FTC Brings Charges Against Company’s Non-Disparagement Clause

Roca Labs, a Florida-based company that sells a weight loss product it describes as an “alternative to gastric bypass surgery,” has come under fire by the Federal Trade Commission (“FTC”) for its use of a non-disparagement clause.

The FTC filed its complaint on September 25, 2015. You may read the complaint here.

In order to purchase a Roca Labs product, customers were required to enter into consumer contract with Roca Labs. Under the contract, Roca Labs customers were prohibited from making any negative comments about Roca Labs in exchange for a discount averaging $800.00. Customers caught disparaging the company were liable for the full cost of the weight loss drug.

Roca Lab strictly enforced its non-disparagement clause, threatening numerous customers with lawsuits.

The FTC charged that the disparagement clause constituted unfair acts or practices in violation of Section 5 of the FTC Act, 15 U.S.C. § 45(a) and (n). The FTC explained that Roca Labs “attempted to bind customers that prohibit purchasers from speaking or publishing truthful or nondefamatory negative comments or reviews about the Defendants, their products, or their employees.” The disparagement clause caused injury to consumers that was “not reasonably avoidable by consumers” or “outweighed by countervailing benefits to consumers or competition.”

While this may initially sound like a death sentence for non-disparagement clauses, that is not the case. The FTC did not state all non-disparagement clauses were prohibited Section 5 of the FTC Act. Instead, the countervailing concern appeared to be that disparagement clause operated on an absolute gag on any negative review, truthful or not.

Associate Director of the FTC’s Division of Advertising Practices Mary Engle explained: “We’re saying that as a matter of law it’s an unfair practice to prohibit your customers from providing truthful negative information online or to the Better Business Bureau.”

Gags to the contrary run up against the First Amendment and Free Speech concerns.

On the other hand, non-disparagement clauses permitting only truthful negative reviews do not risk chilling protected speech and giving rise to FTC intervention. Likewise, non-disparagement clauses where a customer agrees to notify the company of their concerns and permit the company to make reasonable attempts to resolve the concern within a stipulated time-period before the client makes any negative reviews would also not be subject to FTC intervention. These latter clauses do not prohibit the customers from providing truthful negative information about the product or service, but instead merely create a cool-down period and allows the company to attempt to remedy the customer’s concern.

Negative reviews on websites like Yelp and online smear campaigns are a real concern for a growing business. But the solution is not to silence customers. The FTC has made it clear that non-disparagement clauses which leave no room for truthful speech violate U.S. law.  In trying to strike a balance between consumer protection concerns and a business’s reputation concerns, small and large businesses alike would be wise to contact a skilled attorney who can help them navigate the legal language necessary to protect themselves.

By Cassandra Kirsch, HopkinsWay PLLC. | © HopkinsWay PLLC 2015. All rights reserved.

This entry was posted in Business Torts, Defamation and tagged . Bookmark the permalink.