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Non-Disparagement Clauses -The Good, the Bad, and the Ugly

August 5, 2020

webster’s Dictionary defines the word “disparage” as “to lower in esteem; discredit; to show disrespect for; to belittle”. In a commercial setting, to disparage is to say or post unkind or unpleasant comments about a person, company, or product. With the large numbers of people now actively participating on social media sites, businesses and lawyers have begun to include “non-disparagement clauses” in contracts such as those for the sale of consumer goods, employment agreements, and in settlement agreements resolving lawsuits. Social media sites make it easy for disgruntled individuals to criticize or attack a product, a service, a company, a former employer, or anyone or anything against which they hold a grudge. The question is whether these clauses are legal, ethical, or appropriate.

In October 2016, a law took effect in the State of Maryland prohibiting the use of non-disparagement clauses in consumer contracts for the sale or leasing of goods or services used for personal, household, or family purposes.  The law prohibits a person or business from threatening or penalizing a consumer for making a statement about either the seller or lessor or the consumer goods or services involved. The law does not, however, prohibit an aggrieved seller or lessor from bringing a defamation action against the consumer if such an action is warranted.

More recently, on December 14, 2016, President Obama signed into law the ConsumerReview Fairness Act. This statute makes certain clauses in form contracts void and unenforceable if they prohibit or restrict a consumer from engaging in oral, written or pictorial reviews or performance assessments of a seller’s goods, services, or conduct. The law prohibits the assessment of penalties or fees against an individual who engages in such communications. Enforcement authority of the law is provided to the Federal Trade Commission (FTC). The law does not apply to employer-employee or independent contractor agreements.

These laws were clearly enacted in response to lawsuits that challenged the assessment of fees and penalties against those who purportedly violated non-disparagement clauses in contracts. The most notorious case was Palmer v., a federal lawsuit that was decided in 2014. In that case, an internet retailer was sued by a couple after the company billed them $3,500 following a negative online review of a product they had purchased. What made things worse for the couple was that the company proceeded to report them to a collection agency which adversely impacted their credit rating. Even more outrageous was that the fine the company attempted to impose was for violating a non-disparagement clause that had been inserted into the company’s online Terms of Use after the couple’s review had already been posted. The court decided in favor of the Palmers and awarded them more than $300,000 in damages against Kleargear. Whether the Palmers ever collected that amount is unknown.

Since these new laws against non-disparagement clauses do not cover all relationships, the question is whether they are permissible in employment or severance agreements. Courts have held that such clauses cannot restrain employees from asserting their rights under the National Labor Relations Act. It would appear that the courts would frown upon any contractual provision that denied an employee the right to file a complaint for illegal or discriminatory employment practices but this is still an evolving area of the law.

Similarly, it would appear that there is no prohibition to inserting a non-disparagement clause in a settlement agreement to a lawsuit. Neither the Maryland statute nor the federal statute appear to specifically prohibit such clauses in the context of settlement agreements. First Amendment considerations do not come into play since the right of free speech does not apply in a private setting absent state action.

We are living in an age of tweets, posts and other instantaneous communications through social media sites such as Facebook, Twitter, Instagram, Snapchat, TripAdviser, Yelp, and Angie’s List. Such communications can reach thousands, even millions of people with just one click of the mouse. A bad review can do severe damage to a business or a product. How “negative” must a review be to trigger the enforcement of a non-disparagement clause?  Is a pure opinion about a former employer such as “I did not like working there” enough to prompt a response by the company? Is an inconspicuous non-disparagement clause concealed in the small print of a contract a suitable way for companies to address a potentially discontented customer? Since this area of the law is evolving, it remains to be seen how the courts will ultimately balance the competing interests of the parties.