Confidentiality in Sexual Harassment Settlements

By Lawrence P. Schaefer |

I spoke on May 21, 2018, at the Upper Midwest Employment Law Institute about issues to address when settling sexual harassment claims, particularly when the company and/or individual paying the settlement insists on what is known as a “non-disclosure agreement” (“NDA”). The public has never been more aware of NDAs, given the issues raised in the “Stormy Daniels” litigation and the apparent practice by our current President when he was a private citizen to require such agreements when paying compensation to individuals he sought to silence. Are NDAs enforceable, and under what circumstances?

The Enforceability of NDAs

NDAs have been common in many types of settlement agreements in the past, particularly when sexual harassment claims have been settled. Part of the “benefit of the bargain” in resolving these claims without public litigation is avoiding the damaging publicity of the claim itself, regardless of how it is ultimately resolved.  Until recently, these NDA clauses in these type of settlements were enforceable provided that basic contract standards were met — i.e. consideration was provided, there were no indication of coercion, the terms were clearly stated and no misrepresentations occurred.

Confidentiality Matters

The value of confidentiality in these settlements accrues to both sides. Individuals I’ve represented making these complaints may want confidentiality, especially for those clients who have a very long career ahead, and don’t want to be publicly disclosed as someone who has made such a complaint against an employer.   Ignoring this potential “scarlet letter” implication for their career progression in the future, especially with the current powerful social media platforms, is naive.  The recent pressure in the growing #Me-Too movement toward complete transparency when these issues arise and are settled presents a thorny issue for individuals courageous enough to raise these claims.

The Tax Implications of NDA Enforcement

The IRS has recently passed a regulation which was intended to punish employers seeking to impose NDAs when settling these claims by no longer allowing legal fees incurred to be deducted as a business expense, thus discouraging these provisions with real tax penalties. This applies, however, to employers and employees. A recent blog written by my colleague, Bert Black entitled, Keeping It Confidential: The Effect of Nondisclosure Agreements on Deductibility of Attorneys’ Fees under the New Tax Law, examines the perhaps unintended consequences of this regulation (which could render taxable legal fees and costs incurred by the individual agreeing to an NDA).  States such as Washington have enacted legislation banning NDAs as conditions of employment, and many states legislatures are considering laws banning them in sexual harassment settlements (i.e. California, New York, New Jersey, Pennsylvania, and South Carolina).  Change is coming.

Protecting the Plaintiff’s Privacy: Four Strategies to Consider

How, then, do advocates for sexual harassment plaintiffs balance this growing demand for transparency with the client’s understandable interest in not being forever publicly associated with having raised and settled the complaint   It may be a difficult needle to thread, but I suggest four potentially effective strategies.

1. There should be no real controversy in ensuring that any amount paid in settlement remain confidential, subject to any future right to subpoena this information by anyone.
2. The identity of the complaining party isn’t the real focus of the need for transparency – it is the alleged perpetrator(s) that can/must be identified, to ensure that proper corrective action is taken, especially if the offending behavior ever recurs.  Therefore, limited confidentiality protecting the complaining party should be acceptable, as should any attendant NDA obligation that is limited in this fashion. Again, subpoena power in the future would pierce this confidentiality/NDA provision.
3. There can be specific events in the future where any confidentiality/NDA obligation is automatically lifted, with notification obligations attendant to any such events to issue to all parties to the agreement.  For instance, if there is any future allegation of sexual harassment (broadly defined) against the alleged perpetrator(s), the settling party is promptly notified, the NDA/confidentiality obligation is automatically lifted, and the transparency sought by the “#Me-Too” movement is served.  An argument could be made that such a “conditional” NDA should also be excluded from the IRS regulation and similar legislation described above.
4. When settling a sexual harassment claim where the opposing side insists on an NDA, make sure it is mutual, and make every attempt to raise other claims as well as additional consideration in settlement.  Consider emphasizing those claims, to the exclusion of the sexual harassment claim, in any written settlement agreement, to make every effort to avoid the tax penalty described above.

 Evolving Views on Protecting Plaintiff’s Privacy

There are no easy answers to these questions, or any strategy that ensure all privacy and confidentiality interests are properly balanced when reaching a settlement.  The best and safest scenario is to reject any such NDA obligation when alleging these claims and negotiating settlement, and have a client who is willing to accept the future “cost” of this transparency.   The most effective advocates, however, need to be fully prepared when the circumstances are different, and there is an understandable desire for some level of confidentiality.

Contact Lawrence P. Schaefer and the attorneys at Schaefer Halleen to schedule a case evaluation to discuss your situation with our employment law firm in Minneapolis. We will explain your legal position and help you make a well-informed decision about how to proceed.