Yelp Drops on FTC Complaints, Lawsuit
Shares of Yelp Inc. (YELP) fell $5.02 (6.6%) to close at $70.61 on Apr 3, 2014, after the Federal Trade Commission said that it received an overwhelming number of complaints about the company’s business review practices over the last five years.
The FTC recently announced that it received more than 2,046 complaints against Yelp. According to The Wall Street Journal, most of the complaints were lodged by small business owners alleging that Yelp posts fraudulent reviews that defame their reputation.
Most of these business owners said that the negative reviews posted on the website appeared after they declined to pay Yelp for sponsorship. One of these business owners Joe Hadeed, owner of Hadeed Carpet Cleaning, filed a lawsuit in Jul 2012.
Hadeed alleged that at least seven negative reviews about his business on Yelp were fraudulent. The negative reviews impacted his business as traffic fell 31.0% and revenues declined approximately 20.8% year over year in 2012. He sued the anonymous reviewers and asked Yelp to reveal their true identities.
However, this was nothing new for Yelp, as it receives approximately six subpoenas on a monthly basis, demanding the true identities of the anonymous reviewers. Yelp vehemently denied the allegations and said that there is no relationship between reviews and sponsorship.
However, the company received setbacks, when both the Alexandria Circuit Court and the Virginia Court of Appeals ruled down its argument. In January this year, Yelp appealed in Virginia State Supreme court against the rulings. The company argued that the reviews are protected under the First Amendment and Hadeed failed to provide substantial evidence that it committed any fraud.
Virginia State Supreme court is expected to issue an order this month. However, websites such as Yelp, Amazon.com (AMZN), Google Inc. (GOOG), Yahoo! (YHOO) are protected under the federal Communications Decency 1996 Act, from being sued for the content they publish.
Although legal experts believe that Yelp is doing nothing illegal, they criticized its practices as unfair. We believe a negative ruling by the Virginia Supreme court will not only hurt the company’s reputation but also dent its cash balance. Moreover, it can attract other lawsuits that will increase Yelp’s legal expenses, negatively affecting profitability, going forward.
Currently, Yelp has a Zacks Rank #4 (Sell).
Read the Full Research Report on YHOO
Read the Full Research Report on GOOG
Read the Full Research Report on AMZN
Read the Full Research Report on YELP
Zacks Investment Research
