Understanding Non-Disparagement Clauses: A Comprehensive Guide
What Is a Non-Disparagement Clause?
A non-disparagement agreement is a contractual provision by which parties agree that they will not malign, speak ill of, or otherwise disparage one another. It has applicability in many contexts, from employee severance packages to separation agreements in a divorce. Non-disparagement agreements appear to be on the rise, because employers are increasingly realizing that the power of their organizations and brand relies on more than just contracts and products delivered. "Reputation" is at least partially the sum of an employer’s practices, vision, and delivery of promises made daily, and its systemic impact. It is a significant part of a business’s value proposition in attracting and retaining customers and employees, and therefore plays a role in the business’s overall value .
Non-disparagement agreements are strongest when used in the context of a general release of claims. Those tend to be longer and more detailed, especially in terms of enumerating what could amount to disparagement. But non-disparagement provisions may also be used in otherwise shorter agreements. Non-disparagement agreements can have a global reach, applying to individuals as well as the company itself, and to its officers, directors, and employees. Such provisions may be mutual, and may also limit statements made to third parties, such as news organizations, industry analysts, association officers, or government investigators.
Legal Background of Non-Disparement Agreements
Employers typically rely on non-disparagement agreements in employment offer letters or service agreements with management. These agreements may also appear in broader contracts, such as separation agreements. When a court is called upon to adjudicate a dispute concerning whether a party has breached such an agreement, it becomes necessary to analyse the common law jurisprudence relating to covenants that are in restraint of trade, and determine whether the non-disparagement obligation is offensive or necessary to protect a legitimate business interest. A non-disparagement obligation is not always enforceable. For example, a recent decision of the Ontario Superior Court of Justice highlighted a situation where the court found that the non-disparagement obligation was unenforceable because the other side (in this case the employer) had breached a warranty of the agreement and was reneging on its agreement to pay a post-employment benefit. In a different case, the British Columbia Supreme Court awarded punitive damages against a former employer who disparaged its former employee on three occasions to third parties.
Non-disparagement undertakings must be reasonable, both temporally and geographically speaking. They are designed to allow contracting parties to end a relationship without damaging the other party’s right to continue doing business in the future. In the absence of such a term, criticisms that damage a party’s reputation are permissible. Non-disparagement agreements are a branch of the more familiar non-competition agreement. The parlance employed by the courts in Canada uses terminology like the "competitive effect" of the disparaging statements must be kept to a minimum. The plain meaning of this passage suggests the court determines how much criticism or comment can be made before it harms the other party’s business.
Common Usage in Business Contracts
Non-disparagement provisions can be found in many different types of business agreements. The parties involved in a Purchase and Sale Agreement (for goodwill and assets) or a Merger Agreement, for example, are likely to include non-disparagement provisions in these contracts. These provisions help all parties involved from disparaging the selling shareholders and the business that is being sold. Similarly, in Partnership Agreements, members and partners may agree not to disparage one another. Such provisions are often found in Revocable Trust Agreements as well.
In analyzing the provision, in addition to its language, it is important to read it in the context of the entire agreement and in the context of the business relationship. For example, if the Agreement involves the sale of shares in a company, Section 4(d)(ii) of the Shareholders’ Agreement of Tesla Motors, Inc. (effective as of April 15, 2008) provides that the selling shareholder agrees not to (A) intentionally take any action to cause the Company to breach or violate any of the terms of the Stock Purchase Agreement or that Agreement, or (B) breach any applicable provision of its Independent Investor Rights Agreement or Voting Agreement (if any). Here, the non-disparagement provision must be read in context with the entire agreement and the plan of the transaction.
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Impact on Employees and Employers
The impact of a non-disparagement agreement can be largely beneficial for both the employer and the employee. By entering into a mutual contract of good faith with one another, there is the potential to create goodwill between the parties and leave the working relationship on a cordial note.
From the employee’s side, a mutual non-disparagement agreement can be extremely advantageous. In cases where an employee is being fired or leaving the company under less than amicable terms, it may be hard for them to seek out new employment opportunities following that separation. If information about the circumstances surrounding their separation were to get out, it could sit negatively both with potential employers as well as with social groups. A non-disparagement agreement may help to provide the employee with some confidence that this will not happen, and that they will be able to re-enter the job market without unnecessary stigma.
For the employer, a mutual non-disparagement agreement can also be very beneficial. It allows the company to move on from the employee in a more harmonious fashion. This can be useful in cases where the departure was a point of contention, and perhaps the employer is worried that the employee will speak negatively about the company. However, instead of removing their posts from social media, they may sign a non-disparagement clause so that they cannot disparage the company on public forums like Facebook or other sites.
Enforceability and Legal Challenges
The enforceability of non-disparagement agreements can depend on jurisdiction and context. In some cases, courts are willing to limit the rights of employees and former employees under state "little else" laws and the National Labor Relations Act. In other cases, courts have refused to do so. Some courts have recognized that even voluntarily entered into non-disparagement agreements between parties may not survive a bankruptcy discharge. Other courts have ordered specific performance of non-disparagement agreements in connection with receiverships. Whether these are appropriate forms of equitable relief will depend on the particular circumstances of each case and the remedies sought by the parties.
Many legal challenges to non-disparagement and disparagement clauses involve the consideration provided to (and received by) the parties in return for the agreement. In particular , in the employment context, whether "cause" existed for termination may turn on the existence of improper or illegitimate motives. Courts have discretion in deciding whether a payment to the employee was actually earned or was a payment made in lieu of notice or consideration for a non-disparagement provision. Exculpatory clauses, which are unenforceable in the insurance context where they are meant to protect the wrongdoer, are generally enforceable in the employment context.
In the commercial context, although courts are generally hesitant to disturb a contract embodying the freely negotiated agreement of commercial parties, attempts to enforce non-disparagement clauses against former employees of a company have been challenged and defeated where the contract was patently unreasonable and contrary to public interest.
Negotiating Non-Disparagenment Contract Clauses
Careful negotiation of the types of non-disparagement clauses being entered into can eliminate or reduce the likelihood of future disputes. When a disputed matter has settled, there is typically a phase where the parties negotiate the terms of the settlement agreement. For most settlements and other forms of legal agreements, it is common for one party to desire broad non-disparagement terms while the other party only desires more limited terms. A party often views a broad non-disparagement clause as a means to prevent the other party from speaking ill of its product, service, brand, company, owner, executives, management, employees, officers, agents, shareholders, members, subsidiaries, affiliates, parent companies or related parties.
Looking out for their own interests, the party seeking a more limited non-disparagement provision generally attempts to keep it as narrow as possible. The negotiating party will seek to exclude from the provision a broad range of individuals and entities. A limited non-disparagement provision may attempt to cover only specific individuals and entities. Below is an example of a narrow formulation for a non-disparagement provision:
"You agree not to disparage [Names of Companies], their products, services, personnel, officers, directors, shareholders, owners, agents, owners, members, agents, subsidiaries, and affiliated companies."
As noted above, typically the party seeking the more limited provision will seek to avoid non-disparagement by individuals who do not fall into the aforementioned broad category. A party may seek to specifically exclude non-disparagement by (1) vendors and suppliers, (2) third parties, (3) experts and consultants used in any litigation, and (4) other subgroups. For instance, the party may propose the following non-disparagement provision in lieu of the more broad formulation:
"It is understood that [Parties] are the affiliates of [the parties] and [Names of Companies] do not agree to non-disparagement by any of their affiliates."
Generally, the negotiating and drafting of a non-disparagement clause involves compromise. As such, a typical end product may vary to some degree from the clauses provided above. While the terms may be different, the general idea is one of the agreements reaching a compromise on the interests of the respective parties. The goal is to allow the parties to feel satisfied with the terms of the non-disparagement provision, while being fair and reasonable to all concerned.
Alternatives and Considerations
There are alternatives to non-disparagement agreements. For example, a party may agree not to disclose our confidential and company information. Similarly, a party could agree to speak positively about the matter at issue, even if the written agreement does not go so far as to prohibit any negative statement. Parties could also agree to publicly report on the status of their relationship or whether the business or litigation was proceeding amicably, even if the parties may have vastly different versions of the facts behind any future news stories.
Parties should consider the subject matter of the non-disparagement clause and other agreements. To ensure clarity, a non-disparagement obligation should mirror the language of other provisions. Similarly, if a party is subject to a non-disparagement obligation during a transition period or until resolving a dispute, that period should be explicitly defined in the agreement. In drafting or reviewing these clauses, the parties should also contemplate any potential exceptions to the clause.
Recent Case Studies
Over the past few years, as confidentiality and non-disclosure agreements have gained traction in the legal industry, so too have non-disparagement provisions. Courts have generally agreed that non-disparagement agreements do not limit an employee’s right to free speech and do not violate public policy. Accordingly, we are seeing a rise in the use of non-disparagement agreements across the country, including in California where any kind of agreement that prohibits "all lawful acts or conduct" is prohibited (with limited exception, such as in the case of privileged communications made in anticipation of litigation). Employers across the country are now requiring non-disparagement agreements with an increasing frequency.
In California, while one district court judge has interpreted sustaining an "all lawful acts or conduct" rule to include disparaging comments or statements , it is not yet settled case law. Indeed, the Ninth Circuit has left that question open. As we advise employers, it is advisable to use limiting language, such as non-disparagement covenants that are defined to be limited to defamatory, derogatory or harmful words directed towards the parties to the agreement. Non-disparagement language can stand up to scrutiny and be enforceable, particularly if the language is limited to specific individuals, not to the organization, and updated information about who is included as a person protected by the language is periodically provided to the employee.
Our recommendation is that in the future, employers across the country should avoid using language that prohibits "all lawful acts" or "lawful acts and conduct".