Yelp faces class action suits, allegations of extortion and artificially inflated stock prices

Yelp, a San Francisco-based company, provides readers access to over 60 million reviews of businesses and services, and has close to 140 million viewers per month. Most of the company’s revenue comes from selling ads to businesses – $233 million in 2013 and expected revenue of $375 million in 2014.

A 2010 class action lawsuit alleged that Yelp has extorted businesses with poor customer reviews by requiring they pay to remove the most negative reviews. Complaints against Yelp were made public by the Federal Trade Commission (FTC), and documented that businesses that refused to purchase ads on the site claimed that their positive reviews disappeared.

U.S. District Judge Edward Chen dismissed the class action claim of extortion for “failure to state a proper claim“. Plaintiffs lost their suit because their allegations because of insufficient evidence – they did not meet the specific requirements of a claim of extortion, namely that businesses had a pre-existing right to be free of the threatened harm, or that Yelp had no right to seek payment for the service they offered.

The LA Times reported that upon appeal, Marsha Berzon, a member of the U.S. 9th Circuit Court of Appeals in San Francisco, declared that although business owners may deem Yelp’s actions as a “threat of economic harm”, they are not unlawful.

Related legal battles ensue. The amount of earnings that Yelp allegedly made as a result of the extortion? $81.5 million. One of two shareholders’ lawsuit, Curry v Yelp, claims that the company artificially inflated prices during the class action suit, resulting in $81.5 million in stock sales earned from misleading statements about the state of the business and the quality of their reviews.

Yelp executives are alleged to have conspired to keep the profits secret and devising a “scheme to deceive the market.” Yelp executives are accused of profiting from the misleading positive information about their business, as shown in their February 2014 financial report, and that they were able to sell off portion of their stock at an artificially high price. Yelp CEO Jeremy Stoppelman reportedly earned over $8 million from the stock sale.

Additionally, a group of Yelp review writers has filed a class-action suit alleging they perform the exact same tasks and work as paid Yelp employees, and are owed damages for their unpaid work.

Relevant reading:

D.C. contractor seeks $750K in damages from a woman who he alleged defamed his business writing a negative Yelp review, The Washington Post.

Calculating lost business profits, by Dwight Steward, Ph.D., EmployStats.

Introduction to Extortion – Essential Elements and Broader Reach of Rico, Stimmel, Stimmel & Smith.