March 1, 2023
By Spencer K. Beall
Edited by Margaret A. Esquenet
The U.S. District Court for the Southern District of New York issued a firm reminder to companies regarding the severity of FTC Act Section 5(a) allegations concerning the use of fake online reviews and misrepresentation of goods and services. In Federal Trade Comm’n v. Roomster Corp., No. 22 Civ. 7389, 2023 WL 1438718 (S.D.N.Y. Feb. 1, 2023) the Court denied roommate-finder platform Roomster Corp.’s (“Roomster’s”) motion to dismiss unfair and deceptive business practices claims under Section 5(a) and state laws, finding that Roomster’s past use of false consumer reviews and listings were sufficient to sustain the claims even if the alleged misconduct has ceased. The court further held that Roomster could not claim Section 230 immunity for its own unlawful activities.
Defendant Roomster operates an interactive online platform where member individuals can post and search for advertisements for roommate requests, property rentals, and sublet living arrangements. In an August 2022 complaint, the FTC and several Plaintiff States alleged that Roomster engaged in unfair and deceptive practices in violation of Section 5(a) of the FTC Act and state laws by (1) misrepresenting property listings on the Roomster platform as
“real, available, and verified” without vetting the properties or removing listings that were shown to be fake; and (2) posting fake listings and fake positive reviews on the platform to increase website traffic and membership enrollment. According to the complaint, the FTC conducted an undercover investigation which revealed Roomster’s alleged failure to vet prospective listings before posting the listings on the platform, which purportedly continued over the course of four years. For example, Roomster allegedly published and maintained listings for non-existent property addresses on the platform and through third-party websites like Craigslist, despite publishing claims that its platform contains “millions of verified listings.” Attracted consumers were invited to enroll in a paid subscription for the platform before being able to access the listings and discover that they were fake, garnering Roomster tens of millions of dollars in membership fees. The FTC’s investigation also revealed that despite Roomster’s claims that Roomster does not pay for consumer reviews, Roomster allegedly purchased over 20,000 fake positive reviews and arranged to have them uploaded to app stores gradually overtime to appear authentic, thereby misleading consumers regarding the existence of fake listings and concealing genuine negative reviews concerning fraudulent listings on the platform. The FTC and plaintiff States sought a permanent injunction against Roomster, civil penalties for each alleged state law violation, and attorney’s fees and costs.
Roomster moved to dismiss the complaint, alleging (inter alia) that the FTC lacked standing to bring its Section 5(a) claims because the offending activities purportedly ended in 2018 and that the FTC did not sufficiently plead that Roomster is committing or is about to commit unfair or deceptive acts in violation of Section 5(a). The Court rejected both arguments, determining that even if Roomster had stopped its unlawful activities, Roomster’s pattern of alleged misconduct made it conceivable that Section 5(a) violations were occurring at the time the suit was filed and/or that Roomster could commit another violation at any point, either of which sufficed to state a plausible claim for unfair and deceptive practices. The Court noted that Roomster’s misleading statements to FTC investigators regarding the authenticity of its reviews and willful publication of false reviews even after receiving notice of the FTC’s investigation demonstrated that Roomster “do[es] not appreciate the seriousness of the allegations against them,” strengthening the FTC’s showing that Roomster is about to violate Section 5(a).
Roomster also argued that its alleged use of fake reviews did not qualify as “deceptive acts” under various state Unfair or Deceptive Acts or Practices (“UDAP”) laws. The Court rejected this argument as well, underscoring that Roomster’s solicitation and publication of fake reviews to deceive consumers and Roomster’s use of false advertisements for fake listings were each sufficient to allege UDAP claims. Roomster contended that Section 230 of the Communications Decency Act shielded Roomster from liability for hosting the allegedly fake reviews and listings as an interactive computer service provider. The Court was not convinced, noting that Section 230 does not absolve liability for a provider’s own unlawful conduct, regardless of whether the provider “contributes to the development of what [makes] the content unlawful” (internal quotations omitted) or “direct[ly] participate[s] in a deceptive scheme.”
The case is Federal Trade Comm’n v. Roomster Corp., No. 22 Civ. 7389, 2023 WL 1438718, (S.D.N.Y. Feb. 1, 2023)
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