Things Are Looking Up For Federal Law Banning “Gag Clauses” That Prevent Customers From Writing Honest Reviews

While most companies understand that honest negative feedback is, at worst, an inevitability of doing business, and maybe even a chance to improve, some companies try to use non-disparagement, or “gag,” clauses that use threats of legal action or financial penalties to prevent customers from writing or saying anything negative about that business — even if what’s being said is 100% true. We’ve seen these in everything from cheapo cellphone accessories, to wedding contractors, to hotels, to dentists, to weight-loss products, to apartment complexes. California recently enacted a law banning this sort of behavior, and some courts have deemed these clauses unenforceable, but there is still no nationwide consensus on their legality. Previous attempts to create a federal ban on gag clauses have been dead on arrival at Capitol Hill, but the latest effort appears to have some life to it.

This morning, the Senate Commerce Committee held a hearing on the Consumer Review Freedom Act, which aims to make it a violation of the FTC Act to use an unfair non-disparagement clause in a consumer contract.

A similar law was introduced in Congress in 2014, but died on the vine without being considered. Likewise, the 2015 House version of the bill has been sitting in committee since the spring.

The Senate version, which has bipartisan support thus far, appears that it will at least get some consideration after this morning’s hearing. Of course, it helps that the sponsor of this legislation, Sen. John Thune of South Dakota, also happens to be the Chair of the Commerce Committee.

“These gag provisions are egregious from a consumer protection standpoint, but they’re also doing harm to our Internet ecosystem,” said Thune in his opening remarks this morning. “A core tenet of the Internet is the ability to freely share information with whomever you like. What good is information if it’s been sanitized to remove truthful criticism?”

Thune raised what would be a frequently repeated point at this morning’s hearing: That, because companies already have ways to deal with defamation through the court system, there is no justifiable reason for businesses to use gag clauses other than to quiet honest speech.

Sen. Bill Nelson of Florida, the committee’s ranking member, noted that gag clauses have the same stifling effect as forced-arbitration clauses — the increasingly used (and Supreme Court-approved) provisions that take away consumers’ rights to sue. Both ultimately remove a wronged consumer’s Constitutionally protected right to seek some sort of redress.

“These non-disparagement and arbitration clauses are just another way for companies to avoid accountability by silencing consumers,” explained Nelson, “whether by preventing them from posting an online complaint or telling their story to a jury.”

He added that, “consumers should be able to write negative reviews about a business. But consumers also should have the ability to seek justice in a court of law when businesses fail to hold up their end of the bargain.”

Interestingly, this morning’s panel didn’t feature a single person who could defend non-disparagement clauses.

There was an executive from TripAdvisor, which does not prohibit listed hotels and businesses from using these clauses but does flag them so that users are aware before they book a trip.

The travel site was thrust into the gag order spotlight in 2014 when a hotel in England charged $157 to the credit card of some unhappy guests after posting a negative review online.

“When a business includes a gag order… everyone is harmed,” explained TripAdvisor’s Adam Medros. “The consumer is improperly censored. The consuming public at-large is less informed than it otherwise would be about the quality of service – or lack thereof – at a given business. Even the business doing the silencing is harmed, as it loses the opportunity to learn from the experiences of its customers.”

On hand to put a human face on the issue was Jennifer Palmer, whose drawn-out ordeal with online trinket retailer KlearGear made national news after the company hit her and her husband with a $3,500 penalty for posting a negative online review.

Not only was the KlearGear non-disparagement clause legally questionable — the company never showed up in court to defend itself — but Palmer proved that the clause was added years after she had made the purchase on the site.

She testified today that she attempted to obtain legal help to deal with the situation — which was having a negative impact on her family’s credit — but that just about everyone she spoke to “wouldn’t touch it with a ten-foot pole,” and those that were willing to help wanted thousands of dollars.

“If we don’t have $3,500 to pay to KlearGear, we don’t have thousands to pay to an attorney,” explained Palmer, who eventually received pro bono legal assistance through Public Citizen.

The problem, as noted by Sen. Claire McCaskill of Missouri, is that damages in such a case are often so small that many lawyers can’t be bothered to invest their time in pursuing litigation.

“It’s very hard for an individual to get to court,” said McCaskill. “How large the damages are is relevant to how willing the attorney is willing to take on a case.”

Another point that continued to pop up during the hearing was the idea that good businesses should not hide from negative reviews, but use them as a way to improve their products and services.

TripAdvisor’s Medros explained that the sort of instant feedback now available through online reviews and social media is “something that companies would have paid millions of dollars for in the past.”

Robert Atkinson, president of the Information Technology & Innovation Foundation, testified that evidence shows that when a business responds affirmatively to a negative review — rather than attempting to bury it or ignore it — that action often has a net positive result.

“Reviews create a virtuous feedback loop,” explained Atkinson. “When consumers review something they’ve bought, other consumers benefit from their experience and can take their feedback into consideration when they shop. Companies can use that market data to improve their products or services—and then, when they improve poorly reviewed features or add new ones, consumers can provide new reviews. Limiting these reviews to only positive feedback significantly reduces the benefits of this process.”

Regarding the need for a federal-level law on gag clauses, Santa Clara University law professor Eric Goldman noted that courts need guidance from legislators on this matter.

While many judges have ruled that these stifling provisions are unconscionable and unenforceable, some courts have been very reluctant to interfere with contractual agreements.

Without some sort of large-scale effort to bar this practice, Goldman said these clauses would just “keep proliferating” because they give small businesses and professional service providers the “illusion of control.”

Sen. Richard Blumenthal from Connecticut argued that a federal law barring these provisions would promote the free market nationally.

“These products and services are sold nationally, and should be enforced nationally without the impediment of a patchwork of state laws,” said Blumenthal.

The only real criticism of the pending legislation came from Ira Rheingold, executive director of the National Association of Consumer Advocates. He noted that he was currently unable to support the bill because it limits the ability of states’ attorneys general to partner with private attorneys in these matters. However, it was repeatedly noted in the hearing that this provision will be removed as the bill moves forward.