Federal Trade Comm’n v. Roomster Corp., --- F.Supp.3d ----, 2023 WL 1438718, No. 22 Civ. 7389 (CM) (S.D.N.Y. Feb. 1, 2023)
The FTC, joined by California, Colorado, Florida, Illinois,
Massachusetts, and New York, sued Roomster, an internet-based room and roommate
finder platform, and related individuals.
Defendants allegedly falsely represented that properties listed on the
Roomster platform are real, available, and verified, and that they created or
purchased thousands of fake positive reviews to support these representations
and placed fake rental listings on the Internet to drive traffic to their
platform. Here, the court refused to dismiss the complaint or to grant a
protective order.
Roomster … purports to be an
intermediary between individuals who are seeking rentals, sublets, and
roommates. Defendants advertise that their platform, available through their
website and corresponding mobile applications, allows users to post and search
listings for living arrangements, including rental properties, room rentals,
sublets, and roommate requests.
However, Plaintiffs claim that
users are more likely to get scammed on Defendants’ platform than to get an
apartment. They explain that many of the listings on the Defendants’ platform
are fake, and the platform is rife with fraudsters who have taken hundreds and
thousands of dollars from its often-low-income users. In spite of this
widespread fraud, they aver that Defendants did not and do not effectively
verify listings or ensure that their listings are real or authentic. Instead,
the Defendants post listings on their Roomster platform immediately upon
request, as long as the street address associated with the listing is
recognized by the platform. For example, during an undercover investigation,
Defendants immediately accepted and published a fake listing where the address
was a U.S. Postal Office commercial facility, not an apartment. That listing
has remained active for several months.
Nonetheless, defendants claim that Roomster has “authentic”
listings and that the Roomster Defendants “mak[e] sure the Roomster profiles
and the listings on the site are complete, accurate, updated and
yes...authentic.” Until they received notice of this investigation, defendants
claimed to have “millions of verified listings” in a “safe community with real
members worldwide.”
In addition, they allegedly paid and continue to pay for
thousands of fake reviews of the Roomster platform to entice individuals to use
the platform and sign up for paid membership. Defendants allegedly purchased
over 20,000 reviews from one defendant who settled out, encouraging him to
submit fake reviews to app stores in ways calculated to evade the stores’
processes for detecting fake or fraudulent reviews. This allegedly deceives potential
users about the significant proportion of fake listings, and obscures real,
negative reviews about the widespread fraudulent listings on the platform.
Defendants also, either directly or through their
affiliates, allegedly placed ads for fake listings on various websites,
including on Craigslist. These listings direct consumers to the app, and and
encourage them to sign up and pay a fee to obtain information necessary to
secure the rental—only to discover that the listing does not exist.
The FTC alleged Section 5 violations through (1)
representing that certain reviews of the Roomster platform were truthful
reviews by actual users and (2) representing that the listings are verified,
authentic, or available. The states alleged violations of their respective UDAP
laws.
First, the FTC acknowledged that it couldn’t get monetary
relief after AMG. Any money would go to the states only.
Second, the court rejected defendants’ argument that their
allegedly improper conduct ceased in 2018, giving the FTC no standing in court.
Section 13(b) of the FTCA allows the FTC to file suit when it “has reason to
believe” a defendant “is violating, or is about to violate, any provision of
law enforced by the [FTC].” The complaint plausibly alleged ongoing violations.
The remaining defendants argued that they had no knowledge that the settling
defendant’s reviews might be inauthentic; that wasn’t an issue on which the
court could take judicial notice, but it could take judicial notice of the fact
that he admitted to his participation in the scheme alleged by the FTC and has
been enjoined from engaging in this type of behavior.
Defendants’ conduct strongly
suggests they were well aware that the reviews might not generated by genuine
users of the platform. Martinez was able to produce thousands of 5-star reviews
for Defendants. At one point, Defendants asked Martinez to post 800 reviews of
their platform to the app stores, specifying he should only post 15 or 20 in a
day. That Martinez had the ability to summon hundreds of five-star reviews of
their platform at a moment’s notice, and with total control over when and how
many would be posted at any one time, strongly suggests to a reasonable reader
that the reviews were not being created by genuine, individual users of the platform.
But had defendants ceased their conduct? They argued that prior
statements that the platform verifies or authenticates users had been removed,
and the generation of fake reviews ended because of the injunction against
their former collaborator. No way. While the Shire case said that the
FTC couldn’t sue under §13 five years after Shire ceased the alleged conduct,
and when it no longer owned the drug that its challenged conduct related to, Roomster’s
platform continues to operate, and plaintifs plausibly alleged that statements
about authentication, fake app store reviews, and fake listings on websites
like Craigslist were necessary to defendants’ business. “Where the conduct in Shire
had ceased five years prior to the FTC seeking the injunctive relief, here
Defendants claim only that their improper verification claims were removed in
early 2020—after they received notice of the ongoing FTC investigation.” But plaintiffs
alleged that “in numerous instances and on various locations on their website,”
defendants continue to represent that the listings are authentic. This couldn’t
be resolved on a motion to dismiss, where the FTC has not conceded that
violations were not ongoing, as it did in Shire. And the FTC didn’t
allege only that Roomster only purchased reviews from that one defendant, only
that they “often” did so. Other associates remained so that channel of
misconduct was not “defunct or reformed.”
Separately, the FTC plausibly alleged that it had “reason to
believe” that defendants were about to commit another violation. The question
is whether there is a “realistic likelihood of recurrence,” which can consider
“factors such as the degree of scienter involved; the isolated or persistent
nature of past fraudulent acts; the defendants’ appreciation of wrongdoing; and
the defendants’ opportunities to commit future violations.” Here, there was a
realistic likelihood of recurrence alleged given defendants’ “pattern of
willful and deliberate behavior over the course of several years, as well as
the continued ownership and control of Roomster by the two named individual
Defendants who run the company,” despite their knowledge of the investigation.
For example, one named defendant personally “instructed [ ] Martinez to produce
‘lots of 5 star IOS app reviews’ ” and directed Martinez “to spread out the
reviews to be ‘constant and random.’ ” The complaint also quoted emails in
which defendants specified when and where precise numbers of allegedly fake
reviews should be posted. Their continued ordering of reviews from Martinez
even after notice of the investigation indicated that they didn’t appreciate
the seriousness of the allegations against them. “And Defendants demonstrated a
lack of candor with FTC investigators, claiming that they do not pay for
reviews of the Roomster platform while they purchased 20,000 from Martinez
alone.”
“Defendants clearly have opportunities to restart whatever
conduct they may have stopped; they simply need to update their website to
assert new false authentication claims.” And there’d be no bar to getting fake
reviews from someone other than Martinez. “Recurring violations are hardly
implausible where, as here, defendants retain control of the company and the capabilities
allegedly used to violate the FTC Act.” The court noted defendants’ “strong
pecuniary interest in restarting the alleged misconduct, as their business has
generated tens of millions of dollars from users signing up for their paid
subscription, allegedly enticed by the deceptive or misleading conduct
described. … [W]ithout the renewed promises of authentication, positive
reviews, and Craigslist referrals consumers are less likely to pay for
subscriptions to the platform.”
And finally, “Defendants cannot moot the case or destroy the
FTC’s standing by offering a stipulation to a permanent injunction if any
illegal conduct is ongoing. The FTC is not obliged to accept their offer and it
does not lose standing merely because it chooses to decline Defendants’ offer,
genuine or not.” Defendants didn’t like that the FTC responded to AMG by
partnering with the states to seek relief. That wasn’t improper.
Defendants next argued that Section 13(b) of the FTC Act is
unconstitutional as an improper delegation of executive power to an independent
agency whose commissioners cannot be removed at will by the president. It
wasn’t. “[E]ven where Congress has legislated unconstitutional removal
protections, an agency can still wield enforcement authority that was lawfully
delegated.”
For now, the court also exercised supplemental jurisdiction
over the state claims. The allegedly fraudulent reviews qualified as deceptive
acts under the relevant UDAP laws, as did falsely advertising rental listings
as “verified,” “authentic,” and “available.” The defendants didn’t argue about
the latter, so the court only addressed fake reviews.
Defendants argued that plaintiffs didn’t allege injury,
because §230 protected them against claims about scam losses. But, “while free
users may see possible listings, users must sign up for a paid subscription in
order to actually contact the listing creator about the rental. Plaintiffs
plausibly allege consumers suffered financial harm when they paid for access to
the Roomster platform based on the misleading or deceptive reviews.”
Defendants also argued that it would be unreasonable for
consumers to rely on subjective user-supplied reviews when deciding whether
they should purchase a paid Roomster account, so there were no UDAP violations.
But the complaint alleged that reasonable consumers would be deceived “because
the reviews appear to be, but are not, truthful representations made by actual
users of the Roomster platform, and because they obscure authentic negative
reviews.” Even if individual user review content comprised subjective opinions
that can’t be actionable misrepresentations, that was irrelevant:
Here, the allegation is that the
reviews are fraudulent because they are not opinions at all—they are fake,
written by someone who was not a real customer and so who was in no position to
offer an opinion. Misrepresentations that are false because they are not
real—they were made up and paid for—can never by definition be “puffery.”
These reviews were allegedly not just actual reviews with
undisclosed compensation for them, but “allegedly manufactured wholesale” (also
not disclosed). Alleged large-scale manipulation of reviews that created a
false and misleading impression of the number of positive reviews could be
false advertising. “Even if Defendants had just paid real consumers to use and
review the platform, as they claim, such conduct would still plausibly qualify
as misleading or deceptive acts” because of the failure to disclose a financial
relationship (citing a number of Lanham Act cases).
At a bare minimum, it would have
been reasonable for consumers to assume that the existence of thousands of
reviews of the Roomster platform meant that there are or had been thousands of
actual users. And the presence of thousands of users on the platform would
reasonably make a consumer more inclined to think she could find a rental on
the platform and sign up for Roomster’s paid services (of course, if she knew
that these reviews had been generated by the owners of the platform, she might
be less inclined to sign up for these services).
In particular, New York sufficiently pled violations of its
consumer protection laws. NY’s laws are territorial, prohibiting deceptive acts
or false advertising conduct “in this state.” A deceptive transaction in New
York will fall within the territorial reach of the law as long as “some part of
the underlying transaction ... occurs in New York State.” Here, Roomster
allegedly transacts business and has its principal place of business in New
York. Roomster’s owners and co-founders, who also serve as Roomster’s CEO and CTO,
reside in the district and transact business here. Plaintiffs plausibly alleged
that “at least some part of the development, approval, implementation, and
financing of the alleged misconduct happened, and is happening, in New York.”
Defendants argued that NY remedies for nationwide consumers
would violate the Dormant Commerce Clause; this challenge was premature.
CDA § 230 didn’t immunize defendants from liability for
their own misconduct, though the court acknowledged that they couldn’t be held
liable for allegedly fake listings on their platform, nor the content of the
reviews provided by their users. Defendants could be held liable for their own
allegedly false claims that listings are “verified and authentic,” and they
also allegedly arranged for third parties to create and post fake reviews about
their website. “Defendants are alleged to have been involved in hiring the
creators of the reviews, paying them to create the reviews …, and specifically
instructing how and when the reviews should be posted. Similarly, insofar as
Plaintiffs’ deception claims capture fake listings on other websites that
direct consumers to the Roomster platform, such as Craigslist, Defendants are
responsible as the creators [of] that unlawful content.” [There’s a covert
agency argument buried in there, which I think is correct.]
The parties were unable to agree on the terms of a
protective order for designating material as confidential. Of note:
That certainly does not bother me.
This court does not believe in protective orders, since parties abuse them by
designating material that is manifestly not “trade secret” as “confidential” –
which generally prevents the public from seeing things that will never be kept
confidential on a summary judgment motion or at trial, but that are simply
embarrassing or worse. …
So if the parties are unable to
agree on the terms of a protective order, none will be issued, because this
court will not impose one unilaterally. And if parties refuse to turn over
documents unless on the ground that they are confidential but not subject to a
protective order, the court will entertain a motion by the party requesting the
documents for an order precluding the uncooperative party from making arguments
that might be supported by the withheld documents, or an order deeming certain
facts to be admitted by the non-producing party.
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