In August, we wrote about a New York hotel that was slammed online when people learned it was fining wedding parties $500 for negative reviews left by their guests.  On Tuesday, California passed legislation prohibiting businesses from doing something just like that: having customers sign non-disparagement clauses agreeing not to post bad online reviews.

AB 2365, signed into law on Sept. 9 by California governor Jerry Brown, subjects businesses to fines for contracts including provisions in which a consumer will waive his or her “right to make any statement regarding the seller or lessor or its employees or agents, or concerning the goods or services.”

According to the newly enacted California law, businesses will be fined $2,500 for a first-time violation, $5,000 for any subsequent violation(s), and potentially $10,000 for “willful, intentional, or reckless violations.”

As noted in this Forbes article, AB 2365 is the first of its kind in the nation, but the issue of businesses threatening consumers extends far beyond the Golden State.

As alluded to above, the Union Street Guest House of Hudson, N.Y. was deducting $500 from guests’ deposits for each negative review placed online.  They have since removed the policy, but only after being flooded with hundreds of 1-star Yelp ratings and getting bad press.

Similarly, both Forbes and CNET wrote about the recent Utah case involving a couple that was fined for posting a policy-violating negative review on Ripoff Report about an online retailer.  When the couple did not pay up, the company – KlearGear – filed a negative credit report against them.  And then the couple filed a lawsuit.

Seeing the fallout from the policies of the Union Street Guest House and KlearGear – the former has surely lost significant business from the public backlash, while the latter was ordered to pay $306,750 in damages – each arguably could have benefitted from a law such as AB 2365 that might have deterred their behavior.

Avoid similar non-disparagement clauses

If business owners – regardless of where they are located or doing business – have not yet paid attention to this new California law and these incidents involving this New York hotel and Utah online retailer, they should be.

With the current internet and social media landscape – which features increasing trust in and reliance on the large number of online ratings and reviews – what is being said about a company online matters.  But businesses need to be careful with how exactly they address negative online reviews – whether upfront or upon discovering the content online.

AB 2365 in California joins other existing laws, such as many states’ anti-SLAPP statutes, which have been passed to counter attempts to silence public criticism.  Thus, it is important that business owners avoid taking action that would (or could) be construed as stifling legitimate speech.

Appropriately responding to negative online reviews

Certainly, there is a difference between legitimate consumer complaints and actual false and defamatory statements; the appropriate response is based on this distinction as well.  With the former, attempting to get in touch with the consumer and trying to resolve the situation (preferably offline) is a must.

If the criticism is legitimate, a negative online review can actually be turned into a positive in terms of helping a business realize it may need to change its ways.  Top businesses regularly use negative feedback to make informed business decisions.

On the other hand, addressing actual defamatory reviews, where the particular speech would not be protected, often involves different strategies or techniques such as cease and desist letters and/or lawsuits (meaning consumers are not allowed to say just anything they wish about businesses, though some consumers seem to believe otherwise).

If nothing else – especially for non-California business owners not subject to this new law – the takeaway from AB 2365 should be to avoid drafting non-disparagement clauses (especially hidden ones) or maintaining policies that punish or threaten to punish consumers for voicing their opinions online.

Even if the other 49 states do not penalize businesses for having such clauses or policies, the bad press alone may be far more damaging to a business than a simple negative review.  And, again, a business is not without recourse if it is the subject of an online review that is false and defamatory.