How Far Can a Company Go to Protect Its Online Reputation?

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Updated 9/15/14: Governor Brown signed AB 2365, put forward by Assemblyman John A. Perez (D-Los Angeles), which makes non-disparagement clauses in contracts for sale or lease of consumer goods or services unlawful unless the clause is knowingly, voluntarily, and intelligently waived by the consumer. Perez authored the bill after learning about the KlearGear case.

The following is a guest blog post by Harmony Groves Kessler, a solo practitioner assisting individuals, small businesses, and attorneys with legal issues in business contracts/transactions public agency law and family law in northern California. She is the former Mayor of Arcata, California, where she served a four-year term on the City Council.

In today’s world, especially with sources like Yelp, it’s simple to find online reviews of most any company. We often rely on posted comments to get a sense of a business and feel justified to warn other customers when we’ve had a bad experience. Companies are increasing their efforts to monitor their online reputation and keep critical reviews from driving business away. But is punishing a customer for a bad review with a large fine going too far?

Some companies have used “non-disparagement agreements” to protect themselves against negative online reviews. In an ongoing case, online retailer KlearGear.com was sued in federal court for trying to enforce a non-disparagement clause in its Terms of Use. KlearGear’s nondisparagement clause states that KlearGear customers could not take “any action that negatively impacts KlearGear.com, its reputation, products, services, management or employees.”

As with many other online retailers, all KlearGear.com customers must agree to the Terms of Use by clicking a box before they can make a purchase.

The Palmers ordered $20 worth of Christmas presents from KlearGear that never arrived. Mrs. Palmer wrote a critical review of KlearGear on RipOffReport.com, complaining that it was impossible to talk to a human at KlearGear. Over three years later, KlearGear demanded $3,500 from the Palmers for their critical review, unless they removed the post.

The Palmers asked the website on which they had posted the review, RipOffReport.com, to remove the comment. But removal of the comment would have required participation in an arbitration process, which required a $2,000 fee. The Palmers could not afford to engage in the arbitration process and were thus unable to remove the post. KlearGear reported the unpaid fine to a collection agency. The Palmers disputed the debt but KlearGear asserted that the debt was valid and demanded an additional $50 dispute fee.

Seeing the unfairness of the Palmers’ situation, non-profit advocacy group Public Citizen offered to represent them in an action against KlearGear.com. Public Citizen sent a demand letter seeking $75,000 in compensatory damages, removal of the “non-disparagement clause” from KlearGear’s Terms of Use, and letters informing all three credit reporting agencies that the debt was in error.

When KlearGear didn’t accept the terms of the letter, Public Citizen sued KlearGear on behalf of the Palmers in federal court in Utah. The complaint seeks declaratory relief that the contract violated the First Amendment of the U.S. Constitution because there was no intelligent, knowing, or voluntary waiver of the freedom of speech when Mr. Palmer agreed to the Terms of Use.

In addition, the complaint alleges that the contract was procedurally and substantively unconscionable, and that KlearGear violated the federal Fair Credit Reporting Act by failing to verify the debt when the Palmers disputed its validity. The suit also seeks relief for defamation, intentional interference with economic relations, and intentional infliction of emotional distress.

If the non-disparagement clause in this case is found to violate the First Amendment and/or to be unconscionable as a contract of adhesion, businesses should be wary of including these potentially unenforceable types “agreements” in their Terms of Use.

But even more important, should businesses even consider going after a customer for a negative review? A survey of online news on the KlearGear case answers a resounding NO! Mrs. Palmer’s review was not nearly as negative as the media coverage KlearGear has received for its treatment of the Palmers. It also shocks the collective conscience that KlearGear would seek a $3,500 fine for a lightly critical review based on a $20 purchase of items that never arrived.

What can businesses do to protect their online reputation without going too far? Be proactive. There are many online reputation services emerging to help businesses monitor their online content and protect their reputation appropriately. (This article is a good starting point, Protecting Your Online Reputation: 3 Key Tasks Your Business Must Complete in 2014.)

For more on tort liability and First Amendment issues relating to online businesses, turn to CEB’s Internet Law and Practice in California, chapter 20. Trade libel and disparagement claims are covered in CEB’s California Tort Damages, chapter 8.

Other CEB blog of interest:

© The Regents of the University of California, 2014. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.

2 Responses

  1. Reblogged this on LeBaron & Jensen, P.C..

  2. […] How Far Can a Company Go to Protect Its Online Reputation? […]

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