States are reining in NDA abuse

With the avalanche of new sexual harassment allegations and lawsuits has come an increased focus on the confidentiality provisions that frequently accompany the settlement of such claims. Several state legislatures are looking to restrict or even outlaw these provisions, which are generally known as nondisclosure agreements, or NDAs. While prohibiting NDAs may seem like a good idea in theory, there are definite drawbacks not only for the parties involved in such litigation but also to the public at large.

Workplace NDAs are most commonly found in two different forms: (1) confidentiality agreements that are signed at the beginning of an employment or contractual relationship that prevent the signatory from disclosing private, confidential or potentially embarrassing information that might become known about the other party; and (2) settlement agreements that are signed after a dispute has arisen between the parties, by which one party is seeking to buy the silence of -- and also get a release from -- the other usually in connection with an existing or threatened legal claim.

While a broad, pre-dispute confidentiality agreement might run afoul of the National Labor Relations Act because it arguably interferes with the right of employees to engage in "concerted activities" for the purpose of "mutual aid or protection," it is the second type of NDA referenced above that has become the focus of so much attention over the past two months. Critics of these agreements argue that such provisions protect and may even enable sexual predators who -- once they have bought the silence of their latest victim -- are "free to do it again."

California already restricts NDAs in the context of a settlement agreement. For more than a decade, Section 1002 of the California Code of Civil Procedure has prohibited a settlement agreement "in any civil action the factual foundation for which establishes a cause of action for civil damages for an act that may be prosecuted as a felony sex offense."

Section 1002 was expanded as of Jan. 1, 2017, by Assembly Bill 1682 to bar settlement provisions that prevent the disclosure of factual information related to an act of childhood sexual abuse, sexual exploitation of a minor and sexual assault against an elder or dependent adult. AB 1682 expressly voids as a matter of law any NDA that violates the statute and mandates possible professional discipline by the State Bar against any attorney who either demands such a provision or advises a client to sign one.

Importantly, Section 1002 only applies to settlement agreements entered into in a "civil action," which means that its restrictions to do not apply to settlement agreements that predate the filing of a lawsuit. That means that a pre-litigation NDA presumably may restrict or prevent the disclosure of the underlying facts -- even if they involve one of the criminal acts specifically identified in the statute.

Building on the recent expansion of Section 1002, State Sen. Connie M. Leyva (D-Chino) has announced that when the California State Senate reconvenes in early January, she will introduce legislation to "ban secret settlements (confidentiality provisions in settlement agreements) in sexual assault, sexual harassment and sex discrimination cases."

There is precedent in California for invalidating a confidentiality clause in a settlement agreement where such a provision violates public policy. See, e.g., Cariveau v. Halferty, 83 Cal. App. 4th 126, 137 (2000) (settlement agreement that prohibited former customer from disclosing securities salesperson's misconduct to regulatory authorities was invalid and contrary to public policy).

Other states are following California's example in moving to curtail litigants' efforts to buy silence in the form of an NDA. For example, Pennsylvania State Sen. Judy Schwank recently introduced Senate Bill 999 that would prohibit agreements that prevent the disclosure of "the name of any person suspected of sexual misconduct ... [or that] suppress information relevant to an investigation into a claim of sexual misconduct." That bill also would render unenforceable an agreement to "waive a substantive or procedural right or remedy of any person relating to a claim of sexual misconduct."

Similarly, New York State Sen. Brad Hoylman has introduced Senate Bill S6382A, titled the "Non-Waivable Employee Rights Act," that would render "void and unenforceable" any provision in a contract that waives "any substantive or procedural right or remedy relating to a claim of discrimination, non-payment of wages or benefits, retaliation, harassment or violation of public policy in employment ... with respect to any such claim arising after the waiver is made."

More than a dozen other states, including Florida, Massachusetts, Virginia, Georgia and Texas, have enacted so-called "sunshine-in-litigation" laws that prohibit agreements not to disclose information involving a "public hazard." Harassment victims in those states could assert that illegal harassment in the workplace (particularly if it is ongoing and egregious predatory behavior) constitutes a "public hazard that has caused and is likely to cause injury" to others and for that reason a confidentiality provision should not prevent public disclosure.

The way the existing system has worked for time immemorial is that the lawyer for a prospective plaintiff contacts the prospective defendant, gives the alleged harasser a glimpse of the facts and the corroboration for same and then makes a demand to be paid a sum of money in exchange for not publicly filing a lawsuit. A private resolution of such claims, which inevitably includes an NDA, can be good for everyone -- the harasser, the employer and even the alleged victim who will never have to testify in court or be publicly cross-examined about the matter.

However, a world without NDAs will instantly become a world without pretrial settlements, which means that far more if not most of these cases will go to trial. Without the promise of containing the adverse publicity, most defendants will see very little value to settling such claims and will come to the inevitable conclusion that they will pay "millions for defense, but not one cent for tribute."

If NDAs go away, courts will be clogged with claims that could and should have been resolved privately, while the parties gird themselves for house-to-house combat as these cases make their way to trial. Nobody wins in that scenario.