Your corporate client is terminating the employment of an individual it thinks has done an awful job, with whom it shares completely differing views about how to run a business, and whom it never wants to darken its doorstep again. Whether because the employee has hired a lawyer and threatened legal action, or out of the goodness of its heart, your client is prepared to provide a severance payment in exchange for a release—but as a condition of the deal, the employee must agree never to say a bad word about the Company, its owners, shareholders, family, customers, business partners, and so forth.
And, your client insists, if she violates that agreement, she needs to repay all the money forked over in settlement, and a penalty to boot.
Opposing counsel agrees to the deal—so long as the clauses are mutual. The Company must agree that no employees will say a bad word about the employee. Also, opposing counsel wants a prevailing party’s attorney fees provision, so that when his client sues the company for violating the agreement, she can recover her fees.
You try to explain to opposing counsel that your client can’t possibly agree to the same provision—how can the company muzzle all these people? How does it know what people will say about her at some after-hours team-building drink-fest?
Well then, opposing counsel says, I will narrow the list only to those who worked with her, and to senior management, and I will give you a list of a dozen people or so who need to be included.
Do we like this deal? Are we glad that we started this conversation? Does your client really care what the former employee says? What kind of damage can she really do, and indeed what kind of damage does she want to do, when her own reputation is on the line?
Understandably, clients don’t want to read about the case they just settled when they browse their favorite social media sites. On the other hand, sometimes, non-disparagement clauses may not be worth the bother. The conversation may empower the former employee, making her feel that the Company has something to worry about, and causing her to think she has gained leverage in negotiating a settlement.
But assuming that the parties are able to reach agreement some manner of agreement—will it be enforceable? Are non-disparagement agreements worth the paper they’re written on? Are they even effective as in terrorem clauses designed to cause the parties to think twice before they badmouth the other?
President Trump certainly seems to like them. He recently threatened to sue Steve Bannon after Bannon was quoted in Michael Wolfe’s bestseller “Fire and Fury” as saying that Donald Trump Jr.’s Trump Tower meeting with a Russian lawyer and others was “treasonous” and “unpatriotic.” Within days, Trump sent a cease-and-desist letter.
The result? The publisher advanced the book’s publication date, and sales went through the roof.
The analogy may be imperfect, but courts considering these claims in the employment context have reached mixed results. In Ohio Educ. Ass’n v. Lopez, No. 09AP-1165 (Ohio App. Oct. 19, 2010), an employee called his former employer’s Executive Director a “slime bag.” The court found that this comment did not breach a nondisparagement agreement, characterizing the comment as a “trifling figure of speech.”
Sometimes these agreements result in damages that may not be reasonably anticipated. In Barr v. Liddle & Robinson, 2016 NY Slip Op 00744 (1st Dep’t 2016), the court held that an employee suing his former employer stated a claim for legal malpractice against his former lawyers when, in violation of a nondisparagement agreement, they gave an interview to the Wall Street Journal, which allegedly resulted in his losing his contractual right to certain deferred compensation.
On the other hand, courts often enforce these provisions. In one well-reasoned and often-cited case, Smelkinson Sysco v. Harrell, 162 Md. App. 437 (2005), the court enforced a $185,000 liquidated damages provision of a non-disparagement agreement as part of the settlement of discrimination and labor law claims. The appeals court reversed the trial court’s ruling that this constituted an unlawful penalty, and found the agreement enforceable.
But there have been other recent and significant challenges to non-disparagement agreements.
First, courts do not like these as part of court-approved FLSA settlements unless they are narrowly drafted to prohibit only defamatory statements by the parties, and not truthful statements about the employees’ experience litigating their case. See, e.g., Lopez v. Poko-St. Ann L.P., 175 F. Supp. 3d 340 (S.D.N.Y. 2016). Moreover, confidentiality provisions that would prevent employees from disclosing the underlying facts leading up to, or the existence or substance of a settlement, regardless of their truth or falsity, are “contrary to well-established public policy.” Kang Ming Sun v. Guang Jun Li, 2015 WL 6125710, at *1 (S.D.N.Y. Sept. 15, 2015).
Prohibiting an FLSA plaintiff from speaking truthfully about his experiences, his claims, and the resolution of his lawsuit is “in strong tension with the remedial purposes of the FLSA,” Lopez v. Nights of Cabiria, LLC, 96 F.Supp.3d 170, 177 (S.D.N.Y.2015), and undermines the public’s “right to know about the terms of such judicially approved settlements.” Armenta v. Dirty Bird Grp., 2014 WL 3344287, at *2 (S.D.N.Y. June 27, 2014).
A related issue concerns the confidentiality of settlement agreements, which has been hotly contested in recent rulings.
As a direct result of the #MeToo movement, the recently enacted Tax Cut and Jobs Act amended the Internal Revenue Code, §162, in a way that denies a business expense deduction for income tax purposes for payments “related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or … attorney’s fees related to such a settlement or payment.”
Of course, a nondisclosure agreement is not necessarily synonymous with a non-disparagement agreement, and these are not prohibited; but where does disparagement cross the line into disclosure? And will an employer’s effort to prevent negative statements about the employer be construed as an effort to keep the lawsuit secret, thus potentially losing the deduction?
In 2016, the SEC announced that it considers illegal any employer-imposed limitation on employees’ ability to disclose confidential trade secret information to the SEC, if the employee wants to make disclosure in pursuit of whistleblower claims, and in fact that employers must affirmatively advise employees of their right to do so.
In In re BlueLinx Holdings, SEC File No. 3-17371 (Release No. 78528/Aug. 10, 2016), the SEC the severance agreement contained restrictions on use of “confidential information” which required in each instance that before disclosing such information outside the company, the employee needed to seek guidance and provide notice to the company’s legal department.
The SEC held this violated SEC Rule SEC Rule 21F-1 (a), which provides: “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications.”
The SEC required the company to notify employees of their right to provide company documents to the SEC or any other government entity without notice to the Company. The SEC also imposed a civil penalty of $265,000 and ordered BlueLinx to notify employees who signed severance agreements within last five years of their right to file whistleblower claims with the SEC and to accept SEC whistleblower awards.
OSHA and the EEOC have also gotten into the act. In 2014, the EEOC sued CVS Pharmacy, challenging as discriminatory a settlement agreement that, among other things, restricted the employee from improperly using or disclosing confidential information belonging to CVS and making “any statements that disparage the business or reputation” of CVS (but clarified that the Agreement did not prohibit the employee from “making truthful statements or disclosures that are required by applicable law, regulation or legal process” or “requesting or receiving confidential legal advice.)” EEOC v. CVS Pharmacy, 809 F.3d 335 (7th Cir. 2015).
The challenge was dismissed principally on technical grounds—the EEOC never sought to conciliate the matter before filing suit—but the EEOC’s disdain for these agreements is plain.
In August 2016, the U.S. Department of Labor Occupational Safety and Health Administration (OSHA) issued guidelines on settlement agreements in whistleblower cases that seek to bar “gag” provisions that prohibit, restrict or discourage participation in protected activity, e.g., broad confidentiality or non-disparagement clauses; broad liquidated damage clauses; a requirement that an employee notify the employer before filing a government complaint; and any disclaimer of knowledge that the employer violated the law. See Memorandum for Regional Administrators, “New policy guidelines for approving settlement agreements in whistleblower cases” (Aug. 23, 2016).
Non-disparagement agreements are a tempting remedy. Clients want them. They are paying to put a matter behind them. But these agreements may be perceived as an effort to unfairly muzzle employees, so they must be written with care, and in the proper context.
Philip M. Berkowitz is a shareholder of Littler Mendelson and co-chair of the firm’s U.S. international employment law and financial services practices.