By Robert M. Langer, John M. Doroghazi, and Joseph E. Gasser
Customer reviews are ubiquitous in today’s commercial environment. Whether the business is Amazon.com or the doctor’s office down the street, consumers are accustomed to rating and reviewing goods and services online and having access to reviews from other consumers to help inform their purchasing decisions. Ratings are important because consumers sometimes have limited opportunities to interact with sellers, prompting them to rely on accounts of others’ experiences. Well-known examples of online channels for customer reviews include Yelp, Angie’s List, TripAdvisor, and Facebook.
Businesses have recognized the potential and pitfalls of online reviews to their brands and reputations. This is in large measure because negative reviews often garner more attention than others and sometimes “go viral.”1 Predictably, businesses often disagree with negative reviews or find them unfair. In an effort to quash negative reviews, some businesses resorted to including provisions in their form contracts that prevented consumers from posting negative reviews. While these clauses were controversial when they first appeared, they now must disappear. In the last lame duck session of the Obama presidency, Congress passed, and President Obama signed, the Consumer Review Fairness Act of 2016 (CRFA).2 The Act prevents businesses from using form contracts to limit their customers’ ability to publically communicate reviews of their experiences. It is a significant rule that all businesses should be aware of.
Litigation Involving Non-Disparagement Clauses in Consumer Contracts
The perceived need for legislative action in this area reviews arose out of the business practice of inserting “non-disparagement clauses” into consumer contracts. An example of such a clause, excerpted from the pleadings in a Texas state court case,3 reads:
In an effort to ensure fair and honest public feedback, and to prevent the publishing of false and libelous content in any form, your acceptance of this agreement prohibits you from taking any action that negatively impacts [the business], its reputation, products, services, management, employees or independent contractors.
In that case, decided before the CRFA was enacted, a Texas trial court dismissed a suit by Prestigious Pets, LLC, a pet-sitting company, against two customers, one of whom posted a one-star review on Yelp along with a review expressing dissatisfaction with Prestigious Pets’ service. The customer, Michelle Duchouquette, complained, among other things, that Prestigious Pets overfed her fish and would not leave her house keys at the house, instead charging a $15 fee to return them. After sending Mrs. Duchouquette and her husband a cease-and-desist letter and threatening litigation, Prestigious Pets sued them for injunctive relief and about $6,800 in damages on both breach of contract and defamation theories. The Duchouquettes moved to dismiss the claim under Texas’s anti-SLAPP4 statute, citing Texas constitutional law holding that online reviews are protected free speech, and arguing both that the Duchouquettes did not libel Prestigious Pets and that they were protected by truth and qualified immunity defenses. The court agreed with Duchouquettes and summarily dismissed the suit without a substantive opinion.
Apart from this chilly judicial reception, non-disparagement clauses have faced criticism outside the courtroom. The Better Business Bureau, for instance, prohibits member businesses’ use of non-disparagement clauses. Similarly, numerous media outlets and other organizations have spoken out against them.5
The Consumer Review Fairness Act
The CRFA, enacted on December 14, 2016, has downgraded non-disparagement clauses from disfavored to illegal. Specifically, it invalidates clauses in form contracts (those with terms “imposed on an individual without a meaningful opportunity . . . to negotiate the standardized terms”) that prohibit, restrict, or impose a penalty or fee on parties who communicate reviews or assessments of goods or services. 15 U.S.C. § 45b.6 The Act also generally prohibits businesses from transferring, or requiring customers to transfer, intellectual property rights in their reviews, thereby allowing businesses to serve takedown notices on the review websites. Id. § 45b(b)(1)(C).
To give these prohibitions teeth, the CRFA makes using form contracts containing non-disparagement clauses a per se unfair or deceptive act or practice under the Federal Trade Commission Act and authorizes the Federal Trade Commission to enforce its provisions. Id. § 45b(d). It also allows for enforcement by state attorneys general and enables them to obtain “appropriate relief.” Id. § 45b(e). The CRFA does not provide for a private right of action.
Importantly, the Act does not apply to employer-employee or independent contractor agreements, id. § 45b(a)(3)(B), and does not displace businesses’ rights to recover for defamation or similar causes of action. Also, website hosts can remove reviews if the content is clearly false or misleading, libelous, vulgar, harassing or abusive, unrelated to the goods or services, or “inappropriate with respect to race, gender, sexuality, ethnicity, or other intrinsic characteristics.” Id. § 45b(b)(2)(C). Furthermore, the Act does not prevent companies from restricting the disclosure of confidential business information, law enforcement information, or personnel or medical files. Id. § 45b(b)(3).
The Act’s effective date is December 14, 2016, but the subsections that invalidate and prohibit the use of non-disparagement clauses don’t take effect until 90 days later, and the enforcement provisions don’t take effect until a year from the effective date.
Enforcement of the CRFA
As indicated above, the FTC and the states both may enforce the CRFA. But the CRFA does not break new ground for the FTC. In late September 2015, the FTC sued marketers of weight loss supplements, Roca Labs, Roca Labs Nutraceutical USA, Inc., and their principals, in federal court for, among other claims, threatening litigation based on non-disparagement clauses in their standard terms and conditions against consumers who complained to the Better Business Bureau or posted negative reviews online. The FTC and the defendants reached a stipulated preliminary restraining order enjoining the defendants from purporting to bind customers to any non-disparagement clause that attempts to limit truthful or non-defamatory comments. The court also ordered that although the defendants could still pursue claims for legitimately false and defamatory statements, they had to seek permission from the FTC first. The suit is still pending at the time of this writing.
It is likely that the states will aggressively enforce the CRFA. Notably, California and Maryland had already taken a stand against anti-disparagement clauses before the CRFA’s enactment. Cal. Civ. Code § 1670.8; Md. Code, Comm. Law § 14-1325. Both states’ statutes provide for private rights of action and prevent waiver of their provisions. They are also broader than the CRFA, applying not just to adhesion contracts but to contracts for the sale or lease of consumer goods or services more generally. While Maryland’s law, like the Act, makes use of an offending clause a per se unfair or deceptive trade practice, California’s does not. And California’s law, unlike Maryland’s, contains its own schedule of penalties: $2,500 for a first violation, $5,000 for a second, and $10,000 for a willful, intentional, or reckless violation.
Businesses should act now to comply with the CRFA. As of March 14, 2017, the statutory grace period will end and the clauses will be illegal. As of December 15, 2017, violations of the CRFA will become enforceable as an unfair practice by the FTC and the states. Moreover, once the grace period ends, plaintiffs may attempt to use violations of the CRFA to assert claims under “Little FTC Acts,” which are state laws patterned after the substantive provisions of the FTC Act. It is important to note that almost all Little FTC Acts, unlike the FTC Act, itself, permit suits by private litigants, not just the government. Remedies under Little FTC Acts may include, e.g., class action provisions, compensatory and punitive damages, as well as attorneys’ fees for the winning plaintiff. All of these regulatory and litigation risks are easily avoided by removing non-disparagement clauses from form consumer contracts immediately.
1 See Viral Power: Negative Social Media Bad for Business, USA Today (Jan. 10, 2015), http://usat.ly/1FLiziF (discussing how video of guitar being mishandled by airline went viral and was viewed 14 million times on YouTube).
2 Codified at 15 U.S.C. § 45b.
3 Anti-SLAPP Motion to Dismiss, Prestigious Pets LLC v. Duchouquette,No. Js15-00559H, Justice Court (Dallas Cnty., Tex.), http://bit.ly/2keiHl6. For the decision granting the motion to dismiss, see Order on Defendant’s Motion to Dismiss, Prestigious Pets LLC v. Duchouquette, No. DC-16-03561, District Court (Dallas Cnty., Tex., Aug. 26, 2016), http://bit.ly/2k93DlY.
4 Anti-SLAPP (Strategic Lawsuits Against Public Participation) statutes have been enacted in 28 states, the District of Columbia, and Guam. They generally provide for prompt dismissal of libel or other suits against those who speak before governmental bodies when the defendant can show that the sole purpose of bringing the suit is to hinder the exercise of the right to petition the government. Some anti-SLAPP statutes, like Texas’s, also cover communications related to matters of public concern more generally, including health or safety, environment, economic, or community wellbeing, or goods, products, or services, and are not limited to petitions to the government.
5 E.g. Editorial Board, Prohibit Contract Clauses Banning Bad Reviews, Hartford Courant (Dec. 9, 2015), http://bit.ly/2kvMFPN; Ed Perkins, “Non-Disparagement” Clauses: the Latest Fine Print Outrage, Chicago Tribune (Nov. 11, 2014), http://trib.in/2jPpm6I; Noah C. Davis, The Yelper and the Negative Review: the Developing Battle over Nondisparagement Clauses, GPSolo eReport Vol. 3, No. 10, American Bar Association (May 2014), http://bit.ly/2lcnkKD.
6 Interestingly, the statute does not contain any reference to interstate commerce, while the bill did. Even though internet postings would presumably have an effect on interstate commerce, and therefore be subject to Congressional regulation, the statute itself is broad enough to extend to non-electronic reviews that arguably may not impact interstate commerce, suggesting a possible foothold for a constitutional challenge in the right circumstances.
Robert M. Langer and John M. Doroghazi are partners at Wiggin and Dana, LLP, in the firm’s Hartford and New Haven offices, respectively. Attorney Langer is the co-chair and Attorney Doroghazi a member of the firm’s Antitrust and Consumer Protection Group. Joseph E. Gasser, also a member of the Group, is an associate in the firm’s New Haven office.