Many startups gain success through word-of-mouth and by building a reputation for reliability and for providing high-quality products or services. Customers can leave reviews on websites such as Facebook or Yelp detailing their positive experience with your business and giving you a good “score.” Often, this can lead to a greater customer base as people often trust these reviews to be objective and honest.

Unfortunately, with the opportunity to amass positive reviews online also comes the possibility of negative reviews—whether warranted or not. If a customer has a bad experience or simply decides they do not like your startup company, they have the ability to say so online for everyone to see. The negative reviews can influence potential customers and clients just as positive reviews can, and developing a less-than-stellar reputation can cause substantial harm to your business.

Many startup owners may wonder whether there are any legal tools that can prevent negative reviews and some company owners across the country have started to include a “non-disparagement clause” in licensing or purchase agreements. The question arises whether these clauses are legal and enforceable for startups in California.

Non-disparagement Clause in Contracts

A non-disparagement clause is common in different types of contracts, including employment agreements and legal settlement agreements, to name a few. Generally, these clauses prohibit employees, former employees, or parties to a settled lawsuit from bad-mouthing a company or taking any similar negative actions to harm a company. While non-disparagement clauses may be appropriate and effective in these types of contracts, they are not necessarily enforceable in consumer contracts.

As of January 1, 2015, the commonly-called “Yelp” Law (Civil Code Section 1670.8) went into effect in California, which prohibits companies from including non-disparagement clauses in contracts with consumers, clients, or customers. It is furthermore against the law to penalize, threaten, or take any negative action against a consumer who makes negative statements regarding a company’s goods or services. Fines for violating this law can range from $2,500 to $10,000 depending on the circumstances. While California is currently the only state with such a law, there is legislative movement across the country toward similar state and federal provisions.

While startups doing business in California should absolutely avoid including a non-disparagement clause in consumer contracts, the law does not prohibit startup owners from managing comments and reviews online. If you host online comments and it is lawful to remove a negative comment, you may lawfully do so.

Contact a Silicon Valley Startup Attorney Today

Many startup owners may not realize the existence of California laws in regard to non-disparagement clauses or other unlawful acts in regard to consumers. This is only one of many reasons why it is important to have the assistance of an experienced startup and small business attorney who understands the relevant state and federal laws. A lawyer can draft and review contracts to ensure they are enforceable and in compliance with the law so you can avoid penalties. Please contact Kalia Law, PC if you would like more information about our legal services for startups.

- Claire Kalia

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