Unfair or Coercive Business Contract Terms

This is an incomplete and preliminary list of potentially coercive or unfair contract terms businesses face as vendors, suppliers, or distributors to incumbent businesses. These terms can also affect musicians, artists, and creatives, and are common across diverse industries — from tech to agriculture, retail to manufacturing, and many others.

Some of these contract provisions are currently legal but, when mandated in contracts by larger businesses with more market power, they can be used to intimidate smaller businesses and entrench the dominance of the incumbent business. Other tactics we’ve listed below may be illegal and actionable under state or federal consumer protection or antitrust laws.

If you — as an entrepreneur or business owner — have dealt with these or other unfair contract terms, please be in touch with us at: [email protected].

Examples of contract terms which warrant further FTC investigation, include:

Tactics used to silence:

  • Nondisclosure agreements (NDAs) which may have indefinite or vague time periods as well as overly broad definitions of intellectual property or confidential company information.
    • Price nondisclosure, sometimes known as a gag or suppression order — when a private entity, like an employer or trading partner, prevents an individual from disclosing prices.
  • Non-disparagement clauses which have unreasonable time periods and/or which lack exceptions (carve-outs) for reporting illegal and/or criminal behavior, or to provide testimony and information for a government investigation or legally issued subpoena.

Tactics to limit your legal options or rights:

  • Mandatory arbitration and/or class action waiver clauses which limit the legal avenues available to a business in the event of a breach of contract or otherwise illegal conduct by their counter-party.
  • Waiver of statutory rights — statutory rights are an individual’s legal rights that are provided by state or federal statute. For example, all businesses have statutory rights under the Uniform Commercial Code (“U.C.C.”) (which has been adopted in some form by all states) governing sales and commercial transactions. Some attempts to limit your rights provided by the U.C.C., such as minimum product quality and warranty standards, are illegal because these statutory rights cannot be waived by contract.
  • Liability disclaimers — this includes contractual clauses excluding or limiting liability for substantial damages (personal injury or death), potentially hazardous or dangerous activities, or financial harm resulting from either party’s negligence. Similarly, indemnity agreements, which require one party to indemnify another for its loses, are often used to unfairly shift liability towards small business.

Tactics to impede fair business dealings, equal opportunity, and free markets

  • Exclusionary contracts — contracts entered by a company with monopoly power that tends to prevent fair competition from competitors. These agreements can come in the following forms but violate antitrust laws when done by a company to maintain a monopoly position. Types of contracts that may be illegal exclusionary contracts include:
    • Exclusive supply agreements — a supplier agrees to exclusively sell goods to one purchaser.
    • Exclusive purchaser agreements — a dealer agrees to only purchase goods from one supplier. These are sometimes called sole source, sole supplier, or sole purchaser contracts, or requirements contracts.
    • Loyalty discounts — discounts given if a business purchases a certain percentage of goods or services from the seller.
    • Slotting allowances — a supplier pays a fee for preferred or exclusive shelf space.
  • Tying — when a business is forced to purchase some product or service to access another product or service. Tying is illegal when it is used to leverage an existing monopoly to gain market share in a secondary market.
  • Most Favored Supplier/Purchaser/Entity Clauses — these clauses often guarantee the supplier/purchaser with the most market power always gets the best deal and therefore exacerbates existing differences in market power.

Tactics to restrict your freedom to set prices

  • No price competition clauses — often seen with restaurants forced to keep prices the same on all delivery apps and with in-person dining, which prevents restaurants from using elastic pricing and having autonomy to set their own prices.
  • Vertical price maintenance restrictions — used to control the prices charged by downstream suppliers.

Tactics to extract profits or information

  • Perpetual claims on intellectual property and/or patents — wide-sweeping definitions of intellectual property which include registered and unregistered IP and/or the rights to collect royalties, products, and proceeds in perpetuity from the supplier’s intellectual property or creative property (e.g., music or writing).
  • Mandatory disclosure of competitive business information — requirements to disclose who a business’ customers are, what percentage of business they do with each customer, etc. Can often happen during due diligence processes while fundraising from a corporate venture capital fund.

Tactics to limit your entrepreneurial options

  • Non-compete clauses — usually found in employment contracts, but non-competes can prevent someone from starting a business for a period of time after leaving their company or practice, therefore restricting entrepreneurship.

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