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.