In Roca Labs Case, FTC Takes Novel Stand Against Non-Disparagement Clauses

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:

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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  1. Dwight says

    What would then follow if the FTC "killed" the company straight out by freezing everything? Is it possible that the FTC is purposely letting them live so as to end up in court in interest of giving a proper testing out of this new use of Section 5 against anti-disparaging clauses?

  2. Grant Gould says

    It will be interesting to see if anything comes of the push against nondisparagement. There are some big players that rely on close cousins of nondisparagement clauses (eg, famously, Oracle) and I'd expect a loud and nasty pushback from industry if the FTC tries to make this an administrative or judicial doctrine to avoid going through Congress.

  3. Drew says

    Does the FTC have much of a chance here? Assertion 65 depends on, "is not reasonably avoidable by consumers." Without that, assertion 66 doesn't hold.

    Roca Labs can claim that consumers could avoid their non-disparagement clauses by not purchasing Roca's products.

    How could the FTC respond?

    There seems to be a legal fiction that the average person can read and meaningfully understand the agreements they sign. This is untrue, but it seems so fundamental to contract law that I'm not sure how the FTC could argue against it.

  4. David Schwartz says

    @Drew The harm is that consumers don't have the information that would allow them to make the decision of whether or not to do business with Roca. Even if they fully considered the affect of the disparagement clause, they could only guess at what information the clause managed to suppress. The FTC is arguing they're entitled to that information when they make the decision.

  5. Karun R says

    Interestingly their website says
    "Roca Labs’ site is undergoing improvements for the next few days and new customers can not be accepted. Support is available as usual."

    I guess that sounds better than "we were shut down by the FTC" .

  6. Randy Scott says

    FTC and non disparagement actions are not novel in Roca labs. It was a part of a consent decree against a Non profit process server organization called California Association of Legal Support Professionals. This was April 2014 the back story is if stopping member speech about process serving industry doesn't work there lets move it to cyber-stalking. It worked for now!