Appeals Court Upholds $150K in Punitive Damages for 3 Fake Reviews

Eric Goldman of te Technology & Marketing Law reports out a recent Missouri Supreme Court ruling that upheld a jury award of $150,00 against an ex-partner that wrote 3 fake reviews on Yahoo & Google about his former business. The ruling should cause competitors leaving fake reviews to take note as it substantially eases the burden on the defamed business to not have to demonstrate direct losses (which is impossible on the interent).

Hosto and Mitchell formed two companies together. Eventually, the relationship soured, and they acrimoniously split their empire. Still grousy, Hosto (pretending to be former customers) posted three fake derogatory Google and Yahoo reviews of the company operated by Mitchell. After a John Doe lawsuit, Yahoo disclosed enough information to identify Hosto as the author, and Hosto confessed to the vendetta. Thus, we have the unusual situation where a pseudonymous review author isn’t contesting authorship. After a trial, the jury ruled in favor of Fireworks Restoration’s (the plaintiff’s) defamation claim.

So far, everything makes sense. But then we get to the remedies, and things get puzzling. The jury awarded $1 in compensatory damages and $150k in punitive damages. On appeal, the court rejects Hosto’s attempts to undermine the jury award: that Mitchell’s company didn’t suffer any reputational harm; that Missouri law doesn’t allow nominal damages; and that the punitive damages were unconstitutionally large in light of the compensatory damages award. As a result, the jury verdict stands.

What to make of this jury verdict? One way to interpret it is that the jury felt that the company suffered no real harm, but Hosto’s behavior was so outrageous it needed to be punished anyway. While the jury’s first conclusion might seem initially counterintuitive, it’s entirely possible that the company suffered no actual harm from the negative fake reviews. Research indicates that a few negative reviews mixed into an otherwise all-positive review set lifts sales conversion because the negative reviews increase the credibility of the positive reviews and help prospective consumers visualize and assess the possible bad outcomes from their wrong choices. Without more detail, for all we know, Hosto could have done his target a favor.

Yet, the judge refuses to put the burden on the plaintiff to find actual lost customers:

We reject Defendant’s contention that Plaintiff needed to produce testimony from potential customers who opted to turn elsewhere due to the web reviews. With the internet, consumers are able to compare businesses and their wares with unprecedented speed. Interpersonal contact is characteristically absent, so if a consumer declines to engage a business it encounters on the internet, that consumer continues his or her search and the business has no knowledge it has been passed by. As such, it would be unreasonably burdensome to impose upon a business plaintiff the requirement that it locate potential customers that it never knew in order to successfully demonstrate actual damage to its reputation. The deleterious impact of such a constraint far outweighs any benefits it would have in proving reputational harm.

In the end, the lesson from this case is obvious and hardly novel: fake competitive reviews are a bad idea. The jury verdict here shows that the jury will punish anyone caught red-handed. At the same time, the jury was quite savvy about the compensatory damages from fake negative reviews. I hope future judges will be equally savvy.

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Appeals Court Upholds $150K in Punitive Damages for 3 Fake Reviews by

15 thoughts on “Appeals Court Upholds $150K in Punitive Damages for 3 Fake Reviews”

  1. I’m impressed with the judge’s logic in not requiring the plaintiff to find customers who declined to do business due to the negative reviews. Our judicial system doesn’t often show that level of understanding of online consumer behavior.

  2. Woah, that is a progressive stance. I just read some of the new research on fake detecting from Google also. It’s just a stupid idea to go after fake reviews or to post them.

    For franchises we have a special issue – there is a real worry that one franchisee doing stupid review crap could get the entire franchise system (often 300+ units) into legal trouble. This is one reason I like to bring a lot of the local place page style marketing into central quality assurance somehow. Why don’t people just ask for positive reviews for good work and be done with it?

  3. @Matt

    Yes that is nice. Although Eric Goldman further in his article, expressed surprise that a punitive damage so many times larger than the compensatory award would stand up.

    @Scott
    Between this ruling and Plastic Surgeon ruling in NYS last year, I would think that any franchisee could be easily scared off such stupid tactics. Although I also assume that the Franchise has a number of legal barriers to keep it from being tainted by the negligence or stupidity of its franchisees, no?

  4. It’s a good question. I know there is wording in many agreements about this type of thing, but I think it’s the franchisor’s responsibility to reel in rogue franchisees misconduct. I’ve not seen any legal cases about it but am researching the topic.

    I just presented to a few hundred franchisees last week and found that they had very little knowledge of reviews at all. So I put up a slide with the words “Fake reviews will bite you” on it. A couple of guys in the room pushed back… “Google can’t tell.” … as I see it, Google could penalize the top-level-domain website for all types of rogue activity.

    This might be a vote for setting up franchisee sites on their own top-level domain names – to contain collateral damage? Curious puzzle.

  5. @Scott

    I think education is the best answer. While Google might not be able to tell but customers surely can and it would only take one consumer/competitor to blow them into the Attorney General for the s*%t to hit the fan.

    I asked Eric just yesterday who would have claims in cases of faked reviews and he noted:

    It’s hard to defend the practice if there’s any fakery in the system. The list of potential plaintiffs are many, including the consumers themselves, the FTC, the state AGs, and competitors. Not all of those claims are strong, but none are frivolous.

    I would ask the franchisees two questions:
    1)Would they do business with a business that faked reviews?
    and
    2)Could they afford a lawsuit or the state coming after them?

    If the franchise decides to not allow the franchisees to use their website unless they signed a no fake review pledge that might help the situation as well. It would protect the franchise and if the franchisee refused to sign it would put them in the situation of losing the benefit of the stronger site and having to invest in their own SEO, not a cheap process.

  6. The issue here is that franchisees sign 10-year agreements and franchisors are not always in a position to impose new agreements / amendments. there are also other complications.

    I have proposed several addenda to franchise agreements for *new* franchisees. Fake reviews, duplicate content, answering “on behalf” of the franchise on national Q/A sites (Quora) and others are on there. They really add up.

    Franchisors are reluctant to add many restrictions to the agreement of course, so we are developing a blanket “Online Marketing Compliance Profile” which can fluctuate as new developments occur.

  7. I thought Scott’s comment on his presentation was interesting. The vast majority of people from the businesses were oblivious to the situation…but some were remarkably cognizant…and also seemed to show reactions that indicated they might well have generated some kinds of fake reviews.

    I frankly think most small businesses operators are still oblivious to most stuff in google places.

    On the trial issue…wow…quite provocative. Puts out a severe warning and precedent to not mess with faked and attack reviews.

    Now here is an entirely different issue on reviews…but sort of interesting. Could it be a google glitch in losing reviews or a purposeful elimination of reviews that violate TOS?

    I went back to look at the reviews I wrote. One thing stuck out on an issue I know I had told you about.

    Last summer I wrote about 4 reviews that were overtly political. I placed the reviews on different business locations representing a certain business I thought was doing something totally inappropriate.

    Simultaneously someone else wrote dramatically similar reviews on different locations for the business. The other person used a totally new google gmail and had no review history. My account had a review history.

    The other person’s reviews were removed almost immediately. Mine have been around for months…..till now or recently :D

    At the time it seemed to indicate some kind of review filter applied by google, though it seemed to apply to only absolutely new accounts. In that so many attack reviews are allowed it seemed like the review had to severely and dramatically violate a Google TOS. Meanwhile virtually the exact same review was left standing by someone with a review history.

    Subsequently I’ve been public in some places about the precise reviews, who did it…(me under my real name) and generally where they were placed.

    If someone from google was reading that stuff they could have found the reviews.

    So maybe google purposefully took them down.

    But then I noticed a perfectly good review I wrote about a restaurant I like was also gone//vanished// invisible//dead to the world. It doesn’t show on the restaurant places page when I’m not signed into google under that gmail account.

    It does show to me when I’m signed into google with an option to edit..but not to the rest of the public.

    And of course its not included in the review history for that email account….but again it pops up when I look at the restaurant places page when I’m signed it.

    Aieeee!!! Another google mystery. glitches??? purposeful takedown of the overtly political reviews that violated Google TOS or what??? What do you think?

    (the good news is I wrote a rave review about blumenthals in olean and it still shows!!!!!) :D

  8. Justice well served. As a business owner I know how frustrating it can be when some jealous competitor starts writing phone negative reviews about your business. You want to do something about it, but at the same time you know it will cost you money in lawyer fees, court fess, or what not. Most of the time we just turn our heads the other way and say to hell with it, who reads this stuff anyway. Well, the reality is that everyone reads that stuff. I wish there would be an easier way to remove fake competitor reviews so you dont have to go to the lengths of court. Online reputation management is and will remain a hassle.

  9. Sorry to go off topic on the court case :

    but it appears there are new filters in Google Places on reviews. They appear to be more recent and of a different nature than in the past.

    TC,Linda Bouquet responded in this thread at the Google Places Forum.

    She reported a number of recent reports from review writers stating their reviews were lost. She has looked at a number of them and had not come up with specific theories on the filter process…

    but it looks like an interesting change.

  10. @Scott
    Certainly there must be a clause that prevents them from doing anything illegal? This is illegal and should require no additional paperwork on the part of the franchise to get them to stop.

    Earlepearl
    I am sure that the review spam algo is being looked at and tweaked all the time… These episodic upsurges in reports of lost reviews probably is indicative a rollout of additional capabilities and that they perhaps screwed it down too tightly.

    @Ned
    It is frustrating. I had one client that had their lawyer send out a “we are looking into this” letter that put a quick end to the chicanery.

  11. +Mike B: Well…this is not surprising. I have mentioned before that the law does not reward “speculative damages”. So assuming arguendo, your not defeated by user agreements, due to Places automatically adding anyone and everyone’s business involuntarily, then as follows:

    Damages must be:

    (1) Foreseeable:

    (2) Certain;

    (3) and unavoidable.

    Foreseeable

    Here, although it is foreseeable Google could let someone easily destroy your business by allowing fake, negative reviews (e hem . . cough cough, any “reputation management companies” blackmail any of you lately with a one star?). I can think of many more applications and conclusions that show foreseeability. Can’t you?

    Certain

    Next, is certainty. That is where you lose unless you are like me (a crazy inactive U.S. Marine . . . .Killlll!!!), and keep stats, use statcounter, track IP addresses, and you can contact the Googlers in question and get them to testify in court/depositions, that if not but for the bad review, the consumer would have used me, Ehline.

    Then of course, you may need to show, at least in my case as a contingency fee, catastrophic injury lawyer, that the prospective client had a viable claim, and that I would have gotten the same or similar result as the other guy who tried the case, or settled it.

    However, the threshold for most, is that they lost a buying body, and that body translated into a dollar amount. Getting this so far?

    Of course, still on the topic of Certainty. Even if you can show you lost warm bodies, you may be left with phantom estimates of what you think you lost. Nope, no go, that is “speculative”.

    That would deny Google the right to know why they are paying you. That would deny the defendant justice to allow a number to be made up out of thin air.

    So how can you prove certainty? Well, you can. And here is how. If you can prove that people avoided you due to bad reviews, and you cannot show an exact amount lost, you may be able to show earning records, like tax returns, to show a huge drop in earnings since the bad reviews.

    Canceled Contracts Can Show Certainty in Loss

    In other cases, such as when a client fires you due to a bad review, and your client is willing to testify that you were fired because of that review, then you can show a loss and argue that you are owed for that particular contract. In my case, if the jury awards a lot, or a little, then my compensation would be my expectancy under the contract (the contingency fee).

    Shareholder Derivative Suits

    If you are a shareholder, you may try and seek to sue Google for this horrible practice of allowing competitors and “reputation management companies” to destroy your online business, but that conversation is for another day. (It hurts stock values and helps Bing and Yahoo!, who actually do remove bad reviews, and fast!)

    Unavoidable

    Google has some great argument to keep those fake reviews up and ignore you. Why bother? After all, you, Mr. business owner, could have taken your listings down, and not competed at all online. Was your choice, you lose. In other words, this was all “avoidable”.

    E hemmm. Not so fast, as discussed above, Google adds your data anyways, you have no choice. The fact they make you sign click on a get out of jail free TOS form, before you can claim your listing Google created for you, is irrelevant in my opinion.

    Probably an unenforceable contract. Some states have consumer protection laws that will not enforce such an onerous provision. But Google will argue in mitigation that you could have just kept on asking to have your listing removed everytime they scraped for new citation data.

    The next issue is whether or not Google has a stranglehold on online marketing. If so, you could argue this is a monopoly, and they are purposefully using their properties like Youtube, etc., to compete directly with you. You could also try and prove that things like “negative SEO”, the new terrible organic results, etc., are all tools to force consumers and marketers into a paid platform, and then try and show a pattern of unfair business practices. (In CA it is B&P 17200.)

    Conclusion

    Yes it is probably possible. But you need a Plaintiff who has it together. And when your plaintiff is so busy trying to recover from Penguin, and there is a scraped site now ranking above him for the 1, 2, and 3 slots (Horde update anyone?), good luck. He is just busy asking his friends, mom, dad, sister, anyone, to help bury the bad reviews, and installing a plugin on his site, that shows a bunch of yellow 5 stars that can never go lower than 5! And he is trying to add more naked anchors. Where is the time to even call a lawyer? Ahhhhh!

    Ok. That was my 45 minute donation to all my fellow Googlers for the day!

    This is not to be construed as legal advice. Semper Fi. Mike

  12. To Mr. Mike Blumenthal;

    It is appalling that you would write “for all we know, Hosto could have done his target a favor.” Perhaps you did not read the false reviews posted on Google and Yahoo. If you did, you would never have made such an inaccurate statement. For the record, here is the first false review that was posted by Michael Hosto, the CEO and President of 1-800 Boardup, verbatim with all inaccuracies:

    Tag line: “The fireworks earns the grade =F

    “Grade: F These people showed up in my front yard in the middle of the night after my house caught on fire. Seriouisly their sales pitch started at 1am as the fire trucks were still spraying water on my house. They market themselves under many different names The Fire Works, A-All Night Fire, The Water Works, AAA Flood, AAA Boardup and likely some others. They had a fancy brochure that had some references so I listened to what they had to say. That was my first mistake! My insurance company recommended another fire restoration company. I made the wrong choice. They told me the insurance company was going to rip me off if I didn’t have an expert on my side to help make the insurance claim. Dealing with these people was the single biggest mistake i have ever made in my whole life. I was a miserable experience and the job was done so poorly we decided to sell the house. They were great salesman but their workman were idiots and the owner was not willing to help in any way. It took 11 months to complete my “Fire Works Experience”. Frankly it was a miserable 11 months. I was so happy just to get them out of my life I paid them much more than I should have because their lawfirm threatened to lien my house if I disagreed with any part of their bill. I had mold in my closet from a roof leak in attic and they just refused to deal with it. They used to “Pre-approved contractors” for the biggest insurance company in STL but they no longer have any direct contracts with any insurance companies because of all the complaints they get. All I can say is … if they show up in your front yard in the middle of the night after your house catchs on fire, RUN! Do yourself a favor and call your insurance company and get a referal for legitimate business people. Very Sincerley, Elaine & Don Collins”

    So I ask you Mr. Blumenthal, would a negative review like this help your business?

    Do you find it unusual that Michael Hosto penned the false review under the names of Don & Elaine Collins? or did you know that?

    Did you read all of the articles about this lawsuit before you decided that you might post your perspective? Did you contact anyone involved to get their input?

    I doubt it as I am the owner of Fire Works Restoration Company and I never heard from you. I sued Michael Hosto for defamation and won. Perhaps when someone attempts to commit a business assassination against you, you won’t be so trivial and think that the false derogatory review written by your competitor will “be a favor”.

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