BILL ANALYSIS Ó
AB 2365
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Date of Hearing: April 22, 2014
ASSEMBLY COMMITTEE ON JUDICIARY
Bob Wieckowski, Chair
AB 2365 (John A. Pérez) - As Introduced: February 21, 2014
As Proposed to be Amended
SUBJECT : UNLAWFUL CONTRACTS: Non-disparagement clauses
KEY ISSUE : SHOULD NON-DISPARAGEMENT CLAUSES BE MADE UNLAWFUL IN
SPECIFIED CONSUMER CONTRACTS IN LIGHT OF RECENT EXAMPLES WHERE
SUCH CLAUSES WERE USED TO INTIMIDATE CONSUMERS FROM EXPRESSING
THEIR REASONABLE OPINIONS ABOUT A BUSINESS' POTENTIALLY SHODDY
GOODS OR SERVICES?
SYNOPSIS
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 is typically contained in the "Terms and
Conditions of Service" of online adhesion contracts, reasonably
skipping ahead to the "checkbox" at the end of the often ten
thousand word online document, otherwise known as "click-wrap"
or "click through" agreements. 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 such as Free Speech.
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. In support of the measure, the City of
Attorney of Los Angeles, Public Citizen and the Consumer
Federation of California write that these clauses, though
potentially appropriate in other contexts, have no place in
today's online consumer transactions for goods and services, and
the measure appropriately makes them void and unenforceable
absent proof of a knowing, voluntary, and intelligent waiver.
TechNet also supports the measure, noting the measure
appropriately balances a consumer's right to free speech while
protecting legitimate contractual needs of businesses. There is
no known opposition to the bill.
SUMMARY : Seeks to make clear in California law that
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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, as
proposed to be amended, be subject to a civil penalty up to
$2500 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, 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 :
1)Protects, under the First Amendment (and a similar state
constitutional provision), individuals against infringement of
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free speech rights by the state. (George v. Pacific-CSC Work
Furlough (9th Cir. 1996) 91 F.3d 1227, 1229.)
2)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 : As currently in print this bill is keyed fiscal.
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.
In support of the measure, the author writes:
A non-disparagement clause generally restricts
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 and appropriately
found in negotiated legal settlement agreements, but are
more recently beginning to find their way into consumer
transactions.
I have been disturbed to learn that non-disparagement
clauses are finding their way into various on-line
contracts, such those for vacation home rentals on
websites such as VRBO.com. However, HomeAway which owns
VRBO.com does not have the power to prevent property
owners from including non-disparagement clauses in the
rental agreements. Also, CNN recently reported that a
Utah couple has been involved in a dispute with an online
retailer, over a negative review the couple posted online
after a bad shopping experience. When the company
discovered the review, it sent the couple an email
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demanding that they remove the review or pay a $3,500
penalty, claiming that the couple violated a
non-disparagement clause in the "Terms of Sale" contract
that they had accepted when they checked a box to
complete their online order form.
Consumers should not be financially penalized for
providing honest on line statements relative to their on
line retail transaction experience. Honest feedback it
crucial to assure consumer confidence in the on line
retail environment. Therefore consumers should not
unknowingly or unwillingly give up this right to speak
freely about their on line retail experience. Such
non-disparagement clauses go beyond an embargo on
business-oriented "trade secrets," but instead represent
an unreasonable limitation on individual freedom. AB 2365
helps to ensure that this free flow of communication
occurs.
Existing Contract Law Does Not Provide Clear and Appropriate
Protection Against This Type of Consumer Abuse : 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 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.
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Background : 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.
The 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 didn't 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 website until
KlearGear.com sent a letter to Mr. Palmer in 2012 (four years
later!) demanding a unilaterally-determined $3,500 penalty,
citing the RipoffReport post as a violation of a
non-disparagement clause hid 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 speech rights.
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Since this story circulated, a consumer rights group, Public
Citizen Litigation Group, now reportedly represents the couple
and has filed a complaint against Kleargear 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 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.
Free Speech Protections Underscore the Inappropriateness of Such
Clauses in These Types of Consumer Contracts : In the Utah case
example noted above, the online retailer reportedly alleged that
the consumers were prohibited from expressing their criticism
because they had "waived" their right to do so simply by
"agreeing" by clicking "Accept" to the online retailer's terms
of sale contract. Such a clause in an adhesion contract may not
in fact be legally enforceable in this context because it
arguably waives free speech rights - and it is noteworthy that
the company in the Utah case that imposed a unilateral charge
against the consumers for allegedly violating the clause, which
it then reported as an unpaid debt.
The First Amendment (and a similar state constitutional
provision) protects individuals against infringement of free
speech rights by the state. (George v. Pacific-CSC Work
Furlough (9th Cir. 1996) 91 F.3d 1227, 1229.) The California
Supreme Court has held that one way in which state action may be
found is through enforcement of private agreements by the
courts. (Intel Corp. v. Hamidi (2003) 30 Cal.4th 1342, 1364
("the use of government power, whether in enforcement of a
statute or ordinance or by an award of damages or an injunction
in a private lawsuit, is state action that must comply with
First Amendment limits") (emphasis added).) A court's
enforcement of a private agreement that restricts a party's
speech, then, would violate the First Amendment as if the
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agreement were with the government.
It is important to note in the context of this measure that the
First Amendment does not necessarily prohibit all consumer
non-disparagement clauses. It seems possible the courts would
find that First Amendment rights could be found to be waived (as
Kleargear claimed in this case), but only if certain strict
conditions are met, namely, that the waiver is "knowing,
voluntary and intelligent." This is precisely the approach
taken in this measure. (See, e.g., Charter Communications v.
County of Santa Cruz (9th Cir. 2002) 304 F.3d 927, 935 (quoting
Leonard v. Clark (9th Cir. 1993) 12 F.3d 885, 889-90).)
Indeed, courts have found waivers of constitutional rights to be
"knowing, voluntary, and intelligent" only when the parties had
equality of bargaining power; when the terms of the contract had
been negotiated, and where the waiving party was advised by
competent counsel. (Erie Telecomms., Inc. v. City of Erie (3rd
Cir. 1988) 853 F.2d 1084, 1096 (citing D.H. Overmyer v. Frick
Co. (1972) 405 U.S. 174 and Fuentes v. Shevin (1972) 407 U.S.
67).)
A waiver made in an online form, or adhesion, consumer contract,
like the one in the Kleargear case, is thus very unlikely if
ever to be found to be sufficiently "knowing, voluntary, [or]
intelligent" to satisfy this strict waiver standard. Therefore,
a court would probably not enforce the non-disparagement clause
in this case. (Id.)
Of course, many if not all consumers would typically not be
aware that such clauses are unenforceable, and, as in the
Kleargear.com case, will naturally - out of fear and
intimidation - "voluntarily" accede with company demands to give
up their First Amendment rights or risk facing unilaterally set
financial penalties, and even potential credit report problems,
absent this important statutory clarification in California law.
This measure will thus ensure consumers can typically preserve
their right to speak freely about their experiences with online
goods and services - thus actually protecting the burgeoning
online marketplace.
Contract Law Principles Also Support This Measure : As noted
above, 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
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provision is unenforceable if it is found to be unconscionable.
(Civil Code section 1670.5.) 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. (9th Cir. 2007) 498 F.3d 976; see also Aral v. EarthLink,
Inc. (2005) 134 Cal.App.4th 544 ("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. (9th
Cir. 2013) 718 F.3d 1052.)
It therefore seems likely that the non-disparagement clause in
the Kleargear 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.
The Bill's Civil Penalty Deterrent To These Types of Unfair
Contracts : As proposed to be amended, this measure seeks to
discourage the use of such presumptively unfair muzzling
provisions in these types of consumer contracts by the potential
availability of specified civil penalties. In the event such
non-disparagement clauses are inserted into such consumer
contracts notwithstanding this measure, consumers, in addition
to the Attorney General or district attorney or city attorney,
will be able to bring a civil action against the business that
violated these provisions. Any such civil penalty will either
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go to the harmed consumer or to the general fund of whichever
governmental entity brought the action to assess the civil
penalty. And in addition to the possible civil penalty noted
above, in the event of a willful, intentional, or reckless
violation of the measure, a consumer or public prosecutor may
also recover a specified additional civil penalty.
Appropriately, the bill also provides that these civil penalties
are not exclusive, as the bill does not seek to mitigate any
other existing relief or remedy already potentially available.
Businesses Retain Reasonable Protections Including Claims of
Waiver and Defamation : As noted above, this measure does not
completely preclude the use of non-disparagement clauses in the
specified consumer contracts. Instead it provides that a
contract or proposed contract for the sale or lease of consumer
goods or services is unlawful if it includes such a provision
unless the consumer waives this protection and the waiver is
knowing, voluntary, and intelligent. However, the burden of
showing the waiver of such rights is on the drafter of the
contract, usually the business. This will be an appropriately
difficult burden to meet in such consumer contexts.
Some businesses may suggest (though none have as yet
communicated with the Committee) that non-disparagement clauses
should be available in order to guard against consumers who
threaten to post negative reviews unless their demands are met.
Although such concerns may be valid in appropriate cases, there
are existing legal protections against this type of potential
extortion under California defamation law. The elements of
defamation include: publication of a statement of fact that is
false; unprivileged; has a natural tendency to injure or which
causes "special damage," and; the defendant was at least
negligent in publishing the statement. (See Civil Code sections
44, 45a, and 46.) If a consumer were to publish false
statements about his or her experiences with a company, for
example, there is the existing possibility of potential
liability for defamation.
Author's Additional Clarifying Amendment : As proposed to be
amended, the measure clarifies civil penalties in the amount of
$2,500 for a first violation; $5,000 for a second or subsequent
violation; and $10,000 for a violation that is a willful,
intentional, or reckless violation of this bill.
In addition, to avoid any uncertainty about the measure's
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intent, the author prudently is amending subsection (a) of the
bill in Committee to read more clearly as follows:
(1) 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 or
their employees or agents, unless the waiver of this
right was knowing, voluntary, and intelligent.
(2) It shall be unlawful to threaten or seek to
enforce a provision made unlawful under this section,
or to otherwise penalize a consumer for making any
statement regarding the consumer's experience with a
seller or lessor or their employees or agents unless
the consumer has knowingly, voluntarily, and
intelligently waived his or her right to do so.
ARGUMENTS IN SUPPORT : Writing in support of this legislation,
Los Angeles City Attorney Mike Feuer states that:
Non-disparagement clauses are finding their way into
various on-line contracts between sellers and consumers.
Recent reports indicate that retailers have been using
such clauses to prevent consumers from making disparaging
remarks about a product or services rendered on business
review websites? In some instances, when consumers are
purported to be in violation of that clause, they are
told they must pay a large fine. These "fines" have
resulted in an unpaid debt, and damaged credit scores,
causing unnecessary fear and stress for consumers? [This
bill] would provide? my office with the authority to
bring an action when a company requires a
non-disparagement agreement without an express waiver? I
hope this effort and the new authority for offices such
as the Los Angeles City Attorney will discourage the
deceptive practice of including non-disparagement clauses
in consumer contracts.
The Consumer Federation of California also writes in support,
stating in part that:
Particularly in our current on-line environment, consumers
tend to hit the accept button without fully reading and
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understanding the provisions associated with that link?
According to Forrester Research, a projected $248.7
billion in U.S. online sales are expected in 2014 with a
compounded growth of 10% for the next five years
worldwide. Apparel, computers and consumer electronics
tend to be the dominant purchases; taking up 40% of the
current online sales. California law does not prohibit
non-disparagement clauses in consumer contracts and it is
unclear if they would be unenforceable in court. [This
bill appropriately] seeks to ensure that these clauses are
unenforceable in California.
Also writing in support of the bill, TechNet states that:
One of the hallmarks of recent technological innovation
is consumer empowerment. Thanks, in part, to the new
communication and consumer platforms supplied by a
diverse and growing contingent of technology companies
that have been adopted and embraced by retailers and
customers alike, information regarding the quality and
desirability of goods and services in California is
available at a level that was impossible just a few years
ago.
By declaring that a non-disparagement clause contained in
a contract for sale or lease of consumer goods or
services is unlawful, unless the clause was knowingly,
voluntarily and intelligently waived, AB 2365
appropriately balances a consumers right to free speech,
while protecting legitimate contractual needs of
businesses.
REGISTERED SUPPORT / OPPOSITION :
Support
Los Angeles City Attorney
Consumer Federation of California
TechNet
Opposition
None on file
Analysis Prepared by : Drew Liebert / JUD. / (916) 319-2334
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