Tuesday, December 31, 2013

Limits on the reach of confidentiality clauses in settlements

A frequent issue in negotiating a settlement agreement is confidentiality. Once an employer makes a decision to pay for a settlement, that employer typically wants to get as much as it can for its payment. It wants to restrict the employee or former employee from saying or disclosing things that could be embarrassing or costly for that employer.
Hopefully, the issue is addressed early in the negotiations. Otherwise, the employer's counsel could wait until all the monetary terms are agreed upon, and then roll out all the conditions and restrictions that the employer would like to have. What are the odds that the employee would walk away from the agreed upon payment just to preserve a right of free speech for topics related to prior employment? Some employees who had the courage to make a legal complaint care enough about the freedoms of speech, petition and association to refuse restrictions on future disclosures. In other situations, the timing and pace of negotiations may prevent exchanges of the full text of a settlement agreement.
The Supreme Court has made clear that people can voluntarily give up their constitutional rights as part of a contract. D.H. Overmyer v. Frick Co., 405 U.S. 174 (1972) (approving a waiver of due process rights as part of a commercial cognovit note). Many factors can contribute to a determination about whether a particular waiver is valid, but in the context of an agreement that settles pending litigation, most courts will enforce the agreement even if it contains a waiver of constitutional free speech rights.
Even when there is no agreement, but a court-imposed protective order to facilitate discovery, the Supreme Court will enforce a restriction on free speech when that restriction serves the purpose of conducting or settling litigation. Seattle Times Co. v. Rhinehart, 467 U.S. 20 (1984).
However, a number of whistleblower and other statutory protections limit an employee's ability to waive a right to make protected disclosures. That is the essence of “protected activity.” The law “protects” certain rights to further the public interest. This issue came to the forefront when nuclear power companies offered whistleblowers large settlements in exchange for an agreement that the whistleblower would not make safety disclosures to the Nuclear Regulatory Commission (NRC). The idea that nuclear plants would be constructed and operated with dangers hidden by “hush money” agreements was too much to bear. Macktal v. Secretary of Labor, 923 F.2d 1150, 1155-1156 (5th Cir. 1991). Thereafter, the Department of Labor ordered that all whistleblower settlements must be reviewed by the Department and those that restrain “protected activity” would not be approved.
The federal Equal Employment Opportunity Commission (EEOC) has a similar policy that prohibits enforcement of agreements that restrain employees from filing or participating in charges of discrimination. The policy states:
Agreements that attempt to bar individuals from filing a charge or assisting in a Commission investigation run afoul of the anti-retaliation provisions because they impose a penalty upon those who are entitled to engage in protected activity under one or more of the statutes enforced by the Commission. By their very existence, such agreements have a chilling effect on the willingness and ability of individuals to come forward with information that may be of critical import to the Commission as it seeks to advance the public interest in the elimination of unlawful employment discrimination.
Employees can still agree to a settlement that gives up their right to receive monetary awards, but they cannot give up their right to file a complaint or to provide information to the EEOC.
Under the National Labor Relations Act (NLRA), the nature of what is “protected activity” is different than it is under other whistleblower laws. The NLRA protects the right of private sector employees to organize unions, and also to engage in other “concerted activities” for their mutual aid and protection. While disclosures to the NLRB are also protected, the main focus of the NLRA is to protect the right of employees to communicate with each other about how the boss is treating them, and how they can work together to improve their lot. For example, under the NLRA, it is unlawful for a covered employer to bar employees from sharing information about their compensation or treatment. Thus, a settlement agreement cannot restrain employees from sharing this same information with each other.
Some courts have also held that the public has a right to know about settlements that touch on the public interest. “There is a strong public interest in disclosure.” Cusack v. Bank United of Texas, 159 F.3d 1040 (7th Cir. 1998). See Public Courts vesus Private Justice: It's Time to Let Some SunShine in on Alternative Dispute Resolution by Laurie Kratky Dore (Chicago-Kent Law Review, Vol 81:463 2006).
In settling federal court matters with federal agencies, the Department of Justice has adopted a regulation setting out a general policy against confidentiality clauses. 28 CFR § 50.23. The policy reflects the government's obligation to account to its taxpayers for how their funds are spent. The regulation permits some exceptions, such as in matters involving national security, and in protecting personal information protected by the Privacy Act. However, this policy will not apply in administrative matters involving other federal agencies.
For federal employees, Congress created new limits on confidentiality agreements through Section 104(b) of the Whistleblower Protection Enhancement Act (WPEA), codified at 5 U.S.C. § 2302(b)(13). All new non-disclosure agreements (NDAs) with any federal agency must now contain the following notice:
These provisions are consistent with and do not supersede, conflict with, or otherwise alter the employee obligations, rights, or liabilities created by existing statute or Executive order relating to (1) classified information, (2) communications to Congress, (3) the reporting to an Inspector General of a violation of any law, rule, or regulation, or mismanagement, a gross waste of funds, an abuse of authority, or a substantial and specific danger to public health or safety, or (4) any other whistleblower protection. The definitions, requirements, obligations, rights, sanctions, and liabilities created by controlling Executive orders and statutory provisions are incorporated into this agreement and are controlling.
Federal agencies are now prohibited from enforcing any NDA, unless it contains the new notice. This effectively bars federal agencies from enforcing old NDAs that sought to restrain others from making disclosures to Congress, Inspectors General, or to anyone else authorized to receive other protected disclosures.
However, what is an employee to do if a federal agency seeks to violate this new law with a contractual term that bars the employee from making disclosures about perceived violations of law? While the agency is barred from enforcing that restraint, what is to keep the agency from attempting to discipline an employee from violating the NDA? If the agency chooses to impose serious discipline for the violation, the employee could appeal to the Merit Systems Protection Board (MSPB) (within 30 days of the unlawful discipline). Whatever the degree of punishment, the employee could go to the Office of Special Counsel (OSC) to complain about the violation of the WPEA. However, the OSC has discretion about which cases it will take. The extent to which federal employees have an inalienable right to free speech remains to be tested. The courage and determination of the employees to stand up for their rights will be the first test. Another test is whether the decision makers will value free speech as much as they value disposing of cases through a settlement.
By Richard R. Renner

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