With the growing popularity of social media and websites like Yelp!, customers have numerous public platforms to provide feedback about your business. When the opinions are not so positive, it can be tempting to attempt to squelch them. However, companies must be careful when managing negative online criticism.

The Federal Trade Commission (FTC) recently resolved three administrative actions enforcing the Consumer Review Fairness Act (CRFA). The actions are the first to exclusively enforce the CRFA since it took effect in 2016.

“Many online shoppers use customer reviews and ratings to get information, but these companies used gag clauses in their form contracts to stop customers from posting honest but negative feedback,” Andrew Smith, Director of the FTC’s Bureau of Consumer Protection, said in a press statement. “These gag clauses are illegal, and companies that know it but use them anyway will be subject to civil penalties.”

Consumer Review Fairness Act

In basic terms, the CRFA prevents businesses from contractually prohibiting consumers from posting negative online reviews. It specifically targets non-disparagement clauses that impose monetary or other penalties on customers who post negative online reviews about a company’s products or services.

More specifically, the CRFA prohibits non-disparagement provisions in consumer form contracts. The CRFA defines such contracts as those with standardized terms that are used in selling or leasing goods or services, and which are imposed on an individual without a meaningful opportunity for the individual to negotiate the contracts’ standardized terms. Under the CRFA, a provision of a form contract is void if it:

  • Restricts a consumer’s ability to communicate reviews, performance assessments, or other similar analysis of a seller’s goods, services, or conduct;
  • Imposes a penalty or fee against a consumer who engages in such communications;
  • Requires individuals to transfer intellectual property rights in the content of their reviews.

Businesses should be aware that the CRFA only applies to non-disparagement clauses in consumer contracts and not to other types of business agreements. For instance, the CRFA expressly provides that it does not apply to employer-employee or independent contractor contracts. It also does not interfere with civil actions for defamation, libel, or slander; a party’s right to establish terms and conditions for content created by an employee or independent contractor; or a party’s right to remove or refuse to display content that contains personal information or obscene or inappropriate material.

The FTC is empowered to penalize violators under its authority to prevent deceptive trade practices and unfair competition. On the state level, attorneys general are also authorized to bring actions under the law.

FTC CRFA Enforcement Actions

The FTC brought administrative complaints against three companies 1) A Waldron HVAC, LLC and its owner, Thomas J. Waldron; 2) National Floors Direct, Inc. (NFD); and 3) LVTR LLC (LTVR) and its owner, Tomi A. Truax. According to the FTC, the companies illegally used non-disparagement provisions in consumer form contracts in the course of selling their respective products, in violation of Section 2(c) of the CRFA. The complaints do not allege that the respondents’ violations were knowing.

The FTC found the following provision of Waldron HVAC’s contracts to run afoul of the CRFA: “CUSTOMER and COMPANY agree that the within contract is a private and confidential matter and that the terms and conditions of the contract…shall not be made public, or given to anyone else to make public, INCLUDING THE BETTER BUSINESS BUREAU… Should the CUSTOMER breach this confidentiality clause, the CUSTOMER agrees to pay COMPANY liquidated damages...THE COMPANY MAY ALSO BE AWARDED COUNCIL [sic] FEES AND COSTS AS REQUESTED BY COMPANY.”

In the case of NFD, the text allegedly violating the CRFA included language such as: “By signing this purchase order you are agreeing, under penalty of civil suit…not to publicly disparage or defame National Floors Direct in any way or through any medium.”  Meanwhile, LVTR’s non-disparagement provision included the following text: “I agree not to call Animal Control or any governmental agency or individuals if there is a discrepancy to how the horses/animals or property are taken care of. You will be charged a minimum of $5000.00 in damages if you report anything or making [sic] contact with any persons or agency… For purposes of this Section, ‘disparage’ shall mean any negative statement, whether written or oral including social media about our Company, Volunteers, Owners, Representatives, etc.”

Notably, all of the companies targeted by the FTC not only required customers to agree to non-disparagement provisions but also sought to impose financial penalties if those provisions were violated. This suggests that the agency finds this type of CRFA violation particularly egregious and worthy of an enforcement action.

All three companies have agreed to resolve the allegations. Under the terms of the proposed consent agreements, they are barred from using such non-disparagement clauses in form contracts for goods and services, and are required to notify consumers who signed such contracts that the prohibited text is not enforceable.

Lessons for New York and New Jersey Businesses

While a negative online review may harm your business, an FTC regulatory action is arguably far more damaging. To avoid potential liability under the CRFA, businesses should focus their efforts on delivering excellent customer service. Providing customers with an effective means to resolve complaints can also often help turn a dissatisfied customer into a happy one. Of course, should an online review constitute actionable defamation, businesses still have legal recourse.

If you have any questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Charles Yuen, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.