BILL ANALYSIS Ó
AB 2365
Page 1
ASSEMBLY THIRD READING
AB 2365 (John A. Pérez)
As Amended April 24, 2014
Majority vote
JUDICIARY 10-0 APPROPRIATIONS 14-3
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|Ayes:|Wieckowski, Wagner, |Ayes:|Gatto, Bocanegra, |
| |Alejo, Chau, Dickinson, | |Bradford, |
| |Garcia, Gorell, | |Ian Calderon, Campos, |
| |Maienschein, Muratsuchi, | |Eggman, Gomez, Holden, |
| |Stone | |Linder, Pan, Quirk, |
| | | |Ridley-Thomas, Wagner, |
| | | |Weber |
|-----+--------------------------+-----+--------------------------|
| | | | |
| | |Nays:|Bigelow, Donnelly, Jones |
| | | | |
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SUMMARY : Seeks to make clear in California law that
non-disparagement clauses in specified consumer contracts are
void and unenforceable. Specifically, this bill :
1)Provides that a contract or proposed contract for the sale or
lease of consumer goods or services is unlawful if it includes
a provision requiring the consumer to waive his or her right
to make any statement regarding the consumer's experience with
the seller or lessor of consumer goods or services.
2)Makes it unlawful to threaten or seek to enforce such a
provision or to otherwise penalize a consumer for making such
a statement, unless the waiver of this right was knowing,
voluntary, and intelligent.
3)Provides that a provision in violation of this bill is deemed
unconscionable and against public policy, and the party that
drafted the waiver provision has the burden of proving that
the waiver was knowing, voluntary, and intelligent.
4)Provides that any person who violates this bill shall be
subject to a civil penalty up to $2,500 for the first
violation and $5,000 for each subsequent violation, to be
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assessed and collected in a civil action brought by the
consumer, by the Attorney General (AG), or by the district
attorney or city attorney of the county or city in which the
violation occurred.
5)Provides that when collected, the civil penalty shall be
payable, as appropriate, to the consumer or to the general
fund of whichever governmental entity brought the action to
assess the civil penalty.
6)Provides in addition to the possible civil penalty noted
above, in the event of a willful, intentional, or reckless
violation of this bill, a consumer or public prosecutor may
recover an additional civil penalty up to $10,000.
7)Provides that the penalty provided by this bill is not an
exclusive remedy, and does not affect any other relief or
remedy provided by law.
EXISTING LAW provides that an agreement may be unconscionable
when the party with substantially greater bargaining power
presents a take-it-or-leave it contract to a customer, or if it
is overly one-sided or if its terms have an overly harsh effect.
(Shroyer v. New Cingular Wireless Services, Inc. (9th Cir.
2007) 498 F.3d 976; see also Aral v. EarthLink, Inc. (2005) 134
Cal.App.4th 544.) (Kilgore v. Key Bank, Nat. Ass'n. (9th Cir.
2013) 718 F.3d 1052.) (Kilgore v. Key Bank, Nat. Ass'n. (9th
Cir. 2013) 718 F.3d 1052.)
FISCAL EFFECT : According to the Assembly Appropriations
Committee, potential minor costs to the AG and local prosecutors
for enforcement, offset to some extent by revenue from civil
penalties.
COMMENTS : This consumer protection bill seeks to make clear
that non-disparagement clauses, which are provisions seeking to
prevent individuals from making critical statements about a
business, are unlawful in specified consumer contracts. The
bill is particularly timely in light of recent examples where
such clauses have been shockingly used by some businesses to
intimidate consumers from expressing their reasonable opinions
about the business' potentially inadequate goods or services.
As noted by the author, online transactions are increasingly
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ubiquitous in today's commerce. In the online world consumers
have naturally become accustomed to ignoring the mass of
boilerplate text that are typically contained in the "Terms and
Conditions of Service" of online adhesion contracts today
(adhesion contracts are standard form contracts drafted usually
by a business with much stronger bargaining power and signed, or
even mouse clicked by a weaker party, usually a consumer, in
need of goods or services who has no opportunity to change or
even bargain for different contract terms).
With the advent of adhesion contracts in consumer transactions
on the Internet, most consumers purchasing goods and services
reasonably skip ahead to "check the box" at the end of the often
ten thousand word online document, otherwise known as
"click-wrap contracts," to complete the order. What consumers
understandably do not realize is that they are typically
agreeing to terms that may be manifestly unfair - and in these
cases, potentially muzzling of cherished constitutional values.
Yet California and federal law do not yet make clear that such
so-called non-disparagement clauses in these consumer contracts
are void and unenforceable. This measure fills that
consumer-protection gap.
As noted above, non-disparagement clauses generally restrict
individuals from making statements or taking any other action
that negatively impacts an organization, its reputation,
products, services, management or employees. Non-disparagement
clauses are commonly found in negotiated legal settlement
agreements between employers and employees, and they can
appropriately - when truly negotiated and understood by both
parties who are typically represented by legal counsel - be used
to most effectively resolve disputes. However, recently such
clauses - which should only be used when both parties understand
their effect and truly bargain for them- are finding their way
into consumer transactions, as seen in the highly reported Utah
case.
As recently reported in the Recorder newspaper, this legislation
was inspired by the experience of Utah residents John Palmer and
Jennifer Kulas. In 2008, Mr. Palmer tried to buy an item on the
novelty-gift site KlearGear.com. Mr. Palmer said he did not get
what he ordered and canceled the transaction. Ms. Kulas, Mr.
Palmer's wife, reportedly then took to RipoffReport.com to
complain about what she thought was KlearGear.com's shoddy
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customer service. And this is where it got really interesting:
the couple reportedly thought nothing more of their business
dealing with the Web site until KlearGear.com sent a letter to
Mr. Palmer in 2012 (four years later) demanding a
unilaterally-determined $3,500 penalty, citing the
RipoffReport.com post as a violation of a non-disparagement
clause hidden deep within the company's "terms of use" policy.
When Mr. Palmer and Ms. Kulas refused to pay, KlearGear.com then
reported the couple's "debt" to at least one credit-reporting
agency. Stunningly, for almost two years, they would run into
trouble trying to secure loans. According to recent reports, in
October 2013, for instance, they were left without heat in their
house for three weeks after they were denied credit to finance a
new furnace, their attorney said.
Of course this Utah consumer horror story and the very nature of
these types of non-negotiated "agreements" written by the
corporate legal counsel, and tucked quietly away in
thousand-word pop up contracts requiring a simply click of the
mouse, naturally means that the great majority of online
consumers do not know, let alone understand, that the terms and
conditions of sale they just "agreed" to mean they are agreeing
to muzzle their First Amendment rights.
Since this story circulated, a consumer rights group, Public
Citizen Litigation Group, now reportedly represents the couple
and has filed a complaint against KlearGear.com in federal court
in Utah alleging that the non-disparagement clause is
unenforceable. They claim that the clause is unconscionable and
that it unlawfully restricts the couple's First Amendment
rights. The suit also alleges that the online retailer
committed defamation and violated the federal Fair Credit
Reporting Act.
Although this particular example happened to not originate in
California, in the age of Internet commerce it just as easily
could have, since the physical location of online businesses is
largely irrelevant because online consumers can typically
purchase goods regardless of where they live. Indeed, an
Internet search shows that non-disparagement clauses have
recently emerged in consumer contracts in several contexts,
including at least one involving a California company.
It is also evident that the use of a non-disparagement clause in
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a consumer adhesion contract likely violates fundamental
principles of contract law. A contract or contract provision is
unenforceable if it is found to be unconscionable. The doctrine
of contract unconscionability has both a procedural element,
focusing on oppression or surprise due to unequal bargaining
power, and a substantive element, concentrating on overly harsh
or one-sided results. (Thompson v. Toll Dublin, LLC (2008) 165
Cal.App.4th 1360.)
A contract may be procedurally unconscionable when the party
with substantially greater bargaining power presents a
take-it-or-leave-it contract to a customer (the classic adhesion
contract), even if the customer has a meaningful choice as to
service providers. (Shroyer v. New Cingular Wireless Services,
Inc.; see also Aral v. EarthLink, Inc.; ("Terms of internet
service agreement that were presented on a 'take it or leave it'
basis either through installation of the software or through
materials included in the package mailed with the software with
no opportunity to opt out, constituted quintessential procedural
unconscionability.")) A contract may be substantively
unconscionable if it is overly one-sided or if its terms have an
overly harsh effect. (Kilgore v. Key Bank, Nat. Ass'n.)
It therefore seems likely that the non-disparagement clause in
the KlearGear.com case would be found to fit these criteria and
would be found to be unenforceable and void as a matter of law.
However, since there appears to be no reported case law on this
issue in California or elsewhere, and it therefore appears to be
an open question whether a court would invalidate a consumer
non-disparagement clause as unconscionable in such contexts,
this bill will helpfully clarify that issue and avoid
unnecessary litigation, expense - and, of course, consumer
trauma.
Analysis Prepared by : Drew Liebert / JUD. / (916) 319-2334
FN: 0003328