BILL ANALYSIS                                                                                                                                                                                                    Ó

                                                                  AB 2365
                                                                  Page  1

          AB 2365 (John A. Pérez)
          As Amended August 11, 2014
          Majority vote 
          |ASSEMBLY:  |74-2 |(May 15, 2014)  |SENATE: |27-9 |(August 13,    |
          |           |     |                |        |     |2014)          |
           Original Committee Reference:    JUD.  

           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 may not include a  
            provision weaving the consumer's right to make any statement  
            regarding the seller or lessor or its employees or agents  
            concerning the goods or services. 
          2)Makes it unlawful to threaten or to seek to enforce a  
            provision made unlawful under this bill, or to otherwise  
            penalize a consumer for making any statement protected under  
            the bill. 

          3)Provides that a provision in violation of this bill is deemed  
            unconscionable and against public policy.

          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  
            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  


                                                                  AB 2365
                                                                  Page  2

            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.

          8)Provides that the bill shall not be construed to prohibit or  
            limit a person or business that hosts online consumer reviews  
            or comments from removing a statement that is otherwise lawful  
            to remove.

           The Senate amendments  make several helpful and consistent  
          clarifications, including that a contract or proposed contract  
          for the sale or lease of consumer goods or services may not  
          include a provision waving the consumer's right to make any  
          statement regarding the seller or lessor or its employees or  
          agents concerning the goods or services.
          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 Senate Appropriations  
          Committee, pursuant to Senate Rule 28.8, negligible state costs.
          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  
          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  


                                                                  AB 2365
                                                                  Page  3

          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  

          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  Mr. Palmer said he did not get  
          what he ordered and canceled the transaction.  Ms. Kulas, Mr.  
          Palmer's wife, reportedly then took to to  
          complain about what she thought was's shoddy  
          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 sent a letter to  
          Mr. Palmer in 2012 (four years later) demanding a  


                                                                  AB 2365
                                                                  Page  4

          unilaterally-determined $3,500 penalty, citing the  
 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, 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 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  
          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  


                                                                  AB 2365
                                                                  Page  5

          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 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 consumer trauma.

          Analysis Prepared by  :    Drew Liebert / JUD. / (916) 319-2334 

                                                               FN: 0004429