New Federal Law Protects Consumer Online Reviews

The rise of social media has been both a blessing and a curse for businesses. The proliferation of consumer discussion boards and crowd-sourced review sites, like Yelp, Angie’s List and TripAdvisor, have opened the door for merchants and professionals to more directly engage with their clientele. This increased dialogue may offer useful feedback on the customer experience and serve as a catalyst for improving brand image, increasing product or service quality, and strengthening customer relationships. A new federal law addresses this issue.

Many businesses, particularly mom-and-pop operations, have raised concerns about fake or inaccurate negative reviews which may seriously damage their brand and decrease bottom line revenues. A 2013 Harvard Business School study found that even modest improvements in online reviews, such as a one-star rise in Yelp restaurant ratings, translated into about a 5-9 percent increase in revenues. Conversely, the same study found that one negative online review may result in a revenue drop of 25 percent or more.

Merchants and professionals are becoming more aware that increasing their positive reviews and tamping down negative ones are essential to improve both brand reputation and profitability. Unfortunately, certain product and service providers resorted to adhesive nondisparagement clauses that either expressly or impliedly blocked negative reviews. These “gag” clauses took on a variety of forms aimed at curtailing bad reviews in order to game rating systems. Some nondisparagement clauses contained customer assignments to vendors of copyright ownership of the contents of their reviews. If a consumer posted a negative review, the provider sent a takedown notice to the site demanding its removal as infringing their copyright.

In certain agreements with medical and dental professionals, contract language stated that patient confidentiality would only be guaranteed if consumers refrained from posting online reviews. Similarly, some clauses only allowed consumers to post reviews and ratings with the prior approval of the product or service provider; helping to ensure that mostly positive reviews appear online. Liquidated damages clauses and other financial penalties were used to punish consumers who dared to breach these gag clauses. A flurry of litigation over these efforts to squelch online speech soon followed.

For example, in Palmer v. KlearGear.com, Case No. 1: 13-CV-00175 (N.D. Utah, filed Dec. 18, 2013), the plaintiffs ordered several small-dollar items from KlearGear.com. The site’s terms of use contained a nondisparagement clause that assessed liquidated damages. When the merchandise ordered was never delivered, the plaintiffs posted a negative review online. About three years later, KlearGear.com sent a bill to the plaintiffs for $3,500 for breaching their non-disparagement clause, and then later reported the unpaid liquidated damages to credit reporting agencies. The plaintiffs asserted that these debt entries hurt their ability to obtain credit for a car loan and furnace repair. The Utah district court eventually struck down both the nondisparagement and liquidated damages clauses, awarding the plaintiffs over $300,000 in damages, court costs and attorney fees.

The Palmer case is cited in the legislative report supporting the new Consumer Review Fairness Act of 2016 (CRFA), signed into lawDec. 14, 2016. This first-of its kind federal law voids adhesive contract provisions that forbid or restrict a contracting party from posting a “covered communication.” Aimed largely at consumer reviews, this term broadly applies to any written, oral, pictorial, or other performance assessments of goods and/or services. This definition is intended to protect not only online and offline written reviews, but growing numbers of consumer evaluations provided in audio podcasts and video and pictorial reviews on sites like YouTube and Instagram.

The CRFA specifically invalidates any adhesive clause that assesses a penalty or fee against an individual for making any covered communications. The law also voids clauses that seek to censor negative reviews through dubious copyright assignment clauses on consumer appraisals. The new law exempts a number of communications, including employment and independent contractor agreements, and confidential materials, such as trade secrets, proprietary information, or private personnel, medical and law enforcement records.

The Federal Trade Commission (FTC) is primarily tasked with enforcing any CRFA violations which are viewed as either unfair competition or deceptive trade practices under the FTC Act. Although the CRFA does not identify specific dollar amounts, the FTC is permitted to use its statutory authority to determine proper civil penalties for violations. Once the FTC has instituted a civil or administrative action, state attorneys general are typically not permitted to bring CRFA actions while the FTC action is underway. However, in certain instances, state attorneys general or authorized consumer protection officials may be able to bring CRFA actions as well as bring actions under existing state civil and criminal laws.

No private causes of actions are permitted under the CRFA, but states are allowed to determine whether or not to permit such actions under their own state laws. For example, California’s 2014 “Yelp” statute allows individual consumers to bring legal actions regarding adhesive nondisparagement clauses, which remains unchanged under the CRFA.

The CRFA also upholds the right of review sites to monitor or control content on their online platforms that may be legally unprotected, such as libelous, false, deceptive or obscene speech. Alternatively, the law also reafirms the right of a review site to remove or refuse to post reviews that are arguably legally protected, but violate a site’s community standards, such as vulgar, sexually explicit or harassing speech.

The FTC is tasked with developing education and outreach programs to aid awareness and compliance with the CRFA. Attorneys also play an important role in helping clients to understand and comply with this new law. Appropriate legal review and revision of a client’s existing form contracts, including a site’s terms of use, may avoid language that runs afoul of the new law. In addition, the law does not disturb a business’s right to bring a defamation lawsuit for false reviews that injure their reputation and revenues. So although businesses may no longer gag consumer evaluations through adhesive contracts, customers must be mindful that their words could still provide the basis for a subsequent defamation claim. Lucille Ponte