Congress Acts to Ban Gag Clauses in Consumer Contracts

yelp gag lawsThere is not a lot that all members of the U.S. Senate can agree on these days, but protecting the ability of consumers to write reviews of businesses is apparently an issue on which there is unanimity. First some background.

From Yelp, to TripAdvisor, to Angie’s List, no one can deny the impact “ratings” websites have had on businesses (including lawyers). It is often the first – and sometimes the last – place consumers go before making a purchasing decision.

For this reason, businesses have a long history of attempting to prevent consumers from posting potentially negative reviews on ratings websites. A few years ago, some doctors demanded that their patients hand over the copyright on any future reviews they might write, so that the doctors could later serve a DMCA notice on the website and take down the post. Those efforts did not go well, and the doctors learned, the hard way, about the Streisand Effect.

More recently, some companies began inserting clauses in their contracts, forbidding customers from writing a negative review or charging a fine for all negative reviews. (In one widely-publicized example, an upstate New York hotel included a provision in its rental agreement that charged its customers $500 for every negative review. The hotel was transparent about its motivations, promising to refund any money if the customer took down the “nasty review”). Alarmingly, some courts suggested that such provisions might be enforceable.

Last year, regulators began taking action against these efforts. In September, California became the first state to outlaw non-disparagement clauses in consumer contracts, providing that, starting January 2016, any “contract or proposed contract for the sale or lease of consumer goods or services may not include a provision waiving the consumer’s right to make any statement regarding the seller or lessor or its employees or agents, or concerning the goods or services.”

Then in October, the Federal Trade Commission filed suit against a company that sought to enforce a “gag” clause to prevent unhappy customers from posting negative reviews and testimonials online. The court enjoined the company from attempting to enforce “any contractual provision that purports to prohibit purchasers from speaking or publishing truthful or non-defamatory negative comments or reviews about Defendants, their products, or their employees.”

Now an effort to ban non-disparagement clauses in consumer contracts is proceeding on the federal level. The Consumer Review Freedom Act would prevent businesses from restricting consumers’ reviews of their businesses. The Senate Committee on Commerce, Science, and Transportation explained the reason for the bill:

Consumers increasingly rely on websites and other platforms that allow consumers to share information about goods and services and, as a result, to benefit from the experiences of others. In particular, consumer reviews have become a powerful informational tool because consumers place a high value on the truthful reviews of other consumers. As a result, businesses are at times frustrated by what they perceive as unfair criticism and some have turned to questionable legal remedies in an effort to protect their reputations, including non-negotiable terms in form contracts that prohibit consumers from publicly ‘‘disparaging’’ a business. Such clauses go beyond protecting businesses from defamation because they also restrict or bar truthful statements, often by imposing financial penalties if the provision is violated. For example, one online retailer assessed a penalty of $3,500 against a consumer for a truthful, yet negative, review. When the consumer refused to pay the penalty, the online retailer reported the penalty as a ‘‘debt’’ to credit agencies. Another online retailer prohibited consumers from even proposing to make negative public statements about the retailer. When one consumer did not receive her order from the online retailer, she informed the retailer she would contact her credit card company. In response, the retailer demanded the consumer pay $250 for violation of the company’s terms of sale.

The consequences of these non-disparagement clauses are far ranging. Penalties and lawsuits that emanate from non-disparagement clauses stifle the speech of consumers, and thus interstate commerce, by not permitting fair criticism of a business even when that feedback is an honest reflection of consumers’ experiences. Non-disparagement clauses also distort public reviews of a business because that business may receive more positive feedback than warranted, thus harming consumers who rely on such reviews.

The bill unanimously passed the Senate in mid-December and has moved on to the House, where a similar bill was introduced last April. Stay tuned.

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