California Governor Signs Bill Prohibiting Nondisparagement Clauses in Consumer Contracts

California has just added a new type of clause to the list of clauses that violate public policy in the state: the non-disparagement clause.

Governor Jerry Brown has just signed AB 2365, which prohibits companies from including nondisparagement clauses in consumer contracts, including online terms of service.

The bill–nicknamed the “Yelp” bill–prohibits now the inclusion of any clause for the sale or lease of consumer goods and services from which waives the consumer’s right to make a statement about the seller or lessor or its employees and agents, or concerning the goods or services.  The bill also makes it unlawful to “otherwise penalize a consumer for making any statement protected under the bill.”

AB 2365 imposes penalties of $2,500 for the initial violation and $5,000 for each subsequent violation, as well as an additional penalty of $10,000 if the violation was “willful, intentional, or reckless.”  The bill authorizes the affected consumer, the Attorney General, or the district or city attorney to file the claim. 

The San Francisco Business Times is reporting that that this bill was adopted in direct response to a Utah case of a couple who received a demand of $3500 from retailer that they had criticized online.

As you might expect, Yelp has already publicly responded by applauding the signing of the law bearing its nickname.

This law has widespread implications for virtually any company engaged in business on the Internet, and any business entering into contracts, where the consumer or lessee is based in California.  Thus, if you do business in the U.S., you now have a new constraint on what you can put in any contract or legal document, including Internet document, that your company adopts or signs.

While it goes without saying why Yelp would support the enactment of this kind of legislation, as an technology transactions attorney who drafts and negotiates contracts for a living, I find this level of government intrusion into private contracts absolutely appalling, as its application is going to go far beyond the narrow set of circumstances that the law was enacted to address.  Plus, the impact of the adoption of this bill is going to be very far-reaching and force companies in all 50 states–not just California–to modify their standard contracts, even their service contracts.

Perhaps it is time to take this issue to Congress–at which point we in the business world will then have the opportunity to see just how far the Yelp lobby’s influence actually extends.