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USA: Fake online reviews and considerations for FinTech

As online shopping increasingly becomes the norm, Americans today can consult a vast library of customer ratings and reviews before purchasing an item for the first time. According to one study, 76% of U.S. consumers trust online reviews as much as recommendations from family and friends1. Another study finds that a one-star increase in a business's rating on a leading consumer rating website leads to a 5-9% increase in revenue in certain industries2. Website providers attempt to combat fake reviews through terms and conditions prohibiting this practice, but fake online reviews persist. According to an analysis by the Washington Post, for example, a majority of reviews in certain product categories on leading websites are fraudulent or paid3.

In an ever more competitive online marketplace in which reviews can make or break a company, the continuing presence of fake online reviews is a serious development worth examining. Fake reviews may be positive, promoting a business in order to drive sales, or negative, attacking a business in order to harm it. Notably, various e-commerce sites adjust rates they charge to list products with them based on the review status of the listed company. Fake reviews have potentially dire consequences for businesses that maintain a digital presence, especially emerging FinTechs and other early-stage companies sensitive to costs. For these young companies, increased costs from combating fake reviews could impact their bottom lines and raise uncomfortable questions during financing rounds, possibly resulting in fewer investors and lower overall investment. Consumer feedback further remains a strong area of focus for federal and state regulators, who perceive such feedback as a valuable tool in informing their consumer protection duties. Fake online reviews can thus attract regulatory scrutiny and become the driver for the initiation of regulatory investigation. Potential enforcement costs imposed by regulators, litigation costs imposed by competitors, reputational damage, heightened customer acquisition costs, and lost or diminished investment collectively serve as potent reminders of the power of fake online reviews and the need for businesses to maintain protocols to identify, address, and mitigate their impact.

 

Legal and regulatory remedies

Any person who creates a fake review or hires someone to disseminate a fake review may face legal or regulatory liability on a variety of fronts. Fake review practices may violate state and federal laws, depending on the substance of the reviews, their target, and whether a regulated entity is involved (e.g., a regulated financial institution). It is important to note that, following adoption of the Communications Decency Act ('CDA') in 1996, the scope of liability for fake reviews does not extend to the 'provider or user of an interactive computer service.' The CDA, in some respects, removes companies that enable third parties to post reviews that may violate state or federal law from liability for the content of such third party's review, notwithstanding that the third-party reviewer may be liable for the substance of their own reviews.

Defamation and libel

Following the U.S. Supreme Court's decision in Gertz v. Robert Welch, Inc., establishment of the elements required to sustain a private claim of defamation has been left to the states. Defamation typically consists of a false, unprivileged publication that has the tendency to injure a party in its occupation. Libel is the written form of defamation and addresses false statements communicated in writing or print that injures a person's reputation or business. Defamation law, and claims for libel specifically, generally apply to online content as it would with any other more traditional form of written publication.

In New York, for example, defamation is defined as 'the making of a false statement which tends to expose the plaintiff to public contempt, ridicule, aversion or disgrace, or induce an evil opinion of him in the minds of right‐thinking persons, and to deprive him of their friendly intercourse in society.' The specific elements of defamation in New York are:

  1. a false statement;
  2. published without privilege or authorisation to a third party;
  3. constituting fault as judged by, at a minimum, a negligence standard; and
  4. causing special harm or constituting defamation per se (with respect to a handful of enumerated instances, including any statement which concerns a person in his or her trade or business and tends to injure him or her).

Fake online reviews may satisfy these elements, exposing the reviewer to liability and offering the injured party some relief. Assuming harm or defamation per se can be shown, fake negative reviews may be most vulnerable to defamation claims since they would likely be false statements, willingly made without authorisation.

False advertising and other state law claims

Publication of false reviews that damage the reputation of a competitor may trigger a private right of action under federal law against the reviewer. Section 43(a) of the Lanham Act 1946 protects businesses against unfair competition arising from misleading advertising or labeling. Specifically, any person who, on or in connection with any goods or services, uses in commerce any word, term, name, symbol, or device, or any false or misleading description or representation of fact which either (i) is likely to cause confusion, mistake, deception, or (ii) in commercial advertising, misrepresents the nature, characteristics, qualities, or origin of another person's goods, services, or commercial activities, will be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act. Depending on the facts and circumstances proven in court, remedies may include injunctive relief, disgorgement of any profits earned by the liable party, damages, litigation costs, and corrective advertising. However, to pursue a claim under the Lanham Act (or a state law tort claim), a plaintiff must be able to identify and locate the consumer4.

In addition, certain states, such as California and New York, have enacted specific statutes prohibiting false or misleading advertising in the marketplace. California's False Advertising Law ('FAL'), for instance, broadly prohibits the dissemination, whether in print ads, online, or through any other means, of statements known to be untrue or misleading (or that should have been known to be untrue or misleading with the exercise of reasonable care) by any business or their representatives. Importantly, the FAL provides for both civil penalties, including restitutionary relief and civil money penalties, as well as criminal penalties5. New York law similarly prohibits 'false advertising in the conduct of any business, trade or commerce or in the furnishing of any service in [New York].' New York courts broadly apply New York's false advertising law to 'virtually all economic activity' to protect consumers against the 'numerous, ever-changing types' of practices falling under the umbrella of false advertising. Potential remedies include, among other things, injunctions, civil penalties, and damages. Posting fake reviews may also constitute a 'deceptive' trade practice under state law. For instance, several states, such as Delaware, Georgia and Hawaii, have enacted the Uniform Law Commission's Uniform Deceptive Trade Practices Act 1964, which broadly prohibits deception in the marketplace and includes a specific prohibition against disparaging the goods, services, or business of another by false or misleading representation of fact.

A plaintiff might also pursue other state law tort claims, including claims of unfair competition and even tortious interference. In particular, 'tortious interference' refers to a type of common law tort that allows a party to bring forth a claim for damages against another that has wrongfully interfered with the plaintiff's contractual or business relationships. While elements of a claim are governed by case law and, thus, vary across states, a plaintiff must generally show:

  1. the existence of a business relationship (or a prospective business relationship);
  2. defendant's knowledge of that relationship;
  3. defendant's intent to disrupt the relationship;
  4. harm to plaintiff; and
  5. causation.

Certain courts, such as California courts, may also impose liability on a person that negligently interferes with any economic relationship containing a probability of future benefits to the plaintiff, including negligent interference with any lawful business, trade or occupation6. In California, available remedies include recovery for all resulting harm, including lost profits (past and prospective) and damage to business reputation, as well as punitive damages if fraud, oppression, or malice is shown7. Injunctive relief is further available to restrain the threat of future interference with economic relations8.

Federal Trade Commission Act

The Federal Trade Commission ('FTC') has enforcement authority under the Federal Trade Commission Act of 1914 ('FTC Act') that it can utilise to combat fake reviews. Section 5(a) of the FTC Act prohibits unfair or deceptive acts or practices ('UDAP') in or affecting commerce. Specifically, misrepresentations or deceptive omissions of material fact constitute deceptive acts or practices. In addition, Section 12 of the FTC Act prohibits, and defines as a UDAP, the dissemination of any false advertisement in or affecting commerce for the purpose of inducing, or which is likely to induce, the purchase of services. Fake review practices may fall within the scope of these FTC Act provisions, exposing reviewers to FTC enforcement actions. The FTC also maintains Endorsement Guides, which provide guidance to businesses to ensure that advertising using endorsements or testimonials abides by the requirements of the FTC Act. Among other items, the Endorsement Guides require that any connection between an endorser and a seller of an advertised product that could affect the weight or credibility of the endorsement be clearly and conspicuously disclosed9.

In February 2019, the FTC announced its first case challenging a marketer's use of fake paid reviews on an independent retail website. The FTC alleged that the defendant made false and unsubstantiated claims on online product pages, including through purchased reviews, in violation of Section 5(a) and 12 of the FTC Act. The proposed court order settling the FTC's action imposed on the defendant a suspended $13,000,000 fine. Most recently, the FTC entered into a settlement with an online platform that compares various financial products for consumers to resolve allegations that the company posted fake positive reviews and testimonials on third-party review platforms, which were in effect written by the company's employees or their family, friends, and other associates.

Dodd-Frank Act

Similar to the FTC Act's UDAP provision, Title X of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act prohibits any provider of consumer financial products or services or its service provider from engaging in any unfair, deceptive, or abusive act or practice ('UDAAP'). The Consumer Financial Protection Bureau ('CFPB') is empowered with UDAAP rule-making and enforcement authority. The CFPB has not yet promulgated rules defining UDAAP, but the contours of the UDAAP standard have begun to come into focus through CFPB enforcement actions. For example, if a provider of consumer financial products or services or a service provider were to hire a third party to publish fake reviews promoting a financial product or service, it might well be deemed a UDAAP violation by the CFPB. Similar to the FTC Act, the Dodd-Frank Act does not provide consumers or businesses with a private right of action.

Federal Deposit Insurance Act

Fake review practices involving an insured depository institution may be subject to further exposure to federal enforcement actions. Under Section 8 of the Federal Deposit Insurance Act of 1950 ('FDI Act'), any insured depository institution or institution-affiliated party10 that violates any law or regulation may be required by the insured depository institution's primary banking regulator to forfeit and pay a civil penalty of not more than $5,000 for each day during which the violation continues. For example, an FDIC-insured bank that facilitates the publishing of fake reviews against a FinTech competitor may be found to have engaged in a UDA(A)P violation, and could consequently be subject to further exposure under Section 8 of the FDI Act. Civil money penalties under Section 8 can escalate depending on the seriousness of violations, up to a maximum of $1,000,000 per day.

Facilitating fake reviews to damage the reputation of competitors may also raise concerns with respect to the depository institution's safety and soundness, risk-management procedures and internal controls, as determined by the institution's primary federal banking regulator. States similarly require bank and nonbank entities subject to their jurisdiction to maintain safety and soundness measures intended to ensure consumer protection and compliance with applicable laws and regulations.

 

Risk management considerations

While legal and regulatory remedies may be available to combat fake reviews, they are likely to be slow and costly, whereas reviews often appear quickly and can have immediately-felt and long-lasting impacts on a company's reputation. Companies that could be impacted by fake reviews - either through negative, fake reviews targeting their products or by a competitor or governmental agency finding that they are in some way causing fake reviews to be created to promote their own products or target competitors' products - might consider how to craft a risk management program that addresses the rise of fake reviews. For example, businesses might consider implementing and maintaining policies and procedures designed to identify fake reviews and outline potential responses to mitigate their impact. In addition, companies might consider designating a specific individual, such as a Chief Information Security Officer or Chief Marketing Officer, to oversee such policies and procedures. When considering potential responses to fake reviews, businesses might consider whether to address them publicly in order to better control any ensuing negative publicity. Businesses may also be well served to consider whether it is worthwhile to understand the available legal remedies and how to communicate with any relevant regulators regarding fake reviews.

When crafting their risk management procedures, companies also ought to keep in mind the Consumer Review Fairness Act of 2016 ('CRFA'), which Congress passed to protect consumers' ability to leave honest reviews about products or services. The CRFA generally prohibits businesses from using non-disparagement clauses that prevent consumers from, or penalise or charge consumers for, leaving reviews in good faith. Businesses should therefore avoid indiscriminate responses to negative reviews and tailor their actions appropriately.

 

1. Local Consumer Review Survey 2019, 11 December 2019, https://www.brightlocal.com/research/local-consumer-review-survey.
2. Michael Luca, Reviews, Reputation, and Revenue: The Case of Yelp.com, Harvard Business School Working Paper, March 2016, https://www.hbs.edu/faculty/Pages/item.aspx?num=41233.
3. Elizabeth Dwoskin and Craig Timberg, The Washington Post, How Merchants Use Facebook to Flood Amazon with Fake Reviews, 23 April 2018, https://www.washingtonpost.com/business/economy/how-merchants-secretly-use-facebook-to-flood-amazon-with-fake-reviews/2018/04/23/5dad1e30-4392-11e8-8569-26fda6b404c7_story.html.
4. Plaintiffs sometimes file suit against unnamed parties and move to use expedited discovery into the actual defendant's identity.
5. Cal. Bus. & Prof. Code §17536(a); §17534: 'Any person, firm, corporation, partnership or association or any employee or agent thereof who violates [the FAL] is guilty of a misdemeanor'.
6. See Judicial Council of California Civil Jury Instructions No. 2204, Negligent Interference with Prospective Economic Relations, (2019), https://www.courts.ca.gov/partners/documents/Judicial_Council_of_California_Civil_Jury_Instructions.pdf. See also Settimo Assocs. v. Environ Sys., Inc., 17 Cal. Rptr. 2d 757, 845 (Ct. App. 1993). 'The tort of intentional or negligent interference with prospective economic advantage imposes liability for improper methods of disrupting or diverting the business relationship of another which fall outside the boundaries of fair competition.'
7. See Levy, Golden, and Sacks, California Torts, Ch. 40, Fraud and Deceit and Other Business Torts, Part D, Subpart 1, §40.107; §40.118 (Remedies).
8. Id.
9. The FTC is currently reviewing whether to amend its Endorsement Guides as part of the agency's systematic review of all current FTC rules and guides.
10. An institution-affiliated party is, among other persons, (i) any director, officer, employee, or controlling stockholder of, or agent for, an insured depository institution, and (ii) any independent contractor who knowingly or recklessly participates in any violation of any law or regulation, any breach of fiduciary duty, or any unsafe or unsound practice that results in harm to the insured depositary institution.

 

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