Ethical Legalism is at Heart of Yelp’s Posting Policies

Last month the U.S. Court of Appeals for the 9th Circuit ruled that the online review site Yelp can change the ratings of businesses on its site as it sees fit. Yelp was accused of lowering the ratings of companies that did not purchase advertising on its site, and in a unanimous decision the court upheld its right to do so. So, for now it is legal for Yelp to manipulate ratings based on ad purchases, but the question that remains is whether it is ethical to do so notwithstanding the claim by Yelp that it doesn’t manipulate the ratings.

The owners of Cats and Dogs Animal Hospital in Santa Barbara, California alleged that Yelp was manipulating the reviews on the hospital’s business listing. The owners claimed that a Yelp representative offered to lower the number of negative reviews if Cats and Dogs purchased ad space. They declined and then claimed that Yelp increased the number of negative reviews on their listing in retaliation.

Cats and Dogs Animal Hospital sued Yelp for extortion, saying Yelp was using the threat of harm through negative reviews to force businesses to buy ads. They were joined by Boris Levitt, the owner of a San Francisco-based furniture restoration business, Wheel Techniques body shop and dentist Tracy Chan. Both Legitt and Chan claimed that several five-star reviews disappeared from their pages just days after refusing to buy ads.

The U.S. Court of Appeals for the 9th Circuit ruled unanimously in favor of Yelp, upholding a lower court’s dismissal of the case. The the three-judge appeals panel said that Yelp has a right to charge businesses for advertising and a right to arrange the content on its pages in any manner it wishes. U.S. District Court Judge Marsha Berzon, writing for the majority, said that Yelp has a right to “post and arrange actual user reviews on its website as it sees fit.”

The Court also found insufficient evidence to support the claim that Yelp was posting or manipulating negative reviews. However, it noted that Yelp did have a right to do so. Even if Yelp were to influence the reviews of non-advertisers, such interference would not rise to the level of extortion. Speaking for the panel, Berzon said, “As Yelp has the right to charge for legitimate advertising services, the threat of economic harm that Yelp leveraged is, at most, hard bargaining.”

Rights and obligations are a tricky thing from an ethical perspective. Users of the Yelp website and its posted reviews have a right and expectation that the reviews are genuine. Most users rely on the reviews to decide whether to use the services of an organization. Since the users of the website’s reviews have a right to honest ratings unaffected by advertising revenue, Yelp has an ethical obligation to meet users’ rights and expectations.

Yelp released an official statement about the decision on its blog, saying, “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.”

For years, Yelp has fought accusations that its rating system is unfair or rigged. Many businesses believe that advertisers are rewarded with better reviews. Yelp has long denied the claims, saying they do not and could not manipulate reviews, since their review-filtering software does not distinguish between advertisers and non-advertisers.

Yelp uses an algorithm that filters approximately 25 percent of the reviews submitted for any given business. According to Yelp, the algorithm aims to only hide spammy or fake reviews posted by the business itself in an attempt to gain a competitive advantage. But the algorithm does make mistakes, and sometimes legitimate five-star reviews are removed. This can be very frustrating, particularly for smaller players who are trying to gain a foothold in a very competitive market.

The companies involved in this and other lawsuits against Yelp see an inherent conflict of interest in Yelp’s business model. Yelp automatically categorizes businesses using public records and address information available online, and third-party users are then allowed to rate these companies. Yelp profits from selling ads to the same businesses that are being rated on its site. No matter how much Yelp denies the claims, it is easy to see why some businesses are skeptical.

From an ethical perspective a conflict of interests does not have to be real so long as it may appear to a reasonable observer that Yelp manipulates ratings based on advertisement purchases. In 2013, Yelp reported net revenue of about $233 million, over 75% of which came from sales of advertising space. Because ad revenue makes up such a large portion of Yelp’s total revenue, the appearance is it could seek to realize huge profits by increasing ad sales and subtlety requiring businesses to purchase ad space on its website in return for posting positive reviews, or leaving off the negative ones.

There is no proof that Yelp manipulates ratings based on ad revenue. There are suspicions to that effect but we have to give Yelp the benefit of the doubt in this instance. Still, the company would be well-advised to develop a code of ethics that details its ethical obligations to users of the site and its ratings with respect to ethical values such as honesty, integrity, responsibility and accountability. In the absence of such a statement of values, it is more likely that doubting users will continue to challenge Yelp’s commitment to ethical business practices.

Blog posted by Steven Mintz, aka Ethics Sage, on October 23, 2014. Dr. Mintz is a Professor in the Orfalea College of Business at Cal Poly San Luis Obispo. Professor Mintz also blogs at: www.ethicssage.com.