On September 9, 2014, Governor Jerry Brown of California signed Bill No. 2365 which prohibits a contract or proposed contract for the sale or lease of consumer goods or services from including “non-disparagement clauses” in the contract.  “Non-disparagement clauses” are clauses that waives a person’s right to review:

  • the seller, lessor or its employees or agents;
  • the goods and services of such seller or lessor.

The purpose of the bill is to address a practice where businesses have used these clauses to prevent consumers from writing negative reviews about a business or its products.   Legislative history regarding the bills noted that adhesion contracts are ubiquitous on the internet and consumers often “check the box” at the end of a long contract in order to complete a purchase order, not realizing that they have agreed to terms that could contain provisions that are “unfair” to them.  Not only does this bill prevent a business from including such provisions in the contract, it also makes it unlawful to threaten or seek to enforce such a provision or otherwise penalize a consumer for making any statement that is protected under the bill.  The bill would not prohibit a person or business that hosts online consumer reviews or comments from removing a statement that is otherwise lawful to remove.

KlearGear Case 

A case in which the “non-disparagement” clause was reportedly used occurred in 2008 when a Utah couple tried to purchase an item from an online website called “KlearGear.com.”   After failing to receive the item, the couple cancelled the transaction and complained about the website’s customer service on another website.  The company then sent a letter in 2012 demanding a $3500 penalty for violating a non-disparagement clause that the couple had unwittingly signed when it agreed to KlearGear.com’s “terms of use” policy.  When the couple refused to pay, the website reported the couple’s debt to a credit reporting agency and the couple claimed that they were unable to obtain loans for the next two years due to their poor credit report.  A consumer rights group then filed a complaint against the website in federal court alleging that the non-disparagement clause is unenforceable.

Under Bill No. 2365, any person who violates this law would be subject to civil penalties ranging from $2,500 for the first violation and $5,000 for each subsequent violation.  There is also an additional penalty of $10,000 if the violation is willful, intentional or reckless.  The bill also authorizes civil actions for violations of the bill, which can be brought by the consumer, the Attorney General, a district attorney or a city attorney.

Protections for Consumers but not for Businesses

This bill is consumer friendly as it is a flat prohibition and does not permit a company or service provider, under any circumstances, to require a client or customer to sign away their rights to post reviews of any kind.   This means that customers are not given an opportunity to “knowingly, voluntarily and intelligently” agree to these provisions as these types of contracts are considered adhesion contracts.  In addition, to the extent that customers have provided false reviews or businesses have suffered negative reviews on review websites like Yelp!, businesses do not currently have similar statutory protections from those practices.  Businesses will need to ensure that to the extent that it does business in California, their customer contracts, including “terms of services”, do not contain provisions that constitute “non-disparagement clauses.”