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Non-Disparagement Still Issue For Franchises

Legislative and judicial opposition to non-disparagement clauses is growing, but franchise owners should not jump for joy.

The KlearGear decision, the proposed California law AB 2365,  and the Ocwen foreclosure gag order investigation are indicative of growing concern about the ability of businesses to squelch free speech, but it is important to realize that franchisees can not rely on such reasoning.

In KlearGear, the customer (John Palmer) who did not get his trinkets cancelled the $20 order and Palmer's wife (Jennifer Kulas) posted a negative comment on RipOffReport.

Three years later, KlearGear demanded that Palmer delete the comment on RipOffReport or face a fine of $3,500 based on a violation of a clause in the online Terms of Service that said that no customer could disparage KlearGear and that KlearGear had the sole right to decide whether it had been disparaged.

KlearGear reported the $3,500 "debt" to Experian and Equifax, which resulted in Palmer being denied an American Express card, charged a high rate on his car loan, and not being able to fix a broken furnace for 3 weeks since he could not borrow any money.

Palmer tried to get the comment deleted from RipOffReport, but the website demanded $2000.

It is worth noting that at the time Palmer ordered from KlearGear, the "non-disparagement" clause was not in the Terms of Service and was only added to the ToS later. According to the Complaint, KlearGear responded that the ToS was "organic" and when Palmer noted that he was not the person that posted the negative review, KlearGear responded that if Palmer spoke to somebody who then posted a review, that Palmer was responsible for that review.

When Palmer disputed the Experian and Equifax records, he was hit with another $50 charge from KlearGear.

Paul Levy of Public Citizen (and a BMM contributor) took the Palmer case and filed suit. It turned out that KlearGear is a bit difficult to find since the business address turned out to be a drop box operated by MailBoxForwarding.com, which says that prices start at $14.95/month and "At the click of a button you can have your mail or packages forwarded globally"

KlearGear defaulted, and federal judge Dee Benson entered a default judgment in Palmer's favor.

Non-disparagement clauses are the target of a pending California bill which would prohibit them in consumer contracts.

But franchise agreements are not deemed to be consumer contracts, and the majority of case law permits the pretextual termination of franchises. As a result it is not common for non-disparagement clauses to be found in franchise agreements, since they are not necessary so long as the franchisor maintains sufficient discretion to find a pretext on which to base termination.

However in the case of The Entrepreneur's Source, such a non-disparagement clause was upheld in TES Franchising LLC v Feldman 943 A.2d 406 (Conn. 2008). The surprising holding of that case was that a report to the governmental body regulating the franchisor was subject to the "non-disparagement" clause. That is very troubling case law which has not gotten the critical analysis it deserves.

CertaPro attorney Lane Fisher actually required as a condition of settlement not simply that a former franchisee not disparage CertaPro, but that the franchisee

say favorable things to the [CertaPro] franchise prospects

(CertaPro v. Rossi [E.D. Pa. 2004] Motion at page 5 clause 12)

In the case of the Quizno's franchisee discussion group (Toasted Subs Franchisee Association), the federal judge denied injunctive relief and made a finding of fact regarding the Quizno's general counsel:

Immediately upon learning of the publication on the TSFA website, general legal counsel for Quiznos, Pat Meyers, directed Quiznos's outside counsel to identify and terminate any franchisee affiliated with the TSFA board. According to Meyers' testimony at the preliminary injunction hearing, the posting was a "last straw" for the thorn-in-the-side that the TSFA, and Bray in particular, had become for Quiznos. While termination is a "last resort" for any franchiser, Meyers viewed the posting as an exploitative "direct attack" on the company, purporting to connect Quiznos to the "heinous" conduct of "killing someone," and completely "unacceptable." He made the decision on the spot that Quiznos would have no relationship with anyone affiliated with the TSFA.  Bray v. Qfa Royalties LLC, 486 F.Supp.2d 1237, 1239 (D. Colo., 2007)

In October 2013 the Stratus Building Solutions franchisor threatened to sue a former franchisee for violating a "non-disparagement" agreement after the franchisee allegedly called franchisor principals Dennis Jarrett & Pete Frese "scumbags", prompting Sean Kelly of UnhappyFranchisee to wonder whether the franchisor would risk a judicial determination as to the factual accuracy of the adjective.

It is often remarked that this web site should not permit anonymous comments.

Perhaps those of this viewpoint should consider the economic realities associated with public criticism of any company, and in particular criticism of your franchisor.

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UPDATE: KlearGear now claims that it is a French company (a subsidiary of "Descoteaux Boutiques") and will not abide by the US court order, despite a clause on its own website stating that venue lies in Michigan; company attorney Stephen Gutman is located in Franklin MI. The company says that the Palmer "debt" will be re-reported to the credit bureaus in the United States despite the court ruling. Inc. Magazine continues to list KlearGear as having 184 employees and located in Michigan--apparently Inc believes that the 184 employees all fit in the mail drop box. The Paris address for Descoteaux Boutiques appears to be a Regus Office, so it looks like another dead end.

Even as of today (May 22) the KlearGear website says:

This site is created and controlled by KlearGear.com., in the State of Michigan, USA, and it can be accessed from all 50 states and the District of Columbia, as well as from other countries around the world. Because the laws of these other places may be different from Michigan law, by accessing this Web site you and KlearGear agree that the laws of the State of Michigan will apply to all matters relating to use of this Web site, without regard to conflicts of laws principles. You and KlearGear also agree and submit to the exclusive personal jurisdiction and venue of the State and Federal Courts found in Kent County, Michigan, with respect to such matters. KlearGear makes no representation that materials on our Web site are appropriate or available for use in other locations, and accessing them from territories where their contents are illegal is prohibited. If you choose to access this Web site from other locations you do so on your own initiative and are responsible for compliance with any applicable local laws.

AttachmentSize
KlearGear COMPLAINT.pdf213.4 KB
KlearGear DEFAULT.pdf50.81 KB
California AB 2365 Non-Disparagement.pdf182.15 KB
Certapro v Rossi Motion re Settlement Agreement.pdf189.61 KB
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About Corbin Williston

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Corbin is the online pen name of a contracts aficionado who needs to get a better hobby.

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