For the first time ever, the Federal Trade Commission (“FTC”) last month sought to have non-disparagement clauses declared unfair under the Federal Trade Commission Act (“FTC Act”) in its case against Sarasota, Florida nutraceutical company Roca Labs, Inc. and its principals. The case is Federal Trade Commission v. Roca Labs, Inc. et al., Case No. 8:15-cv-2231 (M.D. Fla.) and Suzette Marteny, a partner in the Tampa office of Shumaker, Loop & Kendrick, LLP is lead counsel for the defendants.
Roca Labs gives its customers the option to purchase products at a discount in exchange for agreeing not to post disparaging comments online. If they elect to pay the lower price, Roca Labs requires customers to sign an agreement containing a non-disparagement clause. The FTC sued and sought to preliminarily enjoin Roca Labs from using such clauses alleging, among other things, that non-disparagement clauses were “unfair” under section 5(n) of the FTC Act.
Section 5(n) provides than an act is unfair if it causes substantial consumer injury that cannot be avoided and is not otherwise beneficial to consumers or competition. Roca Labs countered by arguing that the clauses were not unfair because consumers were free to avoid the clauses by paying full price.
After hearing argument from both sides at the preliminary injunction hearing, the Court ultimately declined to side with the FTC and specifically made “no finding about whether non-disparagement clauses are . . . a violation of the FTC Act.”[1]
The FTC’s actions are unsurprising in light of growing support to outlaw such clauses in consumer contracts, as companies seek to use non-disparagement clauses and other means to control their online reputations and reign in the proliferation of often unjustified negative online reviews.
It is unclear whether the FTC is targeting non-disparagement clauses in contexts other than in consumer contracts, but a decision in the FTC’s favor would create a tsunami of ramifications for businesses across the U.S. What is clear is that the matter is a hot topic that has gained the attention of Congress, which has twin bills pending in the House and Senate. In addition to that, state legislatures are also closely looking at the issue and California has already passed a bill outlawing use of such provisions.
Either way, wise businessmen and women will keep their fingers on the pulse of this issue as future events unfold.
[1] Tr. Show Cause/Prelim, Inj. Proc., p. 60.
