How to navigate the complexities of non-disparagement clauses

When seeking to contractually resolve contentious disputes between adverse parties, perhaps no provision is more fraught or less understood than the non-disparagement clause ("NDC"). The case law surrounding these clauses is often deceptively murky, frequently leading to litigants ceding unnecessary ground in disputes over their interpretation and enforcement. It, therefore, behooves attorneys whose work touches this sensitive area to familiarize themselves with its most common perils.

NDCs, like all contract clauses, are interpreted in the context of the agreements containing them. Olson v. Doe, 12 Cal. 5th 669, 680 (2022). When used in resolving an employment dispute, the drafting attorney must carefully evaluate the scope of the NDC, as overbroad language opens up arguments that the NDC functions as an illegal non-compete provision. See, e.g., Parsable, Inc. v. Landreth, No. 22-cv-01741-CRB, 2022 U.S. Dist. LEXIS 241809, at *11-14 (N.D. Cal. Aug. 5, 2022) (prohibition of "negative" comments argued to make it "difficult if not impossible to compete without the ability to comment on competitive offerings and how one's product is superior or better suited to the client's needs.").

Non-competes are far from the only context in which NDCs are proscribed. In the wake of the #MeToo movement, many jurisdictions are seeking to significantly curb the utility of NDCs in any agreements intended to resolve claims of discrimination, harassment, or retaliation. New York, for example, signed S4516 into law on November 17, 2023, which provides that "no release of any claim, the factual foundation for which involves unlawful discrimination, including discriminatory harassment, or retaliation," shall be enforceable if "the agreement resolving such claim" includes a liquidated damages or forfeiture provision in connection with violating an NDC. For its part, California was ahead of the game, having passed Senate Bill 1300 back in 2018 to outlaw the imposition of NDCs or any other restrictions by employers on discussing unlawful acts that occur in the workplace.

Assuming an NDC is permissible, the next step is to ensure that language intended to be comprehensive does not have the unintentional opposite effect of circumscribing the prohibited forms of disparagement. Many attorneys are inclined to specify various categories of disparaging remarks in NDCs followed by a broad catch-all clause without realizing that under the doctrine of ejusdem generis, the catch-all clause can only cover remarks "of the same kind" as the preceding specified categories. See Nygard, Inc. v. Uusi-Kerttula, 159 Cal. App. 4th 1027, 1045 (2008).

Because the harm flowing from a breach of an NDC is "likely to be difficult to ascertain or prove at the time of the agreement," the remedy of choice is generally liquidated damages. Piñon v. Bank of Am., NA (In re Late Fee & Over-Limit Fee Litig.), 741 F.3d 1022, 1026 (9th Cir. 2014). However, as Judge Abraham Koh recently explained in the pages of the Daily Journal, such clauses may subject settlement agreements to heightened scrutiny, "and a poorly drafted liquidated damages provision could, in fact, invalidate the parties' entire agreement." See Abraham Koh, "Liquidated Damages Could Undo a Settlement Agreement," Daily Journal (Nov. 30, 2023).

Where liquidated damages are not outright barred, care must be taken to fix the amount payable at a number that bears a reasonable relationship to the harm anticipated by the breach (rather than merely intended to have an in terrorem effect). See Red & White Distribution, LLC v. Osteroid Enters., LLC, 38 Cal. App. 5th 582, 588 (2019). However, the inherently "squishy" nature of reputational damages generally affords some latitude in this process. See, e.g., Pitt v. Byrnes, No. 21STCV06661, 2021 Cal. Super. LEXIS 76790, *6-7 (Aug. 9, 2021) (finding "a liquidated damages provision of $​5,000 per violation" of an NDC "is not so divorced from the actual damages as to be unenforceable as a matter of law" given "reputational damages and damages for lost economic opportunities are extremely difficult to quantify"); see also Loggervale v. Holland, No. C 20-04679 WHA, 2023 U.S. Dist. LEXIS 102190, at *90 (N.D. Cal. June 12, 2023) ("There is no fixed standard for emotional distress, indignity, shame, or humiliation.").

If a party refuses to stipulate to liquidated damages, litigants are often inclined to cave on the prospect of recovering for mental suffering or injury to reputation arising from a breach of contract due to a general body of law rejecting such measures. See, e.g., Strategic Execs. Agency v. Health, No. CV 18-10459-AB (ADSx), 2020 U.S. Dist. LEXIS 137614, at *29 (C.D. Cal. May 29, 2020); Sun Grp. U.S.A. Harmony City v. CRRC Corp., No. 17-cv-02191-SK, 2018 U.S. Dist. LEXIS 236278, at *18 n.2 (N.D. Cal. July 9, 2018). However, because an NDC "relate[s] to matters which concern directly the comfort, happiness, or personal welfare of one of the parties" and serves "directly to affect or move the affection, self-esteem, or tender feelings of that party," it can be argued that damages for mental suffering proximately caused by an NDC's breach lie outside the general rule. Windeler v. Scheers Jewelers, 8 Cal. App. 3d 844, 851 (1970) (quoting Westervelt v. McCullough, 68 Cal. App. 198, 208-09 (1924)); see Smith v. NBC Universal, 524 F. Supp. 2d 315, 327 (S.D.N.Y. 2007).

Some litigants are reluctant to seek emotional or mental distress damages because they do not wish to subject themselves to an independent medical examination ("IME"), which defendants routinely seek to challenge the existence or extent of a plaintiff's claimed non-economic injuries. However, "Courts do not normally order independent medical examinations for claims seeking generic emotional distress damages." J.M. v. Cty. of Stanislaus, No. 1:18-cv-01034-LJO-SAB, 2019 U.S. Dist. LEXIS 216854, at *37 (E.D. Cal. Dec. 17, 2019). Additionally, a plaintiff only puts their medical condition "in controversy" (thus potentially warranting an IME) where they claim the mental injury resulting from the defendant's conduct is ongoing. See, e.g., Vinson v. Sup. Ct. (Peralta Comm. College Dist.), 43 Cal. 3d 833, 839 (1987); Doyle v. Sup. Ct., 50 Cal. App. 4th 1878, 1887 (1996). Placing the injury entirely in the past thereby cuts off a defendant's right to an IME.

As the foregoing demonstrates, NDCs are a powerful, evolving, and frequently misunderstood aspect of contract law. Although NDCs are currently under a magnifying glass due to their historical potential for abuse, they remain an important tool for facilitating dispute resolution across various matters, and practitioners must remain capable of navigating their complexities from the drafting table onward.