Congress Takes Aim at Gag Clauses in Form Contracts

When Jennifer Palmer wrote an unflattering review of online merchant KlearGear on RipOffReport.com, KlearGear fired back with an unexpected response: a demand, according to Palmer, that she pay $3,500 for violating the company’s contractual clause prohibiting negative online reviews. After Palmer failed to pay, KlearGear allegedly notified several credit reporting agencies—a move that ensnared her and her husband in a six-year-long ordeal that all but destroyed their credit, leaving them unable to secure a needed car loan, obtain a credit card, or buy a furnace to heat their home during the cold winter months.

“My story shows what can happen when companies are allowed to use non-disparagement clauses in their contracts to bully consumers,” Jennifer said.

Palmer’s story is not unique. She is just one of millions of people who have been subject to companies’ contractual “non-disparagement” or “gag” clauses, which prohibit consumers from making negative statements about the companies online. Alleged violators of these clauses, like Palmer, can face serious reprisals from the company, ranging from the imposition of hefty fines, to the near-ruin of consumers’ credit. But yesterday, the U.S. Senate took a forceful swing at this practice, unanimously passing a bipartisan bill, the Consumer Review Fairness Act, that would bar the continued use of gag clauses.

The use of non-disparagement clauses has been a longtime practice, specifically in the context of severance and settlement agreements. This recently passed legislation, however, targets a new breed of gag clauses: those that are specifically aimed at thwarting ordinary consumers from writing negative online reviews. These gag clauses have proliferated in recent years in light of the increasingly influential role that online review sites, such as TripAdvisor and Yelp, have come to play in purchasing decisions.

One study, for instance, revealed that around 70 percent of shoppers look at online reviews before they make their purchases. And a one-star increase in a restaurant’s Yelp rating, according to another study, leads to an approximately nine percent increase in the restaurant’s revenue. Still another study suggests that more than half of millennials say online consumer opinions have greater bearing on their purchasing decisions than the opinions of their family and friends.

Accordingly, these online review sites, which provide a ready-made platform for consumers to sound off on virtually any company’s product or services, have become an unruly beast for companies faced with disgruntled customers. Enter gag clauses, which businesses across a range of industries—from healthcare, to retail, to hospitality—have begun employing to tame this beast in recent years.

A New York Hotel, for example, imposed a $500 fine on any guest who posted a negative online review. One online retailer fined customers $250 both for writing—and for threatening to write—negative online reviews. A dentist invoked a clause in an agreement that he claimed gave him copyright ownership over a patient’s Yelp review. And an apartment complex not only fined tenants $10,000 for posting negative reviews, but also alleged that the copyright of any published content about the property would be transferred to the property’s management under the Digital Millennium Copyright Act.

Consumer advocates and marketing experts argue that gag clauses actually make businesses worse off. By stifling customers’ genuine views on a given product or service, companies miss out on information that would help them meet the needs of their customers—and that would ultimately improve the company’s sales and credibility. Restricting the reviews to only positive comments hurts consumers in turn. If they are cut off from access to information, consumers may end up making unwise purchases. They may even end up writing reviews of their own on the products that they purchased, perpetuating the cycle of incomplete information and suboptimal shopping decisions.

In response to these problems, various state and federal governmental branches have already rejected the legality of these clauses. For instance, the U.S. Department of Health and Human Service clarified that under the HIPAA Privacy Rule, doctors cannot insert gag clauses into patient agreements. And in 2014, California was the first state to enact a statute banning gag clauses in consumer contracts.

A few courts have also taken a stance against gag clauses. A New York State court in 2003 ordered a computer software company to remove a clause that required consumers to seek permission before publishing reviews. And the Federal Trade Commission (FTC) obtained a preliminary injunction against a marketing company that used gag clauses in its consumer contracts.

But consumer advocates say that these state and federal actions create only a patchwork of safeguards for consumers. Federal legislation is the necessary legal response, they explain, as it would establish a uniform baseline of consumer protections. The Consumer Review Fairness Act aims to accomplish this objective in several ways.

For one, it would void consumer contracts containing clauses that prohibit consumers from writing reviews about the companies’ products or services. Further, in cases in which companies continue to flout the ban on gag clauses, the bill would authorize the FTC to initiate enforcement actions against businesses, on the basis that those businesses have engaged in “unfair or deceptive acts or practices.” The legislation would also empower states attorneys general, as well as state consumer protection officers, to bring civil suits on behalf of their respective states’ residents.

Skeptics of anti-gag clause legislation have questioned whether this kind of bill might be harmful to certain businesses. Small businesses, for example, may not have the resources to bring lawsuits against indignant consumers who have written potentially libelous reviews about them. Given the feeble protections that libel law offers these businesses, therefore, they are often at the mercy of axe-grinding consumers, who, under the cloak of anonymity, can write numerous negative online reviews at a time—potentially causing substantial damage to a company’s reputation in the process.

Outspoken critics of gag clauses, on the other hand, have hailed the passage of the bill. They have called it an important measure for preserving the ability of consumers to share their opinions freely with others online, without fear of retaliation.

“By ending gag clauses, this legislation supports consumer rights and the integrity of critical feedback about products and services sold online,” U.S. Senator John Thune (R-S.D.), a co-sponsor of the bill, said yesterday in a statement applauding the bill’s passage.

The bill, which the U.S. House of Representatives unanimously passed in September, now heads to the President’s desk.