Non-Disparagement Clauses in Business-to-Business Agreements

With the rise of social media, a good business reputation has become essential to retaining customer loyalty and market share. As just one example, Macy’s recently pulled a line of dishes because one person tweeted that they found the words and art on the dishes to be offensive body-size shaming. See news report here. The single tweet was retweeted thousands of times and Macy’s decided it was better to pull the product than face a potentially angry backlash.

For these and other reasons, non-disparagement clauses in business-to-business contracts have become more and more common. Where a contract is subject to back-and-forth negotiation, non-disparagement clauses are enforceable and important. These clauses are typical in business purchase/merger agreements, shareholder agreements, commercial and office leases and, increasingly, in vendor and supplier contracts. If you are thinking about including non-disparagement language in your business contracts or if you are being asked to sign an agreement with non-disparagement language, make sure you understand what you are signing and seek the advice and counsel of an experienced San Diego corporate attorney.

A sample mutual business-to-business non-disparagement clause might read something like this:

“Mutual Non-Disparagement. Each party to this Agreement, agrees that neither it nor any of its respective agents, officers, key employees or directors, will in any way publicly disparage, call into disrepute, defame, slander or otherwise criticize the other Parties or any of their products or services, in any manner that would damage the business or reputation or otherwise degrade the other party’s reputation of such other parties, their products or services in the business or the community or in the [relevant] industry.”

The purpose of a non-disparagement clause is to protect a business’ reputation and the reputation and goodwill related to a product or service. Branding and creating consumer loyalty is expensive, and non-disparagement clauses are an important mechanism for protecting that investment in branding and advertising. There are many variations that can be negotiated with these types of clauses including carve-outs (exceptions) for reporting criminal behavior, violations of the law, statements made in legitimate court filings, or testimony/information provided pursuant to a governmental investigation or legally-issued subpoena. Time-limits are also often negotiated. Another key area of negotiation are the default provisions in the event that one of the parties breaches its non-disparagement obligations. As can be seen, there are a host of practical and legal issues related to these types of clauses. But protecting your business’s reputation and the goodwill associated with your products and services is worth the time and effort.

As noted, in business-to-business agreements that are subject to negotiation or potential negotiation, California courts will enforce non-disparagement clauses. Under California law, disparagement is a form of business liability for which you can be sued. Generally, a disparaging statement is disparaging if it is understood to cast doubt upon the quality of another’s land, goods, services, business character, or intangible things and if the person making the statement intends the statement to cast doubt on the good reputation/character of the target. See Hartford Casualty Ins. Co. v. Swift Distribution, Inc., 326 P. 3d 253 (Cal. Supreme Court 2014).

Contact San Diego Corporate Law

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard focuses his practice on business law, transactional, and corporate matters and proudly serves business owners and residents in San Diego and in the surrounding communities. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard. Like us on Facebook.

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