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Non-Disparagement Clauses Banned in Consumer Contracts

Businesses frequently enter into contracts, whether it is with employees, other businesses, or customers. It is easy to think that the power to contract gives a business the ability to set whatever terms it prefers for an interaction, so long as the other party agrees. However, state law puts some limits on the power of contracting. It is important to consult with an experienced business law attorney before adding new language to the contracts you use to be sure the terms will be enforceable down the road. One example of the laws you need to be aware of when drafting contracts has to do with non-disparagement clauses.

You Cannot Use Non-Disparagement Clauses in Consumer Contracts.
A non-disparagement clause can be extremely appealing to a small business owner. In this day and age, where potential customers rely heavily on online reviewing services, like Yelp, when making decisions about who to do business with, an unfair and unflattering review can sink a small business. To counter this problem, some businesses began including clauses in their contracts with consumers prohibiting the consumer from making negative statements about the company. However, California has now banned these clauses.

The new law is found in the California Civil Code. What is important to note is that this ban does not just make these provisions unenforceable. It also provides civil penalties against anyone who threatens or seeks to enforce one of these provisions. Depending on the facts of a particular case, the penalty could range from $2,500 to a whopping $10,000 for willful violations of the law. If you have used one of these clauses in the past, the best practice now may be to notify your customers that you are changing that particular term or condition of your previous agreement since it is no longer lawful.

Ban May Go Federal
While the California law affects businesses that do business in California, currently, there is no federal ban on these clauses. That may change, however. The Chicago Tribune reports that two California congresspersons, Rep. Swalwell and Rep. Sherman, have introduced the “Consumer Review Freedom Act” in Congress. It remains to be seen whether this bill will succeed on a national level, but if it were to succeed, then the results for businesses nationwide would be similar to what we are going to see in California.

New Law Does not Affect Employment Contracts, But be Wary
This new law only bans non-disparagement clauses in consumer contracts. This means that this specific law does not apply to employment contracts. However, depending on how such a clause is worded, it may run afoul of federal laws. Last year the ABA Journal reported that the National Labor Relations Board had found that one such clause violated the National Labor Relations Act because it restricted employees’ right to discuss compensation or job conditions with co-workers or union organizers.

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