What Are Non-Disparagement Clauses?
Non-disparagement clauses are generally defined as contractual clauses which provide that one party will not make any negative statements or representations about the other party to the contract. As used here, the "other party" may include the employer, other employees, or even, in the case of non-disparagement provisions contained in a Collective Bargaining Agreement, the union itself.
Non-disparagement clauses are frequently used in post-employment settlement agreements, including severance agreements, to insure that the former employee does not speak to former coworkers or others about the company other than in a positive light, or doesn’t speak about the company negatively to anyone else. However, these clauses are not limited to the employment context. For example, sales representatives may be asked to sign non-disparagement agreements as part of a product distribution agreement. Or a non-disparagement agreement may be in effect between two general partners in a private equity fund.
In most cases, employers will include non-disparagement provisions in an employee’s Separation Agreement when the employer gives the employee some type of severance payment after his/her employment ends . Sometimes employers will even include a non-disparagement provision in the employee’s separation letter even when he or she is being terminated without severance payment. Finally, in the healthcare industry, non-disparagement clauses are sometimes used in the context of "shrink-wrapped" licensing agreements between pharmaceutical companies and providers. In this instance, the pharmaceutical company attaches its own contract to one of its products. In substance, these contracts are non-negotiable, but they require that the provider agree to limited licensing terms in order to use the product.
Notwithstanding the prevalence of non-disparagement clauses, some employment lawyers have been reluctant to enforce them. For example, a particularly infamous case from the 1990’s involved Professor Barry Minkow v. The California Employment Development Department, among others. There, the California Court of Appeals rejected enforcement of a non-disparagement clause because it held the clause was impermissibly overbroad.
Regardless, the non-disparagement provision in Employment Law renders it a vastly important tool for controlling the corporate image and managing public perception of an organization.
The Legal Basis of Non-Disparagement Clauses
Historically, non-disparagement clauses were not enforceable. However, over the years common law legal precedent has allowed courts to enforce non-disparagement clauses as effectively "contractual limitations on speech:" the courts have held that, absent a carve-out in the non-disparagement clause that allows for "disclosure," or "truthful factual reporting," an individual is permitted to agree to a contract that prohibits her from making disparaging remarks (for example, this is what the Honorable Judge Ponsor issued as the Court’s rationale for ordering enforceability of the non-disparagement clause in the April 7, 2011 release that Donald Sterling signed with the NBA: Donald Sterling et al v. National Basketball Association et al, Civil Action No. 10-2088 (D.P.R. April 7, 2011).).
In fact, the non-disparagement clause of the Settlement Agreement was a key component in the court’s provisional enforcement order. See Exhibit D, Sett. Agmt. at ¶ 10 ("Neither party hereto shall directly, or indirectly, in any manner or fashion, make any written statements, or expresses any opinions . . . regarding the other party hereto or the matters set forth herein to any media outlet . . . . . . . Nothing contained herein is intended to require the disclosure or waiver of any information that is protected under the First Amendment, Section 1040 of Title 18 of the United States Code, the California Uniform Trade Secrets Act, or similar Federal or State law or regulation.") (emphasis added).
Are Non-Disparagement Provisions Always Binding?
The enforceability of non-disparagement provisions is still an open question in many jurisdictions. Even though a substantial number of courts and judges have commented on the subject, most of the resulting case precedent is not binding as it comes from lower level state trial and appellate courts. Federal courts that have ruled on this issue are equally divided, and some jurisdictions have yet to weigh in on the enforceability of non-disparagement provisions.
Many commentators have noted the confusion generated by the inconsistent treatment of these clauses. Nevertheless, certain factors may be used to generally predict the enforceability of non-disparagement provisions. For example, some courts have concluded that non-disparagement provisions that are part of agreements between former employers and former employees are enforceable because they are part of a severance agreement intended to make the employee’s exit from her employment "on good terms". In contrast, some states routinely strike down these clauses if they are invoked against employees when they leave their jobs. Courts have also refused to enforce non-disparagement provisions that require broad disparaging remarks by an employee about an employer, relying upon an interpretation of anti-disparagement clauses that is essentially similar to how courts generally interpret waivers of class or collective action claims. Some courts have argued that any clause requiring employees to make such a broad effort could not be enforced even if it were permissible to waive a class action claim in the first place.
Other potential exceptions to the general enforceability of non-disparagement clauses arise as well, especially if they impose obligations not only on current employees but also on former employees. Some courts have held that clauses are impermissibly overbroad if they extend to pre-release comments about the company before approval of the release is given. But these courts have also upheld non-disparagement clauses in releases when their reach was limited to the time period after signing and which provided the employees initial job-related information. Other courts have suggested that legal opinions (i.e., legal charges filed with the EEOC or state anti-discrimination agency) should be excluded if they are protected by statute. Finally, certain courts have concluded that the fact that an employee retained the right to make truthful statements about the employer’s conduct negated any possible violation of public policy.
By contrast, one court has pointed out difficulties with the use of a non-disparagement provision in a severance agreement for a collective bargaining agreement (CBA). In that case, the appellate Court cited the relevant labor act provision, which requires collective bargaining over any disagreements, and concluded that the non-disparagement clause was unenforceable because it did not specifically limit its reach to statements made during a dispute grievance process.
Thus, courts may interpret and enforce non-disparagement clauses quite differently depending on the type of contract involved, or otherwise take into account a variety of factors including:
If a non-disparagement clause is unenforceable under state contract law, that does not necessarily mean that the protection is invalid. The Supreme Court of the United States has upheld the enforcement of non-disparagement provisions based on public policy grounds even if not enforceable under contract law. Other courts, however, have not issued binding authority as to the issue.
In light of the conflicting state and federal decisions as well as the confusing interpretation of non-disparagement clauses, employers are well advised to seek union-free states and make that preference clear in their employment agreements in order to maximize the chance that the provisions will be enforceable.
How Recent Developments in the Courts Have Affected Non-Disparagement Provisions
The last five or six years have seen a flurry of litigation over non-disparagement clauses, typically ones contained in severance agreements. In the aftermath, the National Labor Relations Board ("NLRB") has held that many allegedly restrictive provisions of severance agreements violate employees’ right to engage in protected, concerted activity. In so doing, the NLRB has aggressively asserted its position that no policies or agreements may be written in a way that would suggest that an employee’s activity is automatically unprotected or that it would be futile or useless.
These administrative decisions have been mirrored by decisions in federal courts as well. The Seventh Circuit Court of Appeals held in 2012 that a non-disparagement provision in a severance agreement violated the National Labor Relations Act ("NLRA") because it could be read as suggesting that any criticism of the employer would be unwelcome. The court there reasoned that the severance agreement would be chilling and would effectively nullify the statute’s protection if employees could interpret the non-disparagement provision to mean that the employer will have a "hostile reaction" to any applicants who criticize the company in the future.
Other circuit courts have similarly held that employers cannot control the dissemination of information even where such information disparages the employer. In Am. Express Fin. Corp. v. I.R.S., the CEO of a subsidiary of American Express stated in a deposition in a lawsuit that he "thought [the IRS audit] was arbitrary and capricious." The CEO, through his attorney, then issued a release by which he purportedly agreed that the statements were made "solely in [his] personal capacity as a private citizen, not as an officer or agent for" American Express. The court, however, found that the release did not protect American Express from a subsequent Internal Revenue Service examination. The court relied on an Internal Revenue Code provision that prohibits the disclosure of information gathered during an investigation unless the IRS releases that information. Because the parties’ agreement purported to allow the CEO "to do under the laws of any state what he could not do under the Internal Revenue Code," the court found that the release and the underlying deposition did not permit the release of the CEO’s testimony to the IRS.
Although the effect of these cases is limited locally to the states or regions covered by the applicable circuit court, the trend has been expanding nonetheless. As such, Massachusetts employers should be wary of the applicability of these cases.
Working For and Against Non-Disparagement Provisions for Employers and Employees
For employers, the key benefit of a non-disparagement clause is a predictable reputation. Employers who require such provisions, whether in agreements or separations, typically desire to control public perception of their employment practices and reputation. Litigation, particularly employment litigation, is expensive. Frequently there is no winner in the courtroom – both plaintiffs and defendants tend to lose. For employers, if the plaintiff wins, there’s a public record of the lawsuit. Separations sometimes become public, which may or may not be advantageous – better to disclose the reason for the separation than have the public read what is presumed to be the reason behind it. Additionally, with a non-disparagement clause, there is less risk of any potential negative publicity. It also provides employers with a measure of control over the actions of their employees, particularly if the provision can bind associates and corporate affiliates. Finally, an eight-figure settlement might go undisclosed by the parties and the court – but a breach of a non-disparagement provision would certainly be discovered and revealed.
Disadvantages to employers are few, but there are some. First, most employees will not speak disparagingly of their employer if they separate on positive terms, so there is little need for the provision. Second, the enforcement of a non-disparagement provision can come at a significant cost to the employer. A breach by an employee may be actionable, but is difficult to enforce and there are limited statutory or contractual penalties. Even if an employee has some stake left in the company, that does not always qualify as a contract, and can be difficult to enforce. Some states provide statutory remedies for non-disparagement claims, while others do not . Finally, no non-disparagement provision, however broadly written, will ever be effective in preventing an employee with a habitual need to speak disparagingly of an employer from telling others what he or she wants. All that remains is for the employer to mitigate any damage that an unhappy former employee might inflict.
For employees, the usefulness of a non-disparagement clause is as a negotiating point. Non-disparagement provisions are a common tool used to encourage a separation agreement without litigation. Employees who don’t need or want to litigate an issue may be willing to generally agree not to discuss the separation with others, or to keep the substance of the separation private. If the employer’s interests in non-disparagement are sufficiently high, the employee’s lack of ability or interest files in a non-disparagement provision should not be an impediment to the negotiation of the separation.
When non-disparagement is an obstacle, other techniques for its achievement or avoidance may be available. For example, non-disparagement clauses can be reciprocal. Another option is to include verbiage that limits the statement or motivation for the communication to certain persons (e.g., shareholders, directors, owners), with a defined heightened interest in reputation for the employer. A third option is to limit the damages available under a clause to liquidated damages, requiring compliance rather than seeking damages for lost reputation. In either case, however, unless the provision is limited to a specific statement or group of statements, it is generally advisable to include an exception under which the employer consents to the statements that are otherwise disparaging or to statements made in protected communications (e.g., internal complaints, collective bargaining). Finally, in some situations, deleting the non-disparagement clause altogether may be the most prudent option.
Negotiating and Drafting Non-Disparagement Provisions
When discussing non-disparagement clauses, employers should consider how best to implement them for the benefit of both parties. From the employee’s perspective, the scope of the clause should be reasonable. The employee may not compromise his/her right to discuss working conditions with other employees. Employees sometimes raise concerns that extend beyond a specific employer, and this should be permitted. One helpful tool to consider is the addition of language explaining the intent or scope of the clause. For example, one employer added the following language to its non-disparagement clause for its severance program: Employees have the right to discuss working conditions with other employees and to disclose their wages, benefits, or terms and conditions of employment in accordance with the National Labor Relations Act and the Settlement Agreement shall not be construed to prohibit such discussions.
Employers should consider the scope of the clause—whether it is applicable broadly to include all of the affiliates of the employer or to a narrower set of the employer’s employees, officers, etc. Employers should be mindful that the separation agreement may include other clauses that are limited to certain roles or levels. For instance, the confidentiality obligations in the separation agreement may limit disclosure by employees to immediate supervisors or members of the human resources department.
Employers may also wish to consider including "non-solicitation" language in their separation agreements. For example, employers may ask their former employees not to solicit co-workers to leave the company or to work for a competitor. This language, however, should be drafted very carefully to avoid being too broad. While the term solicitation is often well understood by parties, the term "competition" may be more controversial, if defined very broadly.
An additional consideration is whether to limit disclosure of the separation agreement as a whole, as opposed to the non-disparagement clause itself. When the full separation agreement cannot be disclosed, there could be questions about how that prohibition extends to statements about the agreement.
Alternatives to Non-Disparagement Provisions
Before turning to non-disparagement clauses, prudence suggests considering whether to instead rely on a more general covenant not to sue, which states that the employee will not pursue a lawsuit against the company in exchange for the company doing the same. Also, using a non-litigation clause that obligates an employee to engage in some form of alternative dispute resolution (like arbitration) also is worth considering. In addition, it can be helpful to address potential reputational harm with the use of a non-communication or non-contact clause that prohibits the employee from communicating with the company’s customers about any matter relating to her employment.
While these clauses may fall short in some respects from a non-disparagement clause – which addresses speech that may not even be covered by the legal system – for practical purposes, they are frequently sufficient . Besides, legal enforcers have been developing a begrudging tolerance for non-disparagement clauses that, as discussed above, can backfire when their reach is overbroad. But, clarity and proportionality can avoid or limit this problem by defining and limiting the scope of the clause or containing an exception that allows for particular statements outside the scope. In addition, if the employee reveals trade secrets or confidential information, the company’s legal options are much broader. So when non-disparagement clauses are so broad that they have a legitimate chill effect on protected activity, their validity is under attack. It is advisable to consider alternatives that may be less useful in practice but avoid the risk that a court will invalidate the non-disparagement clause altogether.
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