Fed. Trade Comm'n v. Roomster Corp.

654 F.Supp.3d 244

FEDERAL TRADE COMMISSION, People of the State of California,State of Colorado, State of Florida, People of the State of Illinois,Commonwealth of Massachusetts, and People of the State of New York, Plaintiffs, v. ROOMSTER CORP., John Shriber, Roman Zaks, and Jonathan Martinez, Defendants.

No. 22 Civ. 7389 (CM)

United States District Court, S.D. New York

Signed February 1, 2023

Angeleque P. Linville, Valerie M. Verduce, Federal Trade Commission, Atlanta, GA, for Plaintiff Federal Trade Commission.

Emily C. Kalanithi, Adelina Acuna, Caroline E. Wilson, California Department of Justice Office of the Attorney General, San Francisco, CA, Jon F. Worm, California Department of Justice Office of the Attorney General, San Diego, CA, Timothy Eugene Sullivan, Office of the Attorney General Office of the Attorney General, Oakland, CA, for Plaintiff People of the State of California.

Abigail Moss Hinchcliff, Department of Law, Denver, CO, Brady Grassmeyer, Office of the Colorado Attorney General, Denver, CO, for Plaintiff State of Colorado.

Miles Vaughn, Florida Office of the Attorney General, Tampa, FL, Ryann Flack, Florida Attorney General's Office, Miami, FL, for Plaintiff State of Florida.

Cassandra Lynn Halm, Elizabeth Blackston, Illinois Attorney General's Office, Springfield, IL, for Plaintiff People of the State of Illinois.

Mychii Snape, Attorney General's Office, Boston, MA, for Plaintiff Commonwealth of Massachusetts.

Christian Robert Reigstad, Melvin L. Goldberg, New York State Office of the Attorney General Bureau of Consumer Frauds & Protection, New York, NY, for Plaintiff People of the State of New York.

Jennifer Ann Surprenant, Sarah Atlas, Greenberg Traurig, LLP, New York, NY, Andrew Geoffrey Berg, Greenberg Traurig, P.A., Washington, DC, Gary Snyder, Greenberg Traurig LLP, Atlanta, GA, for Defendants Roomster Corp., John Shriber, Roman Zaks.

DECISION AND ORDER DENYING DEFENDANTS' MOTIONS TO DISMISS, TO STAY DISCOVERY, AND TO ENTER A PROTECTIVE ORDER¹

McMahon, United States District Judge:

This action is brought by Plaintiffs, the Federal Trade Commission ("FTC") and the States of California, Colorado, Florida, Illinois, the Commonwealth of Massachusetts, and the State of New York ("Plaintiff States," and together with the FTC, "Plaintiffs"), against Roomster Corporation, John Shriber, individually and as an officer of Roomster, and Roman Zaks, individually and as an officer of Roomster (collectively, "Defendants").² Defendants operate an internet-based room and roommate finder platform called "Roomster." Plaintiffs allege that Defendants have falsely represented that properties listed on the Roomster platform are real, available, and verified. They further allege that Defendants have 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. Plaintiff FTC alleges that Defendants' acts or practices violate Section 5(a) of the FTC Act, 15 U.S.C. § 45(a). Plaintiff States allege that Defendants' acts or practices violate the unfair and deceptive acts and practices laws of their respective states.

Defendants move for dismissal of Plaintiffs' complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). Defendants have also moved for a stay of discovery pending disposition of their motion to dismiss, and for the entry of a protective order relating to discovery.

For the reasons set forth below, Defendants' motions to dismiss and for a protective order are DENIED. Defendants' motion to stay discovery is DENIED as moot.

I. Background

A. The Defendants

Defendant Roomster Corp. ("Roomster") is a New York corporation with its principal place of business at 285 W Broadway, Suite 410, New York, New York 10013. (Compl. ¶ 16, Dkt. No. 4). Roomster is a small company that is co-owned by Defendants John Shriber and Roman Zaks. (Id.)

Defendant John Shriber ("Shriber") is the co-founder, co-owner, and Chief Executive Officer of Roomster. (Id. ¶ 17). Shriber exercises control over all aspects of Roomster's business operations and is responsible for approving Roomster-supplied platform content. (Id.).

Defendant Roman Zaks ("Zaks") is the Chief Technology Officer, and along with Defendant Shriber, the co-founder and co-owner of Roomster. (Id. ¶ 18). Zaks also exercises control over all aspects of Roomster's business operations and is likewise responsible for approving Roomster-supplied platform content. (Id.).

B. Allegedly Fake Rental Listings, Reviews, and Craigslist Postings

Defendants' Roomster platform purports to be an intermediary between individuals who are seeking rentals, sublets, and roommates. (Id. ¶¶ 6, 21). 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. (Id. ¶ 21).

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. (Id. ¶¶ 42-44). 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. (Id. ¶ 25). 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. (Id.). 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. (Id. ¶ 26). That listing has remained active for several months. (Id.).

Despite this failure to police fraud on their platform, Plaintiffs allege that Defendants claim that the listings provided on their platform are real, available—and are verified as such. (Id. ¶ 22). In numerous instances and on various locations on their website, the Roomster Defendants state 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." (Id. ¶ 23). Until they received notice of this investigation, the Roomster Defendants claimed on their mobile device applications to have "millions of verified listings" in a "safe community with real members worldwide." (Id. ¶ 24).

Plaintiffs also allege that Defendants have 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. (Id. ¶¶ 27-30). Defendants, directly and through others (including dismissed defendant Jonathan Martinez), have posted mass quantities of positive four and five star fake reviews. (Id. ¶¶ 27, 29). Although the Defendants claim they do not pay for reviews, Plaintiffs allege that Defendants purchased over 20,000 reviews from Martinez alone. (Id. ¶ 30).

Defendants engaged Martinez to submit fabricated reviews of the Roomster application to mobile phone application stores ("app stores") through "drip campaigns," which involve the steady submission of random numbers of fake reviews at random times to evade the stores' processes for detecting fake or fraudulent reviews. (Id. ¶ 31, 32-39). Plaintiffs argue that, by purchasing fake reviews, Defendants are distorting the market for this type of service, deceiving potential users about the significant proportion of fake listings, and obscuring real, negative reviews about the widespread fraudulent listings on the platform. (Id. ¶¶ 27, 31, 41).

Plaintiffs further allege that the Roomster Defendants, either directly or through their affiliates, placed advertisements for fake listings on various websites, including on Craigslist. (Id. ¶ 42). Through these fake listings, consumers are directed to Defendants' platform and encouraged to sign up and pay a fee to obtain information necessary to secure the rental—only to discover that the listing does not exist. (Id.).

As a result, the FTC alleges that the Roomster Defendants are violating or are about to violate the FTC Act, because, among other things, they have engaged in unlawful acts and practices repeatedly over a period of at least four years, have done so willfully and knowingly, and continued their unlawful acts or practices despite knowledge of numerous complaints and the FTC investigation. (Id. ¶ 45).

C. The Present Litigation

On August 30, 2022, Plaintiffs filed the Complaint in this action. Plaintiff FTC alleges two counts of violations of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a). Plaintiff FTC alleges Defendants engaged in a deceptive act or practice and the making of false advertisements by (1) representing, directly or indirectly, expressly or by implication, that certain reviews of the Roomster platform were truthful reviews by actual users of the Platform. Plaintiff FTC further alleges that Defendants engaged in a deceptive act or practice by (2) representing, directly or indirectly, expressly or by implication, or through affiliates acting on their behalf and for their benefit, that the listings on their Roomster platform are verified, authentic, or available.

Plaintiff States assert various counts of their respective state unfair and deceptive acts and practices laws ("State UDAP Laws").³

On the same day, Plaintiffs also filed a stipulation for a permanent injunction, monetary judgment, and other relief with former defendant Jonathan Martinez, (Dkt. No. 2), which the court approved on September 6, 2022. (Dkt. No. 31). In the stipulation, Martinez did not admit or deny any allegation of the complaint, but he agreed to be permanently enjoined from selling consumer...