Congress Codifies ‘Gag Order’ on Consumer Review ‘Gag Clauses’

In an October 2015 post – “FTC Obtains ‘Gag Order’ Against ‘Gag Clauses’” – I wrote about a Federal Trade Commission enforcement action that shut down Roca Labs (RL), a weight-loss supplement company, for deceptive advertising and for sneakily inserting a “gag clause” in its terms and conditions intended to shut up unsatisfied customers from sharing their experiences with other consumers in user comments and reviews. The clause read, in pertinent part:

“You agree that … you will not disparage RL … This means that you will not speak, publish … print, review, blog, or otherwise write negatively about RL … Should any customer violate this provision … you will be provided with … 72 hours to retract the content in question. If the content remains, RL would be obliged to seek all legal remedies … If you breach this Agreement…all discounts will be waived and you agree to pay the full price for your product.”

The company offered consumers a price discount in return for endorsing its products, conditioned on an agreement not to write anything bad about it. If they did, they could immediately owe the full price. Roca vigorously enforced the “bad review ban,” threatening to sue and actually suing purchasers who said they had or would complain to third parties such as the Better Business Bureau (BBB), or would post negative comments. It also threatened complaining customers who wanted refunds by telling them they would be liable for extortion or defamation for threatening to post, or posting, truthful negative reviews and that their “discounts” would be revoked.

The FTC challenged the gag clause under its “unfairness” authority, alleging it was unfair because it caused substantial consumer injury that was not reasonably avoidable and was not outweighed by countervailing benefits to consumers or competition. The case is still in litigation and has attracted amici curiae in support of the FTC from several prominent companies, including Yelp. They have advised the court that Roca’s gag clause, far from being an isolated instance, was representative of a disturbing and growing trend of non-disparagement provisions appearing in standard consumer contracts.

Meanwhile, on the heels of the case and no doubt with encouragement from the FTC, Congress late last year unanimously passed the “Consumer Review Fairness Act (CRFA), which outlaws entirely the use of gag clauses to stifle honest consumer expression. The statute, which took effect last March, protects a broad variety of honest consumer assessments, including online reviews, social media posts, uploaded photos, and videos, and applies not only to product reviews but also to consumer evaluations of a company’s customer service.

Specifically, it makes illegal the use of any non-negotiated, standardized contract, such as a company’s terms and conditions, to: (1) bar review of a company’s products, services, or conduct; (2) impose a penalty or fee against someone who gives a review; or (3) require people to give up their intellectual property rights in the content of their reviews. Restrictions are still permitted on reviews that contain confidential or private information; are defamatory or morally offensive; are unrelated to the company’s products or services; or are clearly false or misleading. In business guidance, the FTC cautions that a consumer’s assessment or opinion with which a company disagrees is unlikely to meet the “clearly false or misleading” standard.

The law delegates enforcement authority to the FTC and state attorneys general, who will be allowed to begin enforcing it this December after an initial grace period for businesses to come into compliance. Violations will be subject to suit in federal court and punishable by civil penalties of more than $40,000 per violation.

As sure as day follows night, you can be certain that the FTC and state AGs are champing at the bit to enforce this new consumer protection law and obtain a big civil penalty judgment as an exclamation point and warning to other would-be censors of legitimate consumer speech. If each sale with an illegal gag clause included in the terms and conditions is counted as a violation, the financial penalty could be ruinous. If you have a gag clause in your terms and conditions, don’t risk being the next Roca Labs. Don’t wait for December. Gag it now.

Talking about Direct Response, FTC

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