Federal Trade Commission v. Roomster Corp.

Background

The Federal Trade Commission and the States of California, Colorado, Florida, Illinois, Massachusetts, and New York sued Roomster Corp., John Shriber, and Roman Zaks. The opinion states that Jonathan Martinez was dismissed earlier after entering a stipulation with the plaintiffs. Roomster operates an internet-based platform for finding rooms, rentals, sublets, and roommates.

The plaintiffs alleged that Roomster, Shriber, and Zaks represented that listings were real, available, verified, and authentic even though many listings were allegedly fake. They also alleged that the defendants created or purchased thousands of fake positive reviews and placed fake rental advertisements on websites such as Craigslist to direct consumers to Roomster’s paid service. The Federal Trade Commission asserted two claims under Section 5(a) of the Federal Trade Commission Act. The states asserted claims under their respective unfair and deceptive acts and practices laws. The Federal Trade Commission sought injunctive relief; the states also sought monetary relief, penalties, fees, and costs.

The defendants moved to dismiss under Rule 12(b)(6), which permits dismissal when a complaint does not state a legally sufficient claim. They also moved to stay discovery while the dismissal motion was pending and requested a protective order governing confidential discovery materials.

Rulings on the Federal Trade Commission’s Claims

The court held that the complaint plausibly alleged that the defendants were violating, or were about to violate, Section 5 of the Federal Trade Commission Act. At the pleading stage, the court was required to accept the complaint’s factual allegations as true and draw reasonable inferences for the plaintiffs. The court concluded that the allegations of continuing representations about listing authentication, fake listings, and fake reviews were sufficient to support the Federal Trade Commission’s request for injunctive relief.

The court also held that the Federal Trade Commission had shown a sufficient case or controversy. Even if some alleged conduct had stopped, the complaint plausibly alleged a realistic likelihood of recurrence based on the defendants’ continued control of Roomster, their alleged past conduct, and their ability and financial incentive to resume the challenged practices. The court rejected the defendants’ proposed stipulation to an injunction as a basis for ending the Federal Trade Commission’s claims.

The court rejected the defendants’ argument that the Federal Trade Commission lacked constitutional authority to bring the action. It explained that Supreme Court precedent continued to recognize the constitutionality of the Federal Trade Commission’s structure and that any problem with restrictions on removing commissioners would not invalidate the agency’s enforcement authority or require dismissal of this case. The court denied the defendants’ motion to dismiss the Federal Trade Commission’s claims.

State Consumer-Protection Claims

The court exercised supplemental jurisdiction over the state claims because they were sufficiently related to the Federal Trade Commission’s claims. It held that the allegations about manufactured reviews plausibly stated claims under each state’s consumer-protection law. The complaint alleged that the reviews appeared to be genuine statements by actual users, were not genuine, and obscured negative reviews. The court concluded that such allegations could mislead reasonable consumers and were not merely nonactionable advertising opinions.

The court also held that New York had plausibly alleged a sufficient connection between the challenged conduct and New York for claims under New York General Business Law sections 349 and 350 and New York Executive Law section 63(12). The opinion points to allegations that Roomster was a New York corporation with its principal place of business in New York and that Roomster’s owners and officers conducted business there and controlled the platform content.

The defendants’ challenge to potential nationwide restitution under New York law was rejected as premature. The court stated that the scope and constitutionality of any monetary relief could be challenged if such relief were later granted, but it was not a basis for dismissal at the pleading stage.

Communications Decency Act

The court rejected the defendants’ claim that Section 230 of the Communications Decency Act immunized them from liability. Section 230 can protect an interactive computer service from claims based on content supplied by another person, but the court explained that it does not protect a service from liability for its own deceptive conduct or for materially contributing to unlawful content.

The plaintiffs were not merely trying to hold the defendants responsible for content that unrelated users posted. They alleged that the defendants themselves claimed that listings were verified and authentic, arranged for third parties to create fake reviews, paid for those reviews, directed how and when they would be posted, and used fake listings on other websites to attract customers. The court held that these allegations concerned the defendants’ own conduct and therefore were not barred by Section 230. The defendants’ motion to dismiss was denied.

Discovery and Protective Order

Because the court denied the motion to dismiss, it denied the motion to stay discovery as moot. The court also denied the motion for a protective order. Judge McMahon stated that the court would not impose a protective order unilaterally when the parties could not agree on its terms. The court noted that if a party withheld documents based on confidentiality without a protective order, the requesting party could seek an order addressing the consequences of that refusal.

Disposition

The court denied the defendants’ motions for dismissal and for a protective order. It denied the defendants’ motion to stay discovery as moot. The clerk was directed to remove the relevant motions from the list of open motions.