low-quality lead generation leads to deceptive marketing claims

In re HomeAdvisor, Inc. Litig., No. 16-cv-01849-PAB-KLM, 2020 WL 5798515 (D. Colo. Sept. 29, 2020)

HomeAdvisor “is an online marketplace that helps connect persons providing home improvement services, i.e., home service professionals (‘HSPs’), with homeowners in need of such services.” It’s a subsidiary of defendant IAC, a media and internet company that owns over 20 operating businesses comprising over 150 brands and products. Defendant ANGI is the holding company for HomeAdvisor and non-party Angie’s List.

Plaintiffs are home service professionals who paid for memberships with HomeAdvisor in order to receive homeowners’ service requests or “leads.” The HSPs must pay $8-140 for each lead depending on type and location; the cost isn’t included in membership fees.

Plaintiffs alleged that HomeAdvisor misrepresents that its leads are connected to high quality, project-ready customers, but instead the leads often directed HSPs to “wrong or disconnected phone numbers,” “wrong contact information,” “persons who never even heard of HomeAdvisor” or “persons who are not homeowners,” “stale Leads, including for projects that homeowners completed months or years prior to the Lead being sent,” or “contacts for vacant or non-existent residences,” among other things.

HomeAdvisor allegedly contracts with over 100 lead generator companies, including the “Venture defendants” and defendant CraftJack. HomeAdvisor’s parent company IAC allegedly exercised control over the terms of the lead generation agreements that HomeAdvisor entered into with these third-party lead generators.

Some third-party lead generators, such as CraftJack, are allegedly HomeAdvisor’s direct competitors and,

in many instances, sell the same leads provided to HomeAdvisor to their own networks of home service contractors, a fact which HomeAdvisor did not disclose to plaintiffs.  HomeAdvisor does not exercise any quality control over the leads it purchases from these third party lead generators, for which it pays a “nominal” amount, and plaintiffs claim that HomeAdvisor is aware that a low number of its leads result in actual home service projects for the HSPs.

CraftJack supplied HomeAdvisor with over 1.15 million leads from 2012 until mid-2017; these were allegedly poor quality, with low contact and win rates. HomeAdvisor’s internal tracking allegedly demonstrates that certain leads generated by CraftJack only have a 24 percent chance of ever making contact with the homeowner. Likewise, plaintiffs alleged that Venture defendants’ leads are exclusively generated through websites they owned and operated; the Venture defendants and HomeAdvisor were allegedly aware that robots were generating fake leads through the websites, but the Venture defendants failed to include a CAPTCHA5 to prevent this abuse.

From 2012-2017, HomeAdvisor’s quality filter allegedly “flagged approximately four to five percent of the leads received, and in most cases, HomeAdvisor ignored the fact that the lead was flagged by the filter.” Indeed, “more than 98 percent of the leads obtained by HomeAdvisor from this five-year period were inserted into HomeAdvisor’s lead database without any significant screening or verification,” including any validation of the accuracy of the address, phone number, or homeowner name associated with its leads.

In addition to this allegedly deceptive conduct, the complaint alleged that the HomeAdvisor entities diverted business away from HSPs by co-opting, using, and exploiting the identities of current and former HSPs:

When an HSP becomes a HomeAdvisor member, HomeAdvisor creates an online profile page based on information gathered during the enrollment process and extracted from the HSPs’ websites and other online sources. … Plaintiffs allege that HomeAdvisor’s “online marketing and search engine optimization (‘SEO’) capabilities are employed to rank the HSPs’ HomeAdvisor Online Profile Pages at the top of internet search results, outranking even the HSPs’ own websites, paid adwords, and other listings.” Plaintiffs allege that, once an HSP’s HomeAdvisor membership is terminated or expires, HomeAdvisor does not remove the HSP’s profile page, but continues to manipulate internet traffic to route homeowners away from HSPs’ websites and toward a HomeAdvisor-related domain. …

For example, plaintiff Hans Hass performed an internet search for terms related to his business – “Alpine Roofing” and “Alpine Roofing Sidney.” His company’s website was listed between a Google ad for roofing.zone/Alpine domain and his business’s HomeAdvisor profile page. When he clicked the roofing.zone link, Hass completed a form asking for his contact information and details about his home improvement project. He was then contacted by other HomeAdvisor roofing HSPs who had received Hass’s contact information in the form of a HomeAdvisor lead.  When Hass complained to HomeAdvisor, he was told that the issue would be reviewed and that HomeAdvisor would follow up with him about the website hijacking.

The RICO claims failed because they were RICO claims.

Lanham Act/unfair competition/trademark infringement claims: HomeAdvisor sought to get rid of these claims to the extent they were premised on “website hijacking,” which here just means infringing uses on websites. Claims under the Colorado Consumer Protection Act, Florida Deceptive and Unfair Trade Practices Act, Idaho Consumer Protection Act, and most of their common law unfair competition claims “are entirely supported by allegations of other misappropriation by Defendants,” so the court didn’t dismiss those.

Lanham Act/NY common law unfair competition: HomeAdvisor allegedly used various website domains, such as roofing.zone, to redirect legitimate internet traffic away from the HSPs’ own websites or businesses by using current and former HSPs’ company names on these domains, as with the Hass/Alpine Roofing example above. However, the complaint failed to allege that HomeAdvisor “owned the allegedly problematic domains or had any control over or affiliation with the owners of those domains.” Plaintiffs argued that they had a valid contributory infringement claim because the complaint alleges that HomeAdvisor “suggested that it could resolve the problem” when Hass complained about his information being on the roofing.info domain.

But contributory infringement requires that “a defendant must have (1) ‘intentionally induced’ the primary infringer to infringe, or (2) continued to supply an infringing product to an infringer with knowledge that the infringer is mislabeling the particular product supplied.” “Allegations of ‘[d]irect control and monitoring of the instrumentality used by a third party to infringe the plaintiff’s mark’ could suggest contributory infringement.” However, the complaint failed to plead intentional inducement, and the lone allegation about Hass didn’t “sufficiently demonstrate a degree of control over the roofing.zone domain by HomeAdvisor so as to allege a contributory infringement theory”; it wasn’t even clear who told him that HomeAdvisor would do something.   

Defendant IAC sought to dismiss aiding and abetting unfair practices claims against it; the court considered the arguments only as to Colorado law, since it only cited a Colorado case stating that aiding and abetting under Colorado law requires proving a “substantial assistance element” that requires a showing that “the secondary party proximately caused the violation, or...that the encouragement or assistance be a substantial factor in causing the tort.”  For aiding and abetting fraud under Colorado law, a plaintiff must (1) allege the elements of common law fraud and (2) allege that the defendant “knowingly participate[d] in the underlying breach or violation.”

Plaintiffs alleged that IAC “was aware that the leads it was receiving from third-party lead generators were low quality and resulted in poor win-rates, but that IAC made the business decision to increase the number of leads it acquired rather than improve the quality of leads,” and that it was aware of HSPs’ frequent complaints over the quality of leads and requests for refunds. The complaint also alleged that IAC exercised control over HomeAdvisor: IAC was involved in the day-to-day operations; had “the ultimate say” on whether HomeAdvisor should cut poor-quality leads; initiated and drove internal discussions concerning how to grow HomeAdvisor’s market share and HomeAdvisor’s branding strategy; and “exerted operational control over HomeAdvisor and its business.”

However, knowledge alone is insufficient to state an aiding and abetting claim. Merely exerting control over HomeAdvisor, the source of the alleged false representations, without any allegations setting forth “the ‘who, what, when, where and how’ of the alleged fraud,” was insufficient.

Likewise, the California UCL, FAL, and Florida FDUPTA each require “an affirmative deceptive act by the defendant.”  The complaint didn’t plead facts that IAC had control over HomeAdvisor’s marketing or that IAC and HomeAdvisor had common marketing procedures or personnel, beyond alleging that IAC “drove internal discussions” over HomeAdvisor’s branding strategy. That wasn’t sufficiently connected to any of the allegations about the alleged misrepresentations. Those claims went too.

Unjust enrichment: The defendants didn’t have to take money directly from plaintiffs for unjust enrichment. The court accepted the theory that “the leads provided to HomeAdvisor by the Venture defendants were fraudulently sold to plaintiffs and that the monies plaintiffs paid to HomeAdvisor made its way to the Venture defendants through the Venture defendants’ and HomeAdvisor’s profit-sharing agreement.” Plaintiffs plausibly alleged that the Venture defendants and CraftJack received a benefit conferred by plaintiffs in the form of profits arising from leads purchased by plaintiffs.