Definition of Non-Disparagement Agreement
A non-disparagement agreement is understood to be a basic form of an otherwise negotiated covenant, which is routinely included within an executed instrument. Such agreements generally express the principle that a party will not publicly speak ill of or criticize the other in a manner which negatively reflects on the other’s reputation or business . While these provisions are commonly incorporated into employment contracts, they are equally afflicted into other contexts addressing separations between parties. The intent of such an agreement is typically to minimize damage to one or both of the parties’ public-facing reputations following the resolution of the underlying matter, enhancing the odds of limiting further litigation and other appeals.
Legal Challenge and Enforceability
Understanding the legal implications of signing a non-disparagement agreement is important for protecting both an employer’s reputation and its business interests. Courts generally enforce these agreements but the enforceability of any particular agreement will depend on state law and if a non-disparagement provision is in particular deemed overly broad and places an unreasonable restraint on the employee, a court may refuse to enforce it.
A non-disparagement provision may be deemed overly broad if it is not sufficiently limited or it is not sufficiently clear. An overly broad or unclear provision will often be struck for failure of consideration. Beyond that, a broad provision may have a chilling effect on employees going beyond situations that would reasonably be considered disparaging.
An overly broad provision may also be challenged as an unreasonable restraint on trade. For instance, a broad provision that is not time limited may be struck as being against public policy because it can be read to prevent employees from finding new employment: they must "refrain from making negative comments" about former employers, including noting the previous employer on a resume or job application is a negative comment. It is further a restraint of trade literally against doing business that can result in a per se violation of the antitrust laws.
If an employee is in breach of a valid non-disparagement provision, the primary remedy for employers (and the only real deterrent) will be injunctive relief requiring the employee to cease the disparagement.
In addition to an injunction, an employer may seek damages for any breach of a non-disparagement provision. Damages may include spelling out the exact damages an employer may seek under the non-disparagement provision, or referring to a general recovery including actual and consequential damages. If a non-disparagement provision is a part of a larger settlement agreement and an employee violates the non-disparagement provision the employer may recover attorneys’ fees and costs under common law recovery rules. In most jurisdictions, an employee may be liable for attorneys’ fees where an employee’s breach of a covenant not to compete was willful.
Common Situations and Uses
One of the most common places to find a non-disparagement provision is in a severance or release agreement at the end of the employment relationship. For example, an employee – especially in a high-level position within a company – may be offered a severance package in exchange for signing an agreement that he or she will not disparage the company. The risk to the employer is that former employees who are disgruntled and "unhappy" can damage the employer’s reputation through damaging posts on social media sites or other platforms. As we know, in today’s society, "bad news travels fast." A provision in a severance agreement prohibiting disparaging communications will discourage the former employee from communicating to the public his or her reasons for leaving the company, especially if the employee has been compensated as a result of the separation. In some cases, this might apply to both sides. However, in any event, the employee has received the benefits offered in exchange for the covenant not to disparage and, therefore, damages to the employer can be avoided.
Another place where non-disparagement provisions are often sought is in business agreements between two entities. For instance, a business partnership agreement that includes a non-disparagement provision can be very useful.
Advantages and Disadvantages for Parties
From the standpoint of the party imposing the non-disparagement obligation, there are several potential advantages, such that it is certainly something that one should at least consider implementing. First, if the party imposing the non-disparagement obligation is an organization, the existence of such a promise can minimize the reputational damage that might otherwise be suffered as a result of disparagement by present or former constituents. Second, as a practical matter, such a promise forces individuals who are inclined to make disparaging comments to think twice about doing so, particularly where the matter asserted in the non-disparagement covenant is of some sensitivity. Third, if you do not have a strong mechanism to impose discipline or other adverse actions on individuals who make disparaging comments outside the bounds set forth in a non-disparagement covenant, the explicit presence of such a covenant might enable you to do so.
From the standpoint of the recipient, on the other hand, there are also advantages and disadvantages in connection with a non-disparagement covenant. First, from a purely practical perspective, if you are aware that you have been asked to enter into a non-disparagement covenant, most recipients are inclined to agree to such a covenant, rather than risk the possibility that your agreement would otherwise be rejected if it is presented without such a covenant. At the same time, if a recipient agrees to a non-disparagement covenant, the existence of the covenant could potentially increase the risk of a challenge to other unfavorable terms of the transaction, on the ground that those provisions would be separately viewed as unacceptable (e.g., certain confidentiality provisions may be viewed as less acceptable if a non-disparagement covenant is also present). Second, and perhaps more importantly, the imposition of a non-disparagement covenant also means that the recipient will not be free to disclose information to third parties, which could benefit the recipient in other contexts (e.g., speaking in confidence with personnel investigators who may be attempting to better understand the motivations of key witnesses in a dispute). Third, there are real differences in the extent of "bad mouthing" that one should be concerned about (e.g., against an existing employer, or against a former employer) and the shape and duration of any such covenant that is to be imposed. Given that reality, the difficulty of establishing a single "best practice" in this area is relatively straightforward.
Agreement Creation and Important Considerations
Drafting a clear and enforceable non-disparagement agreement can be essential to a company’s ability to prevent future harm to its reputation. A carefully worded provision that includes, like the ones provided above, the requirements of a number of states’ opinions (i.e., vague "bad-mouthing" won’t breach agreements) is helpful, but not always necessary. Indeed, if the provision goes on to identify the types of communications encompassed within it, such as "discussions to investors," "communications in press releases," or "by virtue of any reports to governmental agencies , " it may eliminate any uncertainty regarding the type of information that may or may not be disclosed. It is also helpful to identify the recourse available in the event that a published report violates the offending employee’s obligation.
Like any sensible contract, the non-disparagement agreement will encourage – if not require – the offending party to remove any inappropriate communications that have already been disseminated. Drafting considerations may include the cost of enforcement, as well as the necessary site language to stem the influence of The Streisand Effect.
Examples and Case Law Analysis
While not universally utilized, non-disparagement agreements and clauses within broader agreements are frequently used by employers as part of the onerous and generally unwanted exit process. The most common example is likely the agreement signed by a departing executive or senior employee, typically in connection with a severance payment or other form of separation benefit, by which the executive agrees to forgo certain legal claims against the employer and not to make statements that disparage the company, its products, its management or its other employees. Such agreements are almost always meticulously drafted by counsel with an eye toward potential future litigation. Thus, the language may be harsh and unyielding, and provide little room for an outspoken, independent-minded individual to reclaim control of his or her reputation.
While non-disparagement agreements triggered in connection with executive departures are common, their particulars vary tremendously from executive to executive. In the small world of executive departures, I have encountered more combinations of variables than I care to recall. Examples include: non-disparagement agreements that do not specifically involve or mention the CEO of the company; agreements that have disclosure and liquidated damages provisions triggered based on vague or broadly interpreted public statements; and agreements that do, or do not, have a time limit or duration. In addition to some of these executive examples, I have recently come across an example of the use of a non-disparagement clause in a business-to-business context. When such clauses are uncommon in business-to-business contexts, they are even more uncommon within the tech world, which is largely characterized by free-spirited young people. Nonethless, they found their way into a recent terms of use that I recently encountered in which the parties described themselves in the clause as, "the parties hereby agree that they will not, either directly or indirectly, through third party, make any statements that would disparage each other."
The bottom line is that the language contained in non-disparagement agreements and clauses generally provide for limited wiggle room for the aggrieved party, particularly with regard to future or potential litigation. The departure of an executive may certainly cause the employer or others associated with it to be gossiped about in social and traditional media. It may also cause the executive to be discussed disfavorably among those associate with the departing executive. The only recourse of the employer or anyone associated with it may be to consider taking the high road, ignoring the situation and moving on. The end result being that a problem may be ignored whether or not the parties are legally bound by a non-disparagement agreement. However, where reputations are at stake disclosure, litigation or otherwise, employers should carefully draft non-disparagement provisions, particularly in agreements between executives and companies. Further, non-disparagement provisions and clauses in business-to-business agreements should be approached with even greater caution given their potential chilling effect on ordinary business dealings.
Alternatives to the Non-Disparagement Agreement
If neither party is comfortable with using a typical non-disparagement clause or agreement, employers have a few options that can help reduce the chance of resistance while achieving the desired result. One is mediation in the workplace, with a clause in the Agreement requiring that any workplace disputes first be mediated and discouraging disparagement during the mediation. This is a practice worth trying if there is a history of disputes, the employee is on board with something less formal than litigation, and there is concern that the employee will not agree to an otherwise typical provision if it means keeping his or her claims out of court and potentially confidential.
Another option is to reassess whether a generic non-disparagement clause is necessary at all . Non-disparagement agreements have become so prevalent that the employee may be fine with just a general request not to disparage the employer, even though an agreement is not actually required or enforceable. If you can present the request in that way, you may be able to avoid using terms that cause an employee concern about entering into the agreement. In this context, the employer’s request for confidentiality may alleviate the employee’s concerns that he or she will be painted as a liar before a jury in a later lawsuit, as well as diluting any negative publicity. Confidentiality provisions are also useful for protecting the confidentiality of the employer’s business information.