Non-Disparagement Agreements

Andrew Crocker and Kurt Opshal of The Electronic Frontier Foundation write about a horror story arising from a customer's signing a "non-disparagement agreement."  The customer, Jen Palmer, tried to purchase an item from KlearGear, but the item was never shipped to her.  After receiving a refund, but running into trouble trying to contact the company's customer service representative, she gave a negative review of the product on Ripoffreview.com.

KlearGear wrote to Palmer three years (!) later and demanded $3,500 based on her violation of a non-disparagement clause she had signed when she had tried to purchase the item.  That clause stated:

In an effort to ensure fair and honest public feedback, and to prevent the publishing of libelous content in any form, your acceptance of this sales contract prohibits you from taking any action that negatively impacts KlearGear.com, its reputation, products, services, management or employees. 

Should you violate this clause, as determined by KlearGear.com in its sole discretion, you will be provided a seventy-two (72) hour opportunity to retract the content in question. If the content remains, in whole or in part, you will immediately be billed $3,500.00 USD for legal fees and court costs until such complete costs are determined in litigation. Should these charges remain unpaid for 30 calendar days from the billing date, your unpaid invoice will be forwarded to our third party collection firm and will be reported to consumer credit reporting agencies until paid.

Palmer was unable to pay the fee to remove the comment and was unable to pay the $3,500 demand, and ran into credit problems as a result.

The EFF reports on a number of inconsistencies with KlearGear's claim, including the question of whether this clause had even existed when Palmer had made her purchase.  The EFF also argues that the non-disparagement agreement is unconscionable, noting that consumers typically do not have any say in the provisions of purchase agreements and that the language in these agreements tends to confer substantial privileges to the seller over the consumer.

I am inclined to agree that the non-disparagement provision is unconscionable.  While I don't think that any First Amendment claims can be made here, the vast asymmetry in the agreement and the likely inability of consumers to negotiate the agreement are problematic.  Moreover, the $3,500 payout is all but guaranteed, since the payout is required upfront, and will cover litigation fees that KlearGear ends up paying, even if any defamation suit it files ends up being groundless.

And as a final note on the issue, the non-disparagement clause avenue for punishing critics appears to be a way around insurance protection that many defendants may have in typical libel cases.  Eugene Volokh notes that many standard homeowner's insurance agreements have clauses that guarantee payouts for damages paid out in a libel suit, or costs incurred in defending against such a suit.  He provides an example of one such claim:

If a claim is made or a suit is brought against any insured for damages because of bodily injury … caused by an occurrence to which this coverage applies, we will: 

1. pay up to our limit of liability for the damages for which the insured is legally liable; and 

2. provide a defense at our expense by counsel of our choice even if the allegations are groundless, false, or fraudulent…. 

POLICY DEFINITIONS …. 

“Bodily injury” means; … personal injury … arising out of … libel, slander or defamation of character; or … invasion of privacy.

A non-disparagement claim along the lines of the KlearGear agreement looks like a contract claim, and not a claim for "damages because of bodily injury," which seems to be restricted to tort claims.  And even if KlearGear were to successfully sue Palmer, such an insurance policy would cover the damages she would need to pay in that lawsuit, but not the contractually-required money she would need to pay for KlearGear's costs.