Last week Adam ably covered the Big Bad News for our old customer-threatening lawyer-suing pink-paste-purveyor Roca Lab: the Federal Trade Commission has sued it for unfair trade practices in violation of the FTC Act.
Most of the FTC's complaint is routine and can be summarized as "Roca Labs sells crap and lies about it." One part, though, seems novel: the attack on Roca's habit of using non-disparagement clauses to threaten customers who give it bad reviews. The FTC's third claim directly addresses that:
UNFAIR USE OF NON-DISPARAGEMENT PROVISIONS
64. As described in paragraphs 12-42 and 44-52, in numerous instances, Defendants have used in the sale of their products, and purported to bind purchasers to, contractual provisions that prohibit purchasers from speaking or publishing truthful or nondefamatory negative comments or reviews about the Defendants, their products, or their employees.
65. Defendants’ practices as described in paragraph 64 have caused or are likely to cause substantial injury to consumers that is not reasonably avoidable by consumers and that is not outweighed by countervailing benefits to consumers or competition.
66. Defendants’ practices as described in paragraph 64 therefore constitute unfair acts or practices in violation of Section 5 of the FTC Act, 15 U.S.C. § 45(a) and (n).
This sounded novel to me, so I reached out to the FTC for comment. On Monday, one of the FTC attorneys on the case confirmed "[t]his is the FTC’s first case alleging that a seller’s use of non-disparagement provisions is unfair under Section 5 of the FTC Act." The FTC's press release on the case also mentions that theory.
The FTC's aggressive move reflects continuing nationwide pushback against companies that use nondisparagement clauses as a method of deterring negative consumer feedback. California recently banned such clauses in consumer contracts, and Congress considered, but as convention requires did nothing about, a nationwide ban.
Why the interest? Probably because of the Streisand Effect. Roca Labs isn't the only company that's made headlines with splashy and foolish non-disparagement bullying against customers. Internet bauble-seller KlearGear flamed out in 2015, and the bumptious MedExpress hit the pavement hard and wound up paying attorney fees. Even obscure small businesses have found themselves thoroughly media-stomped when they've tried to invoke such non-disparagement clauses.
A non-disparagement clause in a consumer contract reflects a business you can't trust. But if you've signed one unknowingly, now you have more leverage — if you're threatened, the FTC's suit against Roca suggests that the FTC may view the enforcement of such clauses (at least in extreme cases) as an unfair business practice.
Meanwhile, Roca Labs has entered a stipulated temporary restraining order with the FTC. This stage — preliminary relief — is often where the FTC kills your company dead by convincing a federal judge to issue an order freezing all operations and assets. By stipulating, Roca Labs' attorneys may have been able to negotiate the terms of the order to be a little less onerous. But the order is still a grave development for Roca. It prohibits Roca Labs from making many of their core marketing allegations about their product, prohibits them from invoking their non-disparagement clauses or threatening customers who complain about the product, freezes all corporate assets except for use in normal business expenses, gives them 10 days to provide an accounting of assets, and allows the FTC to take expedited depositions about their products and assets. The order permits Roca Labs to continue to pursue its previously-filed frivolous defamation lawsuits, but with this FTC case those suits have become unwinnable. This is a devastating order.
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