Ryan T. Williams

    Posted By: Ryan Williams @ 10/02/2014 11:59 AM     9th Circuit  

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