by Paul Alan Levy
On the eve of a Senate Commerce Committee hearing on the Senate version of the Issa-Swalwell bill, (the latter is endorsed by Public Citizen) that would ban non-disparagement clauses in consumer contracts, the United States District Court for the Middle District of Florida has become the first federal court to recognize the ways in which a company can use non-disparagement clauses to help deceive customers about the quality of its products, enjoining a Florida supplement company from using such clauses.
The Federal Trade Commission had sued Roca a seller of supposed miracle supplements, for misrepresenting the quality of its products and for misusing non-disparagement clauses, to which consumers supposedly agreed by accepting a “discounted” price for Roca’s useless products. The FTC sought a preliminary injunction against both Roca’s deceptive ads and against the use of the nondisparagement clause, and Roca consented to the proposed preliminary injunction respects except one – it fought to hold onto its nondisparagement clause. Although Marc Randazza filed an excellent amicus brief presenting broad arguments about how unfair nondisparagement clauses are as a general matter, the FTC’s arguments were largely focused more narrowly on deceptive use of the pseudo-discount to obtain agreement and on the argument that the clause aids other aspects of Roca’s pattern of deceptive behavior. The judge’s findings were limited to those aspects of the situation, leaving for another day a more general assault on nondisparagement clauses in consumer contracts.
The injunction is not perfect – it includes a proviso (paragraph B on page 7 of the injunction) that the judge no doubt thought was needed to make clear that Roca Labs is still able to sue for defamation; but the clause was poorly worded to allow Roca to include a clause barring consumers from “publishing untruthful and defamatory negative comments about Defendant . . ..” Of course, Roca Labs is a public figure at this point, so the clause that the trial court has authorized might be misused to allow Roca to contract out of the obligation, imposed by the First Amendment on state libel law, to show actual malice or, indeed, negligence if Roca Labs were not a public figure. Considering that the common law duties remain, Roca does not need a clause in its contracts with consumers to preserve those rights. We can hope that the trial judge will fix this flaw at the permanent injunction stage of the case.
Public Citizen has endorsed the Issa-Swalwell bill while suggesting that the Senate Bill be modified to eliminate a provision forbidding states from making arrangements with private lawyers to enforce the bill’s provisions. I am told that the Senate sponsors are amenable to that change.