Risks and Rewards for Businesses That Use Non-Disparagement Clauses

In recent years, there has been a growing backlash at both the state and federal level against businesses’ use of non-disparagement clauses. Businesses, in an effort to protect their brand reputation, will sometimes include a non-disparagement clause in commercial contracts, restraining customers from posting online negative reviews of the company and its services. Businesses have also included non-disparagement clauses in employment contracts to restrict current and former employees from posting salaries or reviews on jobseeker websites such as Glassdoor.com. Businesses are then able to sue consumers or past employees for posting negative comments on review websites such as Yelp.com about the business or its services, regardless of the validity of the claims. Businesses may even include in its non-disparagement clause the right to privately fine customers or employees who post negative reviews. One such case involved KlearGear.com, which attempted to fine a disgruntled customer $3,500 for posting a negative review after the customer alleged he had never received the items he had purchased. Another case, this time in New York, involved a dentist who threatened to fine a customer $110,000 for posting a negative review online.

The use of non-disparagement clauses has rankled consumer advocates and legislators, especially in light of the media attention that these and similar cases have received. In 2014, California became the first state to pass legislation banning companies from using non-disparagement clauses in consumer transactions unless the consumer knowingly waives his or her right to complain. The law includes fines of $2,500 for the first violation and $5,000 for each subsequent violation. In April 2016, Maryland became the second state to ban anti-disparagement clauses. An additional three states—New Jersey, Oklahoma, and South Carolina—have proposed legislation banning the practice. None of those three states have been successful.

At the federal level, legislators from both sides of the aisle and in both houses have worked to ban anti-disparagement clauses in consumer transaction. The Consumer Review Freedom Act passed the Senate in December 2015. The House of Representatives passed their own anti-disparagement, the Consumer Review Fairness Act, in September 2016. The Senate will now have the task of reconciling the two Acts, casually referred to as the Yelp Laws, before sending it for the President to sign it into law. Likely provisions include cancelling out any current anti-disparaging clauses and giving the Federal Trade Commission the authority to take action against businesses that use anti-disparagement clauses.

It is important to note that business still have common law remedies in situations where customers unfairly post negative reviews, regardless of the state of the anti-disparagement laws. If employees are customers post reviews that are false or otherwise defamatory, businesses and employers will still have legal recourse. For a business to successfully sue for defamation, it would need to prove that a consumer negligently or maliciously posted or published a false statement of fact about the business. A business would also need to show that the defamatory review resulted in actual damage to the business.

Worried about protecting the brand or online reputation of your company? Contact Royse Law Firm, where our team of dedicated professionals can assist you with your pressing corporate and intellectual property concerns. Contact us today.

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Erica Riel-Carden