Online review site Yelp (NYSE:YELP) can lower or raise the rating of a business depending on whether it advertises with the company, a federal appeals court ruled in a lawsuit filed by small businesses claiming Yelp used the tactic to try to extort ads from them.
Yelp has denied doing that, saying it uses an automated system to cull reviews that determine ratings.
The 9th U.S. Circuit Court of Appeals ruled on Tuesday that even if Yelp did manipulate reviews to penalize businesses, the practice would not constitute extortion.
The court said businesses do not have a right to positive reviews on Yelp, and that the San Francisco-based company can seek payments for its advertising.
"The business owners may deem the posting or order of user reviews as a threat of economic harm, but it is not unlawful for Yelp to post and sequence the reviews," Judge Marsha Berzon wrote for the three-judge panel. "As Yelp has the right to charge for legitimate advertising services, the threat of economic harm that Yelp leveraged is, at most, hard bargaining."
Berzon said the plaintiffs could pursue other claims involving Yelp, but the extortion allegation did not hold up.
Yelp said in a blog post on its website that it has never altered business ratings for money.
"We are obviously happy that the court reached the right result, and saw through these thin attempts by a few businesses and their lawyers to disparage Yelp and draw attention away from their own occasional negative review," the company wrote.
The ruling supported a lower court decision that dismissed the lawsuit filed by businesses that said positive reviews disappeared from their Yelp page, which dropped their overall star rating; or a negative review reappeared or was moved to the top of the review after they declined to purchase advertising from Yelp.
One of the businesses, Santa Barbara-based Cats and Dogs animal hospital, claimed a Yelp representative said the company would hide negative reviews or place them lower on the page in exchange for advertising.
"The Mafia wishes it had this ruling," said Lawrence Murray, an attorney for the plaintiffs, who equated the alleged tactic to a "shakedown."
Murray said the plaintiffs have not decided whether they will appeal.
Two of the business that filed suit accused Yelp of writing negative reviews. The 9th Circuit found there was insufficient evidence to support that claim.
Yelp has been dogged by concerns about the legitimacy of its ratings, in part because people don't understand the algorithm it uses to try to filter out fake reviews, said Georgios Zervas, a professor at Boston University who specializes in online marketing.
Zervas also said the algorithm can make mistakes.
A business might see a 5-star rating one day, only to find it's gone the next, he said.
"Businesses can find that confusing and occasionally upsetting," Zervas said.
However, Zervas said his research did not find the algorithm showed any preference for businesses that advertise with Yelp.