Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
Nondisclosure Agreements (NDAs) have recently come under fire within the #MeToo debate. Opponents of the NDA argue that its sole (and negative) purpose is to silence victims of sexual harassment and allow those accused to continue to harass others. NDA proponents, however, offer a different perspective. An NDA is one of many mechanisms used to defend against allegations that are in dispute. It can provide a smooth transition to resolution rather than litigation, and can benefit both the alleged victim and the employer.
It is difficult to find a news story about #MeToo without seeing NDAs referenced. Be it a presidential debate, magazine article, or a #MeToo podcast, NDAs are a hot topic. Public opinion seems to be that NDAs should be abolished, or at least used far less often. And public and internal pressure from employees is proving effective. Just last week, a presidential candidate agreed to release former employees from NDAs included as part of the settlement of their employment-related lawsuits, and a titan in the publishing world has just promised publicly that it will not require NDAs as part of the settlement of matters involving harassment or discrimination. Other employers will likely follow as pressure from the public, and employees, continues to build.
The attacks on NDAs have expanded into legislation. Federal, state and local governments, including New York, have taken steps to make it more difficult for two parties to enter into an NDA. The Federal Tax Cuts and Jobs Act of 2017 provides that where an NDA is included in a settlement of sexual harassment claims, the employer may not treat any settlement payments as tax deductible, nor may either party deduct related attorneys’ fees or litigation expenses.1 There are other federal bills in the pipeline, such as the Be Heard Act, which would abolish NDAs as a pre-employment condition. States have also been active. As of 2018, New York law required that an NDA be the preference of the employee if it is to be included as part of a settlement agreement that resolves a sexual harassment allegation. New York law also now gives the employee a mandatory 21 days to consider the terms of the NDA and seven days to revoke it. The parties cannot waive these waiting periods. In 2019, New York expanded this law by applying these requirements to any NDA that resolves a workplace harassment claim (not just sexual harassment).2
New York is not alone. A growing number of other states have also passed laws that significantly restrict or prohibit employers’ use of NDAs when resolving claims of sexual harassment. California, Illinois, Maryland, Nevada, New Jersey, Oregon, Tennessee, Vermont, Virginia, and Washington have all enacted legislation that restrict an employer’s use of NDAs. California, Nevada, and New Jersey now prohibit NDAs altogether when resolving a sexual harassment claim.
These new laws do not restrict the right of the parties to agree to keep confidential the terms of a settlement agreement, the amount paid, or the fact that such an agreement exists. Rather, the laws target the parties’ agreement not to disclose the underlying harassment allegations.
It is nonetheless important to assess the utility of NDAs before the march to restrict and even abolish them continues, and we suggest that the #MeToo focus on NDAs may be misplaced. When employees threaten or initiate a civil lawsuit against their manager or employer, they are most often seeking resolution through monetary compensation. From the employer’s perspective, the employee’s allegations may be false, incomplete, half-truths, or simply claims that, even if true, are insufficient to state a legal claim. The employer may not accept a complaint of sexual harassment as true, without an investigation and due process afforded to the individual accused. The Second Circuit recently made those requirements clear, which we previously discussed here. There may also be a dispute between the employee and employer as to how much an employee has suffered in damages from the alleged sexually harassing act (a joke, a comment, a touch, or worse). Whether the claim is frivolous or has some merit, it most often benefits both parties to engage in settlement discussions to assess whether public civil litigation is necessary.
Until a jury rules, the facts are almost always in dispute, so when two parties resolve a dispute with settlement and an NDA, they are almost always agreeing to disagree as to the truth of the employee’s allegations and the merits of the employer’s defenses. Discoverable facts can be embarrassing and harmful to both parties. Therefore, it is often desirable for both parties to utilize an NDA so that neither side must publicly respond to the other’s version of events. After all, if there is no NDA, there is also no obligation for the employer to remain silent if attacked with allegations that it knows to be false or misleading.
Not only are NDAs useful to resolve a dispute, they are also only one clause among many within a settlement agreement. Settlement agreements typically include other clauses that are not currently in the spotlight, but that often benefit the employee while restricting the parties from telling their side of the story. These include non-disparagement and affirmative statement clauses, and neutral or even positive reference clauses. These are often included to get the matter settled irrespective of the employee’s work performance during employment, or the truth of the employee’s claims. Settlement agreements are complex contracts that benefit both parties. An NDA is only a small piece of this puzzle.
Employers that feel they cannot seek an NDA that preserves their good name will be less inclined to consider settlement in the first place or include clauses that benefit the employee as part of the resolution. Does more litigation of these kinds of cases work in employees’ favor? That is not so clear. In reality, sexual harassment cases litigated through trial in New York do not always favor plaintiffs. It is also unclear whether employees will feel more or less empowered to come forward to their employers with complaints of sexual harassment if the promise of public anonymity (i.e., a mutual NDA) is not available. Many employees, at least within the context of internal investigations, want their employers to keep their complaints confidential.
For employers and managers that may encounter a harassment claim in the future, it is important to assess, in almost every situation, whether resolution rather than litigation should be considered because of the cost of litigation if for no other reason. It is important to understand that, while legislation and public opinion may be restricting the use of NDAs, and internal pressure may be building to abandon the practice, it could be critical to retain the option to utilize NDAs, when, for example, disclosure of the underlying “facts” would mean public disclosure of inflammatory, bogus claims. NDAs are not necessarily meant to silence the truth. In most cases, “the truth” is in the eye of the beholder. That is why we have juries. NDAs allow both parties to avoid litigating their respective versions of the truth with a settlement agreement that puts that, and every other issue, behind them.
1 26 U.S.C. §162(q)
2 These requirements appears in N.Y. Gen. Oblig. Law § 5-336; N.Y.C.P.L.R. § 5003-b; New York AB 8421 (2019). Many lawyers who represent employees oppose the mandatory nature of these waiting periods for multiple, good reasons.