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| Songmee L. Connolly |
The new law provides that “contracts or proposed contracts for the sale or lease of consumer goods or services may not include a provision waiving the consumer’s right to make any statement regarding the seller or lessor or its employees or agents, or concerning the goods or services.” California Civil Code Section 1670.8(a)(1). It will also be “unlawful to threaten or to seek to enforce” such a provision, or to “otherwise penalize” a consumer for making any such statement. California Civil Code Section 1670.8(a)(2).
Notably, the law carries maximum statutory penalties of $2,500 for the first violation and $5,000 for each subsequent violation. California Civil Code Section 1670.8(c). Willful, intentional or reckless violations carry a maximum penalty of $10,000. California Civil Code Section 1670.8(d). The law expressly does not prohibit or limit a person or business that hosts online consumer reviews or comments from removing a statement that is otherwise lawful to remove. California Civil Code Section 1670.8(e).
The bill was introduced earlier this year due to concerns from the increasing use of nondisparagement clauses in online clickwrap agreements. The bill sought not only to protect consumers from unknowingly giving up their ability to speak freely about their online retail experiences, but to also prevent them from being intimidated or penalized for doing so. The bill's analysis specifically cites the experience of two Utah residents, where a company demanded $3,500 for an alleged violation of a nondisparagement clause in its online terms and conditions four years after the two customers criticized the business online. When the couple did not pay, the company reported the “debt” to at least one credit reporting agency, and for almost two years thereafter the couple had credit problems and difficulty securing loans. The couple subsequently filed suit against the company, which included a request for declaratory relief that the nondisparagement clause was substantively and procedurally unconscionable, as well as unenforceable on First Amendment grounds. Earlier this year, the couple obtained default judgment against the company, and were awarded compensatory and punitive damages of $306,750.00, as well as their attorneys’ fees and costs totaling $48,011.86. See Palmer et al. v. Kleargear.com, Case No. 1:13-cv-00175 (D. Utah, filed Dec. 18, 2013).
While at least one federal court has upheld a nondisparagement clause in a clickwrap agreement under Arizona law, see FreeLife International Inc. v. American Educational Music Publications Inc., 2009 U.S. Dist. LEXIS 97680 (D. Ariz. Oct. 1, 2009), there has been no known decision in California. Accordingly, the bill was intended to resolve this open question of whether such nondisparagement clauses in consumer contracts would be unenforceable under California law.
Understanding Section 1670.8’s Impact and Ambiguities
Section 1670.8 has no geographic limitations and thus would apply to any consumer-facing entity or person doing business in California. Thus, even out-of-state businesses with prospective and current customers in California should ensure compliance. And although the bill was introduced to ban nondisparagement clauses in online contracts of adhesions, the statutory language itself is broader than that, effectively applying to nondisparagement clauses in any contract or proposed contract with consumers in California.
It is also worth noting that the statute will apply only in the consumer context. In other words, if you are a business that has used or uses nondisparagement clauses in, for example, business-to-business agreements, severance agreements or settlement agreements, these should fall outside the scope of California’s ban. While Section 1670.8 itself does not define consumer, other California statutes provide sufficient guidance. See, e.g., California Civil Code Section 1761(d) (defining consumer as “an individual who seeks or acquires, by purchase or lease, any goods or services for personal, family or household purposes”); California Business & Professional Code Section 302 (defining consumer as “any individual who seeks or acquires, by purchase or lease, any goods, services, money or credit for personal, family or household purposes”).
Moreover, because the law carries statutory penalties, plaintiffs’ class action attorneys will be incentivized to test its scope and ambiguities. For example, a business that unwittingly keeps a nondisparagement clause in its online terms (i.e., a “proposed contract”) would likely be in violation of Section 1670.8. Plaintiffs’ attorneys could assert this is not a single violation of Section 1670.8, but multiple violations vis-a-vis each member of a putative class of prospective and existing customers to whom the terms were uniformly presented. Given the potential size of aggregated penalties, one can expect class actions to be filed next year against such businesses in violation of Section 1670.8. Whether these are test cases or cases simply to extract settlements, businesses should not have to defend against them if they can take steps now to ensure compliance.
Additionally, the law makes it unlawful to “otherwise penalize” a consumer for making a statement protected by the statute. The statute, however, provides no guidance as to what it means to otherwise penalize a consumer. Does refusing to conduct business with a consumer who has posted a negative review penalize a consumer? Or, is something more required? This will be a fact-specific issue for each case, one left for California courts to decide.
The statute also covers “any” statement protected by the statute and does not expressly require such statement be truthful. Thus, hypothetically, if sued for defamation, a consumer could cross-claim for violation of Section 1670.8 because the suit penalizes the customer. While it is highly unlikely any court would find such an argument persuasive, until there is judicial precedent to the contrary, such claims under the plain language of the statute do not appear frivolous and could nevertheless be brought. However, keep in mind that because such defamation claims and cross-claims are likely subject to California’s anti-strategic lawsuit against public participation statute, they should be brought only if one can establish a reasonable probability of prevailing thereon.
Finally, while the statute has no retroactive application, it also provides no exception or safe harbor for any consumer contracts with nondisparagement clauses entered before Jan. 1, 2015. Thus, if such contracts remain effective after Jan. 1 they are likely still subject to Section 1670.8 and should be amended to ensure compliance.
Practice Tips
If you are doing business in California and have used, are using or are considering using nondisparagement clauses in any of your customer contracts, you should take the following steps this year to ensure compliance with Section 1670.8 beginning Jan. 1, 2015:
- Review all consumer contracts, including online terms and conditions. You should review all of your consumer contracts or proposed contracts for any nondisparagement clauses. As mentioned, because the law includes “proposed contracts,” it would cover online terms and conditions presented to a prospective customer irrespective of whether or not a consumer has actually consented thereto. Therefore, be sure to review all online terms and conditions (i.e., clickwraps) and ensure that no nondisparagement clauses exist therein.
- If your consumer contracts have nondisparagement clauses remove them and notify your customers. If you discover you have existing consumer contracts with nondisparagement clauses (this includes any terms and conditions previously accepted by your customers), you should revise and amend them to remove these clauses. You should also provide notice to your customers of the updated terms. The method of notice (e.g., email or online post) will depend on, inter alia, the contract’s terms and what is practicable for your business.
- Avoid any nondisparagement clauses beginning in 2015. In addition to removing any nondisparagement clauses in your consumer contracts, it goes without saying that you should not suggest, propose or otherwise include any nondisparagement clauses in your consumer contracts beginning Jan. 1, 2015.
- Do not attempt to contract around Section 1670.8. Do not try to include language in your agreements to contract around the prohibition of Section 1670.8. Section 1670.8(b) provides that any waiver of Section 1670.8’s provisions is “contrary to public policy” and “void and unenforceable.” In fact, the bill's legislative history reflects that proposed statutory language allowing for a knowing, voluntary and intelligent waiver had been stricken. Moreover, trying to apply another state’s law through a choice-of-law clause will be very likely unenforceable given California’s clear public policy to render such nondisparagement clauses unlawful.
- Be cognizant and careful in how you respond to consumer statements. Before taking any adverse action in response to a customer statement, whether in writing or otherwise, be cautious and cognizant that any such actions could be viewed as “penalizing” the customer and potentially subject you to liability under Section 1670.8.
Conclusion
The law did not intend to leave a business completely without recourse. The bill analysis notes that a business may still bring claims against consumers for defamatory statements. And businesses may still seek removal from third-party websites hosting unlawful customer statements in accordance with such websites’ policies and procedures. Moreover, a business can always respond with its own statements in response to customers’ reviews. It is also good business sense not to use nondisparagement clauses, which are ill-received and could generate negative publicity for your business. Indeed, customer reviews can often be good sources of information for a company to identify within the business the things they are doing right or issues that should be addressed and improved.
Even if you are not doing business in California, it is important to note that similar federal legislation may soon follow. Shortly after Section 1670.8 was signed into law, Reps. Eric Swalwell, D-Calif., and Brad Sherman, D-Calif., introduced the Consumer Review Freedom Act of 2014 (H.R. 5499, 113th Cong. (2013-2014)) to make nondisparagement clauses in form contracts void and unlawful under federal law. As currently proposed, the proposed bill does not affect any cause of action under state law. Moreover, in contrast to California’s law, the proposed bill does not specify any statutory penalties or create a private cause of action for use of nondisparagement clauses, but instead provides for enforcement by the Federal Trade Commission and state attorneys general.
—By Songmee L. Connolly, Fenwick & West LLP
Songmee Connolly is an associate in Fenwick & West's Mountain View, California office.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
