BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2013-2014 Regular Session
AB 2365 (Pérez)
As Amended June 12, 2014
Hearing Date: June 24, 2014
Fiscal: Yes
Urgency: No
RD:rm
SUBJECT
Contracts: unlawful contracts
DESCRIPTION
This bill would provide 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 or its employees or agents,
unless the waiver of this right was knowing, voluntary, and
intelligent. The bill would also make it unlawful for a party
to threaten or to seek to enforce a provision in violation of
the above, or to otherwise penalize a consumer for making any
statement regarding the consumer's experience with a seller or
lessor, or its employees or agent, unless the consumer has
knowingly, voluntarily, and intelligently waived his or her
right to do so.
The bill would provide that any waiver of the above provisions
would be contrary to public policy, and would be void and
unenforceable. Any person who violates the above provisions
would be subject to specified penalties, among any other
applicable remedies that are available under existing law.
BACKGROUND
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. In other words, it is essentially a
provision in a contract requiring one or more parties to agree
(more)
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not to make negative statements about the other party or parties
- a private party-enforced gag order of sorts.
Earlier this year, a story was reported in the news about a Utah
couple's experience as a result of a non-disparagement clause,
highlighting how companies are using these clauses to prevent
customers from even speaking truthfully about their own personal
experiences. Namely, it appears that in 2008, a customer by
name of John Palmer purchased Christmas gifts for his wife off
of a website, KlearGear.com. The items never arrived and the
Palmers said the transaction was automatically canceled.
Reportedly, after repeat calls to the company to find out what
happened, the wife, Jen Palmer posted a review of the company on
another website, writing that "[t]here is absolutely no way to
get in touch with a physical human being. No extensions work."
Then, some three years later, the couple received an email
appearing to be from the company, stating that the couple would
be fined $3,500 if the negative review posted on that other site
was not removed within 72 hours-all because they had seemingly
signed away their right to post a review online after agreeing
to the company's non-disparagement clause forbidding them from
taking any action that negatively impacts the company. The
article notes that this couple is essentially "facing a $3,500
fine and a damaged credit score for doing what many people do
after a bad purchasing experience: posting an online review."
Moreover, CNN reported that"[l]egal experts warn that more and
more companies are adding this type of language in the fine
print as protection," giving an example of a similar clause on a
vacation rental company that threatened a charge of up to
$10,000 for online reviews containing "unreasonable negative
sentiment" (though after a report about the clause aired, the
company removed it from its terms and conditions). (See CNN,
Pamela Brown, Couple Fined for Negative Online Review (Dec. 26,
2013)
[as of Jun. 16, 2014].)
This bill seeks to protect consumers' rights to make statements
regarding their experiences with any seller or lessor or its
employees or agents by: (1) prohibiting the use of
non-disparagement clause in a contract unless the waiver of this
right was knowing, voluntary, and intelligent; or (2) by
threatening to or seeking to enforce such a provision or
otherwise penalize a consumer, unless the consumer has
knowingly, voluntarily, and intelligently waived his or her
right to make such statements.
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CHANGES TO EXISTING LAW
Existing law , the Unruh Civil Rights Act, provides that all
persons in California are free and equal, and regardless of a
person's sex, race, color, religion, ancestry, national origin,
disability, medical condition, genetic information, marital
status, or sexual orientation, everyone is entitled to the full
and equal accommodations, advantages, facilities, privileges, or
services in all business establishments. (Civ. Code Sec. 51.)
This bill would provide 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 or its employees or agents,
unless the waiver of this right was knowing, voluntary, and
intelligent.
This bill would provide that it is unlawful to threaten or to
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
its employees or agent, unless the consumer has knowingly,
voluntarily, and intelligently waived his or her right to do so.
This bill would provide that the party that drafted the waiver
provision has the burden of proving that the waiver was knowing,
voluntary, and intelligent. This bill would provide that any
waiver of the provisions of this section is contrary to public
policy, and is void and unenforceable.
This bill would provide that any person who violates this
section shall be subject to a civil penalty not to exceed $2,500
for the first violation, and $5,000 for the second and 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. 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. This bill would provide that,
additionally, for a willful, intentional, or reckless violation
of this section, a consumer or public prosecutor may recover a
civil penalty not to exceed $10,000.
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This bill would provide that the penalty provided above is not
an exclusive remedy, and does not affect any other relief or
remedy provided by law.
This bill would prohibit the above provisions from being
construed to limit any authority otherwise provided by law of a
person or business to remove an online consumer statement that
is libelous, harassing, obscene, vulgar, or sexually explicit,
contains the personal information or likeness of a person other
than the consumer, or violates the Unruh Civil Rights Act.
COMMENT
1. Stated need for the bill
According to the author:
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 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 i[s] 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.
2. Should private companies be able to contractually stop
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individuals from speaking honestly about their personal
experiences?
This bill seeks to ensure that consumers are able to make
statements about their consumer experience with a retailer,
unless that ability is knowingly, voluntarily, and intelligently
waived.
As explained by the Consumer Federation of California (CFC), in
support of this bill, "[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. These clauses are
commonly and appropriately found in negotiated legal settlements
or employment agreements. However, non-disparagement clauses
are more recently being included in consumer transactions and
various on-line contracts . . . ." CFC points out that
"[p]articularly in the currently on-line environment, consumers
tend to hit the accept button without fully reading and
understanding the provisions associated with that link."
Indeed, it appears that these clauses are, in fact, increasingly
becoming the norm, which is alarming given that it is common
practice for people to provide online reviews of their
experiences to friends and strangers. While in the past it
might have been difficult to prove violation of a
non-disparagement clause where Sally tells her friend Sue about
a bad shopping experience online over a cup of coffee in
private, the use of these fine print non-disparagement clauses
can present (and have presented, as reflected below) a
significant problem in the current online environment. One need
only look to websites such as Yelp, Tripadvisor, CitySearch, or
HealthGrades, to see how prevalent it has become for people to
provide their recommendations and experiences to fellow
consumers.
Further demonstrating the need for this bill, in addition to the
example of the Utah couple discussed in the Background, the
author points to a story out of New York about a financial
corporation that required some struggling homeowners to agree
not to criticize the company in public if they want to have a
mortgage modified-and the company was not alone. Apparently,
more borrowers in litigation were being required to sign
non-disparagement clauses if they want the terms on their
mortgages eased. Furthermore, in some cases, the servicers go
even further and demand that the clause be inserted into loans
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modified outside of litigation. (See Reuters, Peter Rudegeair
and Michelle Conlin, Exclusive: New York regulator probes Ocwen
over reports of homeowner gag rule (May 21, 2014)
[as of Jun. 16, 2014].)
The author asserts that, unfortunately, "[t]here are no laws in
California that explicitly regulate the use of non-disparagement
clauses in retail on line transactions. There are only general
laws regulating business practices that may apply. AB 2365
makes it clear that the consumer should know if they are waiving
their opportunity to honestly tell of their sale or lease
experience." CFC also points out that it is not clear if these
would be unenforceable in court. This bill seeks to ensure that
they would be, except in the instance where the waiver has been
made knowingly, voluntarily, and intelligently by the consumer.
As a matter of public policy, a non-disparagement clause raises
the question of whether anyone should be contractually stopped
from talking about their personal experience with a company.
Such clauses also arguably raise a question as to why defamation
actions are not sufficient to address harms where the statements
are false and harm the other party's business reputation as that
recourse would not impose a gag order on customers for honest
reviews based not only on their perception of their experience,
but also based potentially on the objective facts (e.g. a review
along the lines of "my order was cancelled without further
explanation or attempt to replace my purchased items.")
In support of the bill, the Public Good Law Center argues that
not only would these clauses inevitably lead to huge amounts of
litigation, but also:
The perils of these non-disparagement clauses to health and
safety, not to mention the marketplace, are not difficult to
imagine. A woman injured by a defective product cannot share
that news with anyone else. A senior who suffers a severe
allergic reaction to a snack bar that contains undisclosed
ingredients faces severe financial penalties if she decides to
warn her friends and family. This is an unacceptably
dangerous prospect. It is chilling to think about how many
more injuries and deaths California would experience were
consumers legally prevented from sharing critical safety
information.
Non-disparagement [clauses] place difficult burdens on honest
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businesses as well. Customers of businesses with something
good to say about a company with a non-disparagement clause
may, of course speak freely-thereby creating a totally
distorted impression that all is well and that consumers
should rush to buy these products. That is not only
dangerous, but it also distorts the marketplace. Honest
businesses are put at a competitive disadvantage by their
unscrupulous competitors' use of non-disparagement clauses:
"We used to have great customer satisfaction numbers - only 1
[percent] of our customers had a complaint, compared to 25
[percent] of theirs; but now it looks like they have no
complaints at all, and our 1 [percent] puts us behind them?."
That's not a situation any upstanding business should be put
in. And it's not a marketplace that any California consumer
should be forced to contend with.
Accordingly, this bill seeks to protect against such harms and
protect the right of the consumer to make any statement
regarding the consumer's experience with the seller or lessor or
its employees or agents by (1) prohibiting the use of
non-disparagement clause in a contract unless the waiver of this
right was knowing, voluntary, and intelligent, or (2) by
threatening to or seeking to enforce such a provision or
otherwise penalize a consumer, unless the consumer has
knowingly, voluntarily, and intelligently waived his or her
right to make such statements. Any waiver of the above
provisions would be contrary to public policy, and would be void
and unenforceable under this bill, and any person who violates
these provisions would be subject to specified penalties, among
any other applicable remedies that might be available under
existing law. Importantly, the bill would specify that the
above provisions shall not be construed to limit any authority
otherwise provided by law of a person or business to remove an
online consumer statement that is libelous, harassing, obscene,
vulgar, or sexually explicit, contains the personal information
or likeness of a person other than the consumer, or violates the
Unruh Civil Rights Act.
Support : California Retailers Association; Los Angeles City
Attorney; Consumer Federation of California; Public Citizen;
Public Good Law Center; YELP; one individual
Opposition : None Known
HISTORY
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Source : Author
Related Pending Legislation : None Known
Prior Legislation : None Known
Prior Vote :
Assembly Floor (Ayes 74, Noes 2)
Assembly Appropriations Committee (Ayes 14, Noes 3)
Assembly Judiciary Committee (Ayes 10, Noes 0)
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