BILL ANALYSIS Ó AB 2365 Page 1 CONCURRENCE IN SENATE AMENDMENTS 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 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 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 AB 2365 Page 4 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 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 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 consumer trauma. Analysis Prepared by : Drew Liebert / JUD. / (916) 319-2334 FN: 0004429