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Nasir and Matt discuss the recent ruling which allows Yelp to alter reviews based on whether a business purchases advertising.  They also answer, “Hi, I am 16 and my partner is 15. We have started our own car brokerage business. When do you think we should actually establish and when we do, what should we establish as ensure we split control and ownership 50/50″

Transcript:

NASIR: Welcome to our podcast where we cover business in the news and also answer some of your business legal questions that you, the listener, can send in to ask@legallysoundsmartbusiness.com. This is Nasir Pasha.
MATT: And this is Matt Staub.
NASIR: Welcome to this podcast. Oh, I screwed it up. We had it so good but then I messed up.
MATT: Yeah, should have maybe played it out for more than fifteen seconds, but I like it. it’s change it up, middle of the week. You know, people need some sort of something new – something new to listen to.
NASIR: It’s like the seventh inning stretch and change it up, right? Change up the pitcher.
MATT: Unfortunately, this isn’t a new topic because we’ve talked about this before. I don’t like to repeat stories but, in some instances, we have to just because of what’s involved and this is going to affect businesses and there’s really no other way to put it. The Yelp case which I think we discussed after the result in the trial court level, didn’t we? I think we did, right?
NASIR: Yeah, I think so. I know you and I talked about it. I can’t remember if we did it over the show or not.
MATT: Okay. They just had their verdict from the federal appellate court and basically they said, I guess I’m paraphrasing what this says but this is a summary. A little background, obviously, people are upset because Yelp was being accused of paying clients favorable reviews and people that deny their advertising, they’re giving them fake bad ratings. That’s the accusation that’s out there. But the Ninth US Circuit Court of Appeals said that Yelp is entitled to set a price for its ads and the businesses review to have no legal right to a high rating. As Yelp has the right to charge for legitimate advertising services, the alleged threat of economic harm is utmost hard-bargaining and not extortion or unfair business practices. Basically, what this is saying is Yelp can pretty much do whatever they want. That’s how I’m reading this. You know, if someone denies wanting to have the advertising, if the business denies the advertising then, you know, Yelp can dock them accordingly. I don’t know if they talked about the actual fake reviews but isn’t that more or less what this is saying here?
NASIR: Yeah. I mean, I would definitely agree with that. Keep in mind that the court didn’t actually look at the facts as to whether or not Yelp was actually doing this or not because this was a review of law before it even got to that point because Yelp has vehemently denied despite many businesses’ accusations that basically their Yelp reviews are distorted depending upon whether they’re an advertiser or not and Yelp says: “Our algorithm does not take into consideration whether it’s a paid advertiser or not.” And so, that seems a little bit unbelievable to some businesses, but let’s just assume that’s true for a moment and that’s what they did. The court says that’s okay because this is a private business and it doesn’t fit the legal definition of extortion in both the criminal or civil capacity. And so, therefore, it’s perfectly fine. You’ll probably find this surprising, Matt, and I know we’ve attacked Yelp many times before but I almost hope that Yelp starts manipulating its reviews this way a little bit more openly because – think about it – from a user experience, if you know that Yelp basically just shows good reviews for those businesses that actually pay for advertising and bad reviews for businesses that don’t pay for advertising, then the value of those reviews are less than even more than they already are and I almost hope that Yelp takes advantage of this and starts openly manipulating its ratings if they haven’t already.
MATT: Yeah, and I’m sure you have, too. I’ve talked to a bunch of people that have had this problem. I’ve talked to people that have paid for advertising – things were great and they stopped paying and all of a sudden their good reviews started disappearing and bad reviews started appearing. Like you said, they didn’t get to the actual factual issue with this but it’s not the point is that saying, even if they did, you know, this is fine whatever they want to do. From a business owner perspective, I’m trying to think how they should approach this. I mean, do you go for it and pay them money so you look better?
NASIR: That’s a good question. I think our marketing consultants will probably say Yelp is just something you have to deal with, it’s here to stay, and so forth. And that may be true too because – I’ll tell you this – if you have a business that people rely on to go to because of Yelp reviews and so forth and all of a sudden, overnight, all your good reviews are filtered out and all your bad reviews, even if they’re very small, are shown and therefore all of a sudden you go from a five-star rating to a four and three or even less, that’s a huge business loss and paying Yelp, even though it may seem like extortion, may be worth it from your perspective. I personally would try my best to avoid it at all costs just because of my philosophical problems that I have with that kind of business practice in my opinion. But I have to note, just this last week, you know, we get Yelp review issues all the time. By the way, this new court ruling does not protect defamation. If someone lists out something that is defamatory, you can still go after that individual for that defamatory statement. But we just got an email this last week saying that this person has been blackmailed by Yelp and they told her that they are going to post only their negative reviews and hide the positive ones until they pay them. In the past, from my understanding, they may have said this a while ago but, in the most recent years, the Yelp representatives have been very careful not to use those kind of specific, almost threats basically saying that. I got this call last week. I’m just wondering if, because of this court case, Yelp representatives are a little bit more open with that because they feel like they now have the law on their side as well.
MATT: Yeah, and it’s hard to discuss things like this because it’s at public court level so we don’t know if this is going to get appealed and get up to the Supreme Court level. I don’t like to always discuss things until it’s actually final but, I mean, this is a problem and I have a problem with this ruling. I just don’t see how this is beneficial for anyone involved other than Yelp. I mean, I guess maybe the businesses that are paying for the advertising but, you know, you’re still paying money out of pocket for this.
NASIR: Yeah, and that basically means that Yelp can keep raising their advertising rates because, eventually, there’s a point where businesses have to pay in order to stay in business. And so, I think it’s inherently unfair to even use the Unfair Business Practices statute in California and that didn’t seem to weight the judges and so forth. I’m not sure if the argument was poor or the judges got it wrong but just it seems like there is something wrong with that and, yeah, you’re right, we’ll wait to see what’s going on with the Supreme Court. But I have to mention this is a big win for Yelp but Yelp had another big win this week with the California State statute that was passed which is basically termed the Yelp Law and we talked about non-disparagement clauses. I think it was in New York in previous episodes. But there’s been no statute on a state level until now basically saying that, if you have a consumer contract, you can’t have a provision that says that the person can’t post a bad review; otherwise, they’ll be penalized in some sort. In a consumer contract, this law in California – and I can’t remember if it’s effective now or effective later, we can update you on that or look it up – basically, if you do that and you’re a contract and it’s intentional or willingly then you can actually be penalized thousands of dollars just for having that in your contract agreement. Again, another big win for Yelp, but I actually agree with that law.
MATT: Yeah. Well, I agree with it to some extent and it doesn’t start until 2015 so businesses still have a few months to have that in there, but I don’t have a problem with having that clause in there as long as it’s outlining a statement that’s made that’s false. I read a little bit into the story you were just talking about but I didn’t really read fully into it and so I don’t know if that’s covered under that or not.
NASIR: Yeah, and I think, no matter what, defamation is still going to be defamation in the sense that, if they post something that is negative but also false, they won’t be able to do that; but, if it’s a matter of opinion and negative apparently in a consumer contract, you can’t do that anymore in California starting 2015.
MATT: I have to go through and read in detail. I mean, I don’t have a problem with having threats. I don’t have a problem with the legislation in that sense where you can’t have a threat in the contract saying you can’t complain. Yeah, definitely a great week for Yelp, I suppose.
NASIR: Our nemesis. Again, I really hope… that law could be appealed but I hope people just get it already. I think people already understand that you can only take reviews at its face value only because who are the people that are reviewing and, whether they’re real or not, it’s very hard to tell. That’s why people look at the numbers and so forth. But, if Yelp is literally just filtering out half, I mean, sometimes, I’ve seen businesses that have fifty reviews and then twenty to thirty of the positive ones are filtered out. That’s so weird and o I just hope, from a consumer perspective, even I am going to make a more conscious effort not to use Yelp just because of this stuff. It really annoys me.
MATT: I’m still going to continue to use it probably but…
NASIR: What? Apparently, my boycott is not going to catch on. In fact, from now on, I’m making an official stance. Until I have proof that Yelp stops these manipulative practices because there’s just so much evidence that they are continuing to do so, I am boycotting Yelp. I’ve said it today.
MATT: That’s a strong statement. How are you going to choose where to go eat?
NASIR: Well, I do use Google Reviews. I have used Yelp in the past but I don’t know. I’ll just have to ask around and use other means of social media and review sites that are alternate. I’m sure there’s, like I said, Yelp needs a competitor in this space. Google Reviews I think or maybe Foursquare but I don’t think people use that anymore.
MATT: I think that’s pretty much on the out.
NASIR: Really?
MATT: There’s Urbanspoon that’s been around for a while but I don’t think they’ve really gained any traction.
NASIR: Yeah. Also, I always feel like I’m always a little bit off compared to what the average reviews are in the sense that a good restaurant that has good reviews, I’ll be like, “I don’t understand why this is good,” and then another restaurant that may be smaller that has maybe two or three reviews and hardly anything is one of my favorite restaurants.
MATT: Yeah, I’m looking at your Yelp profile right now. You have 258 reviews – 240 of them are one-star. It’s very, very harsh.
NASIR: Yeah, they’re all bowling alleys, too. I just review bowling alleys.
MATT: I don’t know if there’s that many bowling alleys in the country.
NASIR: Uh, yeah. Actually, I’ve never bowled in my life either but I just go there for the food.
MATT: That’s an interesting choice.
NASIR: Yeah.
MATT: Well, that explains all your one-star reviews. I think bowling alley restaurants probably are pretty low on the restaurant scale.
NASIR: And I always order the most expensive. Like, I always order the lobster or something fancy then they mess it up every time. “One lobster, please.”
[MUSIC]
NASIR: All right. Well, let’s get to our question of the day.
MATT: Question of the day.
“Hi. I am 16 and my partner is 15. We’ve started our own car brokerage business. When do you think we should actually establish and, when we do, what should we establish? As insurer, we split control and ownership fifty-fifty.”
So, right off the bat, it’s a car business with one of the two people can’t even drive, right? A fifteen-year-old?
NASIR: Yeah, fifteen. Well, I guess some states may have the fifteen-year-old may have a learner’s permit.
MATT: You can have a permit but you have to have an adult in the car so the sixteen-year-old partner can’t even be the passenger. I don’t want to crush these people because I admire two teenagers starting a business. I think that’s very good. But I would start something where you’re at least of age. In two years, they’re going to start an alcohol selling business.
NASIR: You know, actually, what I like about this question, you know, obviously, every week, we have to choose which questions to answer and sometimes we push off to the next week and so forth, but what I like about this question is that these two people are young and they are asking a question that many may seem pretty basic but it’s a question that a lot of entrepreneurs and small businesses when they’re starting out don’t ask and that is “When should we actually establish a formal organization or entity?” and “How should we ensure that we’re splitting up our business appropriately?” In this case, fifty-fifty. Believe it or not, it’s just a very common thing that’s just delayed and postponed because people think, “Oh, we’ll deal with it later and I trust the other person,” et cetera.
MATT: Yeah, that’s true. Are there age limits for who can even set up an entity? I don’t know. I guess they can file it and it doesn’t really matter.
NASIR: That’s a whole different issue, right? You can be a minor and have ownership but the problem is, when it comes to signing contracts and being obligated under contracts, even though in most states you can actually sign a contract, until you’re eighteen, it can be voidable by the minor. And so, when you have two minors that are agreeing to each other, then it’s kind of like a loosey goosey kind of arrangement because technically either party could terminate but then there’s also some other legal theories like unjust enrichment and things like that that can fall back on for any kind of unjust business relationship but I think that’s also a whole other issue as well.
MATT: That’s probably something that needs to be looked into for this teenager car brokerage. Let’s see. Established, we split control and ownership fifty-fifty. Well, I think de facto right now, it’s probably going to be fifty-fifty split, I suppose. I mean, I don’t know.
NASIR: Yeah, they have a general partnership, right? Unless you have something else in writing that says otherwise, almost every state has basically uniform partnership laws where, if there’s nothing else in writing, these are the default rules and then where you’re sharing profits then it’s assumed that all the expenses and profits are shared equally, et cetera, in the same proportion as the other and there are all these other laws. But, if you really want to ensure split control and ownership, obviously, you have to put that in writing. As far as when you should do that, as soon as possible. I mean, there’s no doubt that you should be able to put that in writing as soon as possible. Of course, this is kind of obvious too but setting up the proper entity and corporate veil or limited liability structure that can prevent you from being personally liable – and also your family for that matter, for your debts that may incur. But, going back to the sixteen and fifteen-year-old thing, I would even consider, you know, since you are starting this business – and you have started, actually – consider getting adults and your parents more involved in the business itself in the sense that they could be the conduits to the contracting and the ownership and then you can have an informal agreement between you and your parents saying, “Just give me the profits or a percentage of the profits and so forth.” I know it sounds condescending but let the adults kind of take care of this legal arrangement to make it all enforceable.
MATT: I mean, that’s great advice. I like how ambitious they are trying to start this business. it’s Mark Cubanesque. For those of you who don’t Mark Cuban, when he was twelve, he used to sell garbage bags door to door however that worked but that’s not the same thing as owning a car brokerage at age fifteen and sixteen. The problem here too – this is not a legal opinion – the problem here too is I don’t know if anyone’s going to do business with you if you’re fifteen and sixteen years old. You kind of need that adult to be in there – or at least I wouldn’t do any business with a fifteen or sixteen-year-old – unless it was…
NASIR: To buy a car?
MATT: Yeah.
NASIR: I’d buy a trash bag from a twelve or thirteen-year-old.
MATT: There you go. All right. That’s our advice – change your business to trash bags.
NASIR: What I would not buy is a car. I’d consider buying maybe a computer, maybe.
MATT: Maybe.
NASIR: That’s an expensive item.
MATT: Yeah. I mean, anything that’s going to be more than $20.00.
NASIR: But I’d assume it’s stolen or something.
MATT: That’s true. It’s happened to me before.
NASIR: What do you mean it’s happened to you? You sold stolen computers?
MATT: No, no, one time in college, I was in a parking lot and these two guys pulled up to me, they were just laughing hysterically and they were like, “We work for this company. The order got screwed up. We got all this free stereo equipment. It’s crazy! We’ll sell it to you for a few hundred dollars.” I was like, “There’s something very questionable about this.”
NASIR: Oh, yeah.
MATT: I went home, told one of my friends, and they were like, “Yeah, we bought that last year.” It’s like, “Well, I guess…” Yeah, it’s very questionable. None of it made sense at all.
NASIR: Yeah, and they’ve done specials on that. It’s a total scam. Usually, they’re just overpriced sound equipment with fancy logos and details on it and, usually, what’s on the box is different than what’s inside and so forth.
I think my final advice to these sixteen and fifteen-year-olds is to basically steal stereo equipment and make sure you get the fifty-fifty in writing and then sell it back of the parking lots of your truck that you can’t drive legally.
MATT: And you’ll make tons of money if you pay Yelp for the advertising.
NASIR: All right. Well, thanks for joining us, everyone, mid-week and don’t forget to keep leaving your iTunes reviews and also keep in mind that iTunes, you don’t have to pay them to leave any reviews or anything like that so completely free.
MATT: True. All right. Keep it sound and keep it smart.

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