It started with the infamous Kleargear case, where an innocent couple where left in the cold of winter in Minnesota unable to finance a new boiler because a website had reported its failure to pay a penalty for writing a bad review to its credit bureaus. The couple eventually won a large default judgment against Kleargear and California quickly passed what became known as the “Kleargear law” in response, prohibiting penalties or restrictions on consumer reviews.
California’s law did not prevent horror stories like the Prestigious Pets case (see slide above) in Texas or a New York wedding hall that included the following clause in its contract:
If you have booked the Inn for a wedding or other type of event anywhere in the region and given us a deposit of any kind for guests to stay at USGH there will be a $500 fine that will be deducted from your deposit for every negative review of USGH placed on any internet site by anyone in your party and/or attending your wedding or event. If you stay here to attend a wedding anywhere in the area and leave us a negative review on any internet site you agree to a $500 fine for each negative review.
Consumer Review Fairness Act of 2016
The House Energy & Commerce Committee approved H.R. 5111, the “Consumer Review Fairness Act” in September to outlaw such practices. In the Committee’s report, it explained
The Internet has enabled consumers to publish reviews of
products and services widely at low cost, improving information
flows to consumers and providers of goods and services. The
wide availability of these reviews has caused consumers to rely
on them more heavily as credible indicators of product or
service quality.\1\ In turn, businesses have sought to avoid
negative reviews. Some businesses have attempted to suppress
negative reviews, even if they are truthful, through provisions
of form contracts with consumers restricting such reviews.
These provisions typically impose monetary or other penalties
for publishing negative comments regarding the provider's
services or products.\2\ The provisions have come to be known
as gag clauses or non-disparagement clauses.
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\1\See, e.g., BrightLocal, Local Consumer Review Survey 2014
(2014), available at https://www.brightlocal.com/learn/local-consumer-
review-survey-2014/ (finding that 88% of consumers rely on online
consumer reviews).
\2\See, e.g., Peter Wilkinson, Guests Fined for Leaving Review of
`Filthy, Dirty Rotten' Hotel on TripAdvisor, CNN (Nov. 19, 2014),
available at https://perma.cc/9PXX-5H67; FTC v. Roca Labs, Inc., No.
8:15-cv-02231-MSS-TBM (M.D. Fla. filed Sept. 28, 2015), available at
https://www.ftc.gov/enforcement/cases-proceedings/142-3255/roca-labs-
inc.
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Gag clauses have been imposed by many different types of
businesses and come in different forms. Some examples include a
$3,500 penalty imposed by online retailer KlearGear, a gag
clause by a weight loss supplement seller,\3\ and a wedding
vendor's prohibition on encouraging disparaging comments.\4\ In
at least a few cases, when a consumer has refused to pay a
fine, the offeror of a contract containing a non-disparagement
clause has referred the monetary penalty to debt collectors,
creating further headaches for the consumer. When KlearGear
referred the $3,500 penalty allegedly owed under the non-
disparagement clause to a collection agency, the consumer sued
KlearGear seeking damages and a declaratory judgment that the
debt was not owed.\5\ The consumer ultimately won a judgment,
and California passed a law banning non-disparagement
clauses.\6\ However, their wider effect on state contract laws
is unclear and common law doctrines may even evolve to accept
them.\7\
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\3\FTC v. Roca Labs, Inc., No. 8:15-cv-02231-MSS-TBM (M.D. Fla.
filed Sept. 28, 2015), available at https://www.ftc.gov/enforcement/
cases-proceedings/142-3255/roca-labs-inc.
\4\Chris Morran, Wedding Company Contract Tries to Ban Bride &
Groom From ``Encouraging'' Negative Feedback, Consumerist (Apr. 20,
2015), available at https://consumerist.com/2015/04/20/wedding-company-
contract-tries-to-ban-bride-groom-from-encouraging-negative-feedback/.
\5\Palmer v. KlearGear.com, No. 1:13-cv-00175 (N.D. Utah, filed
Dec. 18, 2013), available at http://www.documentcloud.org/documents/
929250-palmer-v-kleargear-complaint.html.
\6\Cal. Civ. Code 1670.8.
\7\See, e.g., Daniel D. Barnhizer, Nancy Kim's Wrap Contracts
Symposium: Escaping Toxic Contracts: How we have Lost the War on Assent
in Wrap Contracts, 44 Sw. L. Rev. 215 (2014) (``If such [non-
disparagement] terms do become widespread, both common law doctrines,
such as unconscionability and reasonable expectations, and statutory
consumer protection regulations that are informed by commercial norms
will be affected in favor of the drafters of such terms'').
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Non-disparagement clauses interfere with the benefits
consumers derive from ready access to ``crowd-sourced'' reviews
of products and services. If such clauses become widely
adopted, negative yet truthful reviews may be chilled,
undermining the overall credibility of consumer reviews. The
newfound utility of consumer reviews would then be reduced as
trust in their veracity diminishes. H.R. 5111 seeks to curtail
non-disparagement clauses in order to preserve the credibility
and value of online consumer reviews.
It passed the House by voice vote in September and the Senate in December by unanimous consent. President Obama signed the bill into law last week.
The key provisions are below, with enforcement by the FTC and State Attorney Generals. No private right of action was created.
SEC. 2. CONSUMER REVIEW PROTECTION.
(1) IN GENERAL.—Except as provided in paragraphs (2) and (3), a provision of a form contract is void from the inception of such contract if such provision—
(A) prohibits or restricts the ability of an individual who is a party to the form contract to engage in a covered communication;
(B) imposes a penalty or fee against an individual who is a party to the form contract for engaging in a covered communication; or
(C) transfers or requires an individual who is a party to the form contract to transfer to any person any intellectual property rights in review or feedback content, with the exception of a non-exclusive license to use the content, that the individual may have in any otherwise lawful covered communication about such person or the goods or services provided by such person.
(2) RULE OF CONSTRUCTION.—Nothing in paragraph (1) shall be construed to affect—
(A) any duty of confidentiality imposed by law (including agency guidance);
(B) any civil cause of action for defamation, libel, or slander, or any similar cause of action;
(C) any party’s right to remove or refuse to display publicly on an Internet website or webpage owned, operated, or otherwise controlled by such party any content of a covered communication that—
(i) contains the personal information or likeness of another person, or is libelous, harassing, abusive, obscene, vulgar, sexually explicit, or is inappropriate with respect to race, gender, sexuality, ethnicity, or other intrinsic characteristic;
(ii) is unrelated to the goods or services offered by or available at such party’s Internet website or webpage; or
(iii) is clearly false or misleading; or
(D) a party’s right to establish terms and conditions with respect to the creation of photographs or video of such party’s property when those photographs or video are created by an employee or independent contractor of a commercial entity and solely intended for commercial purposes by that entity.
(3) EXCEPTIONS.—Paragraph (1) shall not apply to the extent that a provision of a form contract prohibits disclosure or submission of, or reserves the right of a person or business that hosts online consumer reviews or comments to remove—
(A) trade secrets or commercial or financial information obtained from a person and considered privileged or confidential;
(B) personnel and medical files and similar information the disclosure of which would constitute a clearly unwarranted invasion of personal privacy;
(C) records or information compiled for law enforcement purposes, the disclosure of which would constitute a clearly unwarranted invasion of personal privacy;
(D) content that is unlawful or otherwise meets the requirements of paragraph (2)(C); or
(E) content that contains any computer viruses, worms, or other potentially damaging computer code, processes, programs, applications, or files.
(c) Prohibition.—It shall be unlawful for a person to offer a form contract containing a provision described as void in subsection (b).
Cyber Report 