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Gag Clause Act Passes Senate

Another satisfied Kleer Gear Customer
Another satisfied Kleer Gear Customer

The U.S. Senate recently passed their version of the “Consumer Review Freedom Act” (CRFA), which would bar companies from trying to enforce “gag clauses” in contracts with consumers. It’s a good law that is long overdue, since clauses like these have been showing up much more often lately and serving as the basis of breach of contract claims bundled with frivolous defamation lawsuits.

The impetus for this law is a Utah federal case, Palmer v., Case No. 1:13-cv-00175 (D. Utah July 1, 2014). The plaintiff there bought one of Kleargear’s products and then complained about it on the Internet. Kleargear then added a “non-disparagement” clause to its terms of sale that included a $3,500 for making negative comments about the company. When Kleargear referred Palmer to collections based on this provision, he sued Kleargear for violation of the federal Fair Credit Reporting Act and got a default judgment. Even though the court there didn’t make any determination as to the validity of the non-disparagement clause, it was a wakeup call to how easily they could be abused.

A more glaring example of this conduct came to light in Roca Labs, Inc. v. Consumer Opinion Corp., where a diet “nutraceutical” manufacturer in Florida sued a consumer review website for, among other things, allegedly inducing customers to breach their non-disparagement clauses with Roca Labs by allowing people to post negative reviews on the website . The court there didn’t decide on whether the non-disparagement clause was enforceable, however, finding instead that the website was immune under 47 U.S.C. § 230. See Roca Labs, Inc. v. Consumer Op. Corp., 2015 U.S. Dist. LEXIS 143107 (M.D. Fla. Oct. 21, 2015). (Disclosure, I was one of the attorneys on that case) Ken wrote a full analysis of the litigation here.

Assuming that Congress can actually get the CFRA passed, it’s worth taking a look at its provisions to see if it would prevent a situation like Kleargear from happening again. You can find the text of the bill here.

The statute protects “covered communications,” which are any “review, performance assessment of, or other similar analysis of . . . the goods, services or conduct of a person.” This is broad language that would certainly cover consumer reviews and reviews of professionals, but may even extend beyond that. For example, with some creative argument this could possibly apply to Charlie Sheen’s alleged sexual NDA. (WINNING!!!)

Next, the law applies to “form contracts,” which are one-sided contracts of adhesion written by a company that the consumer has no real chance to negotiate over: a “take it or leave it” situation. Most “clickwrap” terms of use agreements that everyone skips through would likely fall under this category. Notable exceptions to this definition are employment and independent contractor agreements, meaning you still couldn’t badmouth your employer with impunity.

The CRFA prohibits three things. First, a form contract can’t prevent a party to the contract from making a covered communication. Second, the form contract can’t impose a fee or penalty against a party for making a covered communications. Third, a form contract can’t require a party to sign over intellectual property rights in reviews that they author.

This means that the CFRA unambiguously outlaws non-disparagement clauses in consumer contracts, specifying that they are void from the outset. It also forbids companies from abusing copyright law by claiming ownership of reviews and then hitting disgruntled customers with DMCA notices. But it does contain exceptions for things like private or confidential information or trade secrets, and makes clear that the law doesn’t prevent a company from suing someone for defamation over a review.

The law does not create a private cause of action, meaning you couldn’t sue a company directly for violation of the law if they tried collecting on an unlawful “penalty” like in Kleargear. Instead, the law provides that any attempt to enforce an unlawful provision is a violation of the FTC act, and gives both the FTC and state officials the ability to bring an action against the company. This would look something like the pending lawsuit between the FTC and Roca Labs in FTC v. Roca Labs, Inc., Case No. 8:15-cv-02231 (M.D. Fla. 2015). Thus, while a customer could win a motion to dismiss simply by pointing to this law, actually stopping a company from trying to enforce gag clauses would usually be out of an individual consumer’s control.

On the upside, if you live in a state with a broad unfair and deceptive trade practices act, you could use that against a censorious asshat company. Although the FTC Act has no private right of action, state unfair and deceptive practices laws frequently import decisions under the FTC Act. Therefore, it could follow that any company that tries to enforce a gag clause (should this law pass) would find itself facing state unfair and deceptive trade practices claims.

This post originally appeared on Popehat. View it here.

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