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Some Gag Clauses and Confidentiality Clauses Violate Federal Law

By: Logan S. Parker, Esq.

Some Gag Clauses and Confidentiality Clauses Violate Federal Law

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The Consumer Review Fairness Act, a federal law passed in 2016 (“CRFA”), prohibits a business from restricting certain kinds of speech. The Federal Trade Commission (“FTC”) has begun actively enforcing this law, and just this past month, the FTC entered into several settlement agreements with businesses who the FTC alleged were in violation of the CRFA. business is in violation of the CFRA if its contract fails this two-prong test: (i) the contract is a form contract and (ii) the contract contains a clause prohibiting individuals from making a review, assessment, or other analysis of the goods, services, or conduct of the business.

The first prong is whether the contract in use is a form contract. The CFRA defines a form contract as a contract for the sale or lease of goods or services that is imposed on a customer without giving the customer a meaningful opportunity to negotiate standardized terms. In the motor vehicle and powersports business, this would include F&I contracts, service agreements, retail installment sales contracts, leases, buyer’s orders, and many of the forms a customer signs when purchasing a motor vehicle or motorcycle. Although some of the terms, such as pricing and the length of a lease, may vary, the vast majority of the terms and conditions are settled and unchangeable. For example, a finance captive will not let you amend the preprinted terms on a consumer lease.

The second prong is that the contract contains a provision preventing the customer from making reviews, assessments, or other analyses related to the goods, services, or conduct of the business. Gag clauses, confidentiality provisions, and non-disparagement provisions would all meet this prong. Confidentiality provisions and gag clauses, for example, prevent a customer from disclosing the terms, conditions, and existence of a contract or purchase. A non- disparagement clause would prevent a customer from posting a negative review about his/her experience at a business or with a product he/she purchased.

An important item to be aware of is that the CFRA explicitly included an exemption for contracts entered into between businesses and their employees or independent contractors. Meaning, you can include gag clauses and confidentiality provisions in form contracts with employees and independent contractors. In fact, it would be a good idea to make employees and independent contractors sign agreements with gag provisions and confidentiality provisions. This may help protect the reputation of the business and the confidential and valuable information held by the business.

The FTC’s message to dealers and other businesses is this: “Review your form contracts. Keep them totally tubular by deleting any clauses that attempt to stop consumers from sharing their honest opinions about your products, service, or conduct.” We suggest that you take this advice to heart – you don’t want the FTC or a gung-ho consumer law firm on your back. If you need assistance reviewing your contracts, please reach out to your experienced motor vehicle dealer lawyer.