You better watch out, you better not cry, you better not pout…Santa Claus is coming to town, and he’s bringing increases in consumer spending and negative customer reviews.
Holiday sales forecasts expect consumer spending to exceed $1 trillion in 2019. Research has shown that consumers are more likely to rely on reviews when shopping and leave negative reviews during the holidays.
Consumer-facing companies are always looking for ways to address and prevent negative reviews. In the past, some companies inserted non-disparagement clauses in their terms of service that prohibited customers from leaving negative reviews, or that claimed to be able to fine consumers for leaving negative reviews.
Today, however, federal and state laws prohibit contracts that limit consumers from leaving negative reviews or fining them for doing the same.
Federal, State Law
Under the federal Consumer Review Fairness Act of 2016 (CRFA), a provision of a form contract is void if it:
- prohibits or restricts an individual who is a party to such a contract from engaging in written, oral, or pictorial reviews, or other similar performance assessments or analyses of, including by electronic means, the goods, services, or conduct of a person that is also a party to the contract;
- imposes penalties or fees against individuals who engage in such communications; or
- transfers or requires the individual to transfer intellectual property rights in review or feedback content (with the exception of a nonexclusive license to use the content) in any otherwise lawful communications about such person or the goods or services provided by such person.
Likewise, under California law, a statute commonly known as “the Yelp bill” prohibits contracts—for the sale of goods or services—from waiving a customer’s right to make a statement about the seller or the products.
As Yelp’s director of public policy has said,“At the end of the day, fair and honest commentary—whether it’s positive or negative—serves to inform both consumers and, if taken properly by the business owner, can actually help them to improve their business practices, as well.”
There’s no private right of action for violating the CRFA, but both the Federal Trade Commission and state attorneys general have the authority to enforce it.
Recently, a vacation rental company agreed to settle claims brought by the FTC after it offered customers form contracts for house rentals that stated: “By signing below, you agree not to defame or leave negative reviews (includes any review or comment deemed to be negative by [the company], as well as any review less than a ‘5 star’ or ‘absolute best’ rating) about this property and/or business in any print form or on any website ... .”
The FTC required the company to stop using such form contracts and to notify affected consumers that the challenged contract provisions are void and that they have the right to post honest reviews online.
Negotiated Settlement Agreements Are Different
One important distinction, however, are settlement agreements with consumers. Non-disparagement clauses are routinely included in settlement agreements, which would seem to conflict with the CFRA and similar state laws. Does that mean that if a customer purchases a product, a dispute arises, and the parties settle, the business cannot prohibit the customer from writing a negative review about the dispute or its resolution?
In fact, businesses should still be able to negotiate non-disparagement and non-disclosure provisions with customers after a sale. The CFRA specifically applies to form contracts, which are non-negotiable, unlike settlement agreements. Similarly, California’s law applies only to contracts for goods or services.
A negotiated settlement agreement resolving a dispute is different from a contract for goods or services. In a settlement, the company and the consumer are knowingly and freely waiving certain rights, such as the consumer’s right to leave a negative review.
To stay out of trouble, here’s what your company should consider:
- Review current form contracts for provisions like an upfront “no-review” or “non-disparagement” policy—anything that implies that leaving a negative review would result in punishment. Similarly, ensure your contracts don’t purport to impose penalties on consumers for reviews or include workarounds like requiring consumers to assign away rights to their reviews.
- If you settle a dispute with a customer and are including a non-disparagement or non-disclosure clause, be sure to allow for sufficient negotiations to distinguish your settlement agreement from a form contract and include representations to that effect.
- Rather than risking a bigger blow-up by taking legal action against a negative review, use your customer service process to address the feedback and reduce the likelihood of a similar review.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
David Fuad is a partner in Orrick’s Complex Litigation & Dispute Resolution practice. He advises a range of clients, particularly in the tech, manufacturing and real estate industries, on complex litigation matters, such as breach of contract, employment disputes, class actions, product liability and trade secrets.
Shawn Estrada is an associate in Orrick’s General Litigation practice.