February 7, 2017

New Federal Statute Limits Ability to Protect Business Reputations: The Consumer Review Fairness Act of 2016

By Michael P. Daly and Jenna M. Poligo

Social media has made it exponentially easier for consumers to make informed decisions by consulting online reviews of retailers, restaurants and virtually any other business. But it has also made it easier for competitors and disgruntled employees to damage reputations through exaggerated or even fabricated negative “reviews.” Indeed, many businesses have had to respond to such tactics by pursuing their rights in court or referring matters to the authorities. Others have responded proactively with non-disparagement clauses, which are contractual provisions that restrict the ability to criticize a business’s goods or services. See Committee Report 114-731, Consumer Review Fairness Act of 2016 at 5-6 (Sept. 9, 2016).

Although non-disparagement clauses have become increasingly common in recent years, id., their use will soon be restricted by the Consumer Review Fairness Act of 2016 (CRFA), 15 U.S.C. § 45b, a new federal statute that will take effect next month. The CRFA applies to “form contract[s],” which it defines as contracts with “standardized terms used . . . in the course of selling or leasing the person’s goods or services . . . and imposed on an individual without a meaningful opportunity for such individual to negotiate the standardized terms.” Id. § 45b(a)(3)(A). It prohibits such contracts from including provisions that “prohibit[] or restrict[] the ability” to provide a review or “impose[] a penalty or fee” for providing a review. Id. § 45b(b)(1). It also prohibits provisions that “transfer[] [the] intellectual property rights” for a review to the other party to the contract, id. § 45b(b)(1)(C), which is designed to prevent businesses from removing reviews from websites by sending takedown notices under the Digital Millennium Copyright Act as the purported owner of the intellectual property rights to the review.

The CRFA’s scope is deliberately narrow, however. For example, it does not prohibit provisions that reserve the right to remove: (1) trade secrets, privileged or confidential information, private medical information, certain information compiled for law enforcement purposes, or content that contains viruses, worms, or other potentially damaging computer codes, processes, applications, or files; or (2) content that is unlawful, contains personal information or likeness of another person, libelous, harassing, abusive, obscene, vulgar, sexually harassing or inappropriate with respect to race, gender, sexuality, ethnicity or other intrinsic characteristics. Id. §§ 45b(b)(2)-(3). It also does not apply to negotiated contracts, employer-employee contracts or independent contractor contracts. Id. § 45b(a)(3).

The CRFA declares that the use of a prohibited provision is an unfair or deceptive act or practice under the Federal Trade Commission Act, id. § 45b(d)(1), and authorizes the Federal Trade Commission to enforce the statute. Id. § 45b(d)(2). The CRFA also authorizes State attorneys general to enforce the statute, but only if the Federal Trade Commission has not initiated a civil or administrative action with respect to a given violation of the CRFA. Id. § 45b(e).

Although the statute was enacted on December 14, 2016, its operative provisions do not take effect until 90 days after enactment (March 14, 2017), and the government enforcement provisions do not take effect until one year after enactment (December 14, 2017), id. § 45b(i), before which the Federal Trade Commission is supposed to conduct “education and outreach that provides businesses with non-binding best practices for compliance.” Id. § 45b(f).

The Congressional Budget Office projects that the Federal Trade Commission would pursue only a “small number of cases.” Congressional Budget Office Cost Estimate, H.R. 5111, Consumer Review Fairness Act of 2016 (Aug. 4, 2016). But the same cannot be said of the plaintiffs’ bar. Although the CRFA does not provide a private right of action, it would not be at all surprising to see the plaintiffs’ bar try to use this statute as a predicate for claims under state consumer protection statutes that do, particularly those that, like New Jersey’s Truth-in-Consumer Contract, Warranty and Notice Act, provide for an award of statutory damages. Indeed, it would be surprising if they did not. And because the statute’s delayed effective date applies only to government enforcement, we could see that start to happen as early as March. Businesses should therefore immediately review their “form contracts,” including online terms and conditions, and remove or revise any provisions that are prohibited by the CRFA.

If you have any questions about this alert please do not hesitate to contact the authors or your usual Drinker Biddle contact.

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