Assembly Speaker John Perez
Assembly Speaker John Perez ()

SACRAMENTO — State lawmakers will offer their first reviews next week of legislation that would crack down on companies using nondisparagement clauses to discourage customers from criticizing their products and services online.

Informally dubbed the “Yelp” bill, Assembly Bill 2365 would bar a retailer or service provider from forcing customers to waive their rights to comment on their experiences with a business “unless the waiver was knowing, voluntary, and intelligent.” Customers, the attorney general and district attorneys could sue violators for as-yet-specified civil penalties under the bill.

The legislation was inspired by the much-publicized experience of Utah residents John Palmer and Jennifer Kulas. In 2008, Palmer tried to buy an item on the novelty-gift site KlearGear.com. Palmer said he didn’t get what he ordered and canceled the transaction. Kulas, Palmer’s wife, took to RipoffReport.com to complain about what she thought was KlearGear.com’s shoddy customer service.

The couple thought nothing more of their business dealing with the website until KlearGear.com sent a letter to Palmer in 2012 demanding $3,500, citing the RipoffReport post as a violation of a nondisparagement clause included in its terms of use. When Palmer and Kulas refused to pay, KlearGear.com reported the couple’s “debt” to at least one credit-reporting agency. For almost two years, they would run into trouble trying to secure loans. In October 2013, for instance, they were left without heat in their house for three weeks after they were denied credit to finance a new furnace, their attorney said.

“The idea that you can have your credit ruined by sharing your opinion is ridiculous,” said Will Shuck, spokesman for AB 2365′s author, Assembly Speaker John Perez, D-Los Angeles. “Current law allows this growing practice, and Speaker Perez thinks consumers deserve more information and better protection, which is what this bill does.”

With the proliferation of consumer-driven rating websites, businesses from dental practices to vacation rental operators to wedding photographers are including nondisparagement clauses in their consumer contractors. But the language isn’t always easy to find. And many of the don’t-trash-us provisions may be unenforceable under unconscionability protections in general contract law, said Scott Michelmen, an attorney with the nonprofit Public Citizen who is representing Palmer and Kulas.

But an unconscionability defense puts the onus on customers to prove it, noted Nancy Kim, a professor and contracts expert at the California Western School of Law. And it may grow harder to prove as nondefamation clauses become more popular, she said.

What’s more, “consumers aren’t likely to fight this issue in court,” Kim added. “If a company points out the clause to them, they are likely to believe it is enforceable. Rather than fight, they will pay up and/or take down their statement.”

Palmer and Kulas have had their credit restored “no thanks to KlearGear,” Michelmen said, and they’re now suing the company in the U.S. District Court for the District of Utah. A motion for default against KlearGear.com is pending. A phone number listed on the company’s website was not in service Wednesday. An email sent to a company representative bounced back as undeliverable.

Michelmen said he knew of no pending legislation in other states targeting consumer nondisparagement clauses. The attorney applauded the California bill’s “substance” while noting some ambiguities that will likely be addressed in coming weeks during policy committee vetting.

AB 2365 is scheduled to be heard by the Assembly Judiciary Committee on April 22. As of Wednesday, it had no public opposition. The California Chamber of Commerce has not taken a position on the bill, and the industry group TechAmerica has told the Judiciary Committee it supports AB 2365.

Contact the reporter at cmiller@alm.com.