Most businesses must maintain an online presence these days in order to succeed. Even if a business does not provide any kind of online service, consumers are still likely to look for a website or social media profile. Many consumers will look at websites like Yelp, which allow consumers to rate businesses and write reviews describing their experience. A negative review can damage a business’ reputation, so businesses must be vigilant about their online profile. Some businesses, rather than responding to bad reviews, have tried to prevent bad reviews from ever occurring by placing “non-disparagement” or “gag” clauses in form contracts. These clauses prohibit customers from writing negative online reviews and penalize any who do so. Congress passed the Consumer Review Fairness Act (CRFA) of 2016 in December. This new law prohibits these types of clauses and allows enforcement by federal and state consumer protection agencies.
The CRFA only addresses contractual provisions that penalize consumers for writing negative reviews without regard to whether the negative review is accurate. A customer who writes a false review of a business could be liable to the business for defamation. This requires the business to prove that one or more statements made by the customer were false, that the customer knew they were false, and that the publication of the statement caused actual, measurable harm to the business. A clear-cut example might be a person who completely fabricates a set of facts in order to disparage a business in an online review, leading to a damaged reputation and loss of revenue.
The type of gag clause covered by the CRFA is not uncommon in certain situations, but it is a relatively new phenomenon for consumers and online review sites. These clauses often appear in settlement agreements resolving a lawsuit, in which a plaintiff accepts a settlement payment in exchange for dismissing the case and agreeing not to disparage the defendant with regard to the subject matter of the lawsuit. Both parties have an opportunity to negotiate terms and to review the final agreement before signing.
Form contracts between businesses and their customers are rarely—if ever—results of negotiations between equal parties. Businesses present this type of contract, often known as an adhesion contract, to customers on a take-it-or-leave-it basis. Courts therefore look closely at any clause that a reasonable consumer might not expect to find. A gag clause imposing a penalty for a negative online review would certainly seem out of the ordinary to most consumers.
In one recent example, a hotel in New York included a clause in its event contract imposing a $500 fine if any guest at the event posted a bad review of the venue. Also, a pet-sitting business in Texas sued a customer for breach of a non-disparagement clause because of a bad review, seeking up to $1 million in damages. The CRFA declares these types of clauses void and authorizes the Federal Trade Commission and the state attorneys general to pursue claims for violations.
For the past four decades, business litigation lawyer James G. Schwartz has advocated for the rights and interests of businesses and business owners in the Bay Area. Contact us online or at (925) 463-1073 today to schedule an initial confidential consultation with an experienced and knowledgeable business advocate.
More Blog Posts:
Ninth Circuit Rules in Consumer’s Favor in California Vehicle Warranty Case, Pleasanton Business & Commercial Law Blog, January 16, 2017
California Court Grants Preliminary Injunctions in FTC Case Alleging Violations of Federal Consumer Protection Law, Pleasanton Business & Commercial Law Blog, December 15, 2015
California Consumer Class Action Alleges Violations of State and Federal Gift Card Laws, Pleasanton Business & Commercial Law Blog, September 30, 2015