NON-DISPARAGEMENT CLAUSES IN EMPLOYMENT CONTRACTS- A GLOBAL PERSPECTIVE
Madhubanti Sadhya, CEERA, NLSIU
Divyae Patel, 5th Semester, Unitedworld School of Law, Karnavati University
The term “disparagement” is defined as the publication of injurious and false statements that are derogatory of another’s product, property or business. Even though disparagement may sound familiar with defamation, but there is a difference between the two. Disparagement is a much broader term, that means anything that discredits or dishonours. A statement made can be disparaging even if it is true and non-defamatory.
In context to employment contracts, a non-disparagement clause is a clause which restricts an employer and employee from making disparaging remarks about one another. Non-disparagement clauses are frequently found in employment and severance agreements. A mutual non-disparagement clause prohibits both the employer and the employee from disparaging the other.The object of a non-disparagement clause is to prevent employees from discussing their experiences in the workplace in any way that could harm the reputation of the organisation or its employers.
Non-disparagement clauses are used across all industries, in companies of all sizes and with employees at any position working in an organization. However, with time the use of non-disparagement clauses in employment contract has increased in the technology industry. The technology industry has created a reputation for being a hostile and unpleasant place to work for women.
Over the past few years, there have been numerous sexual harassment cases that have taken place at leading and well known technology companies. High designated officers of leading companies such as Google resigned from their positions after sexual harassment allegations were made against them. However if these companies would have used a non-disparagement clause in their employment contract, the female staff who showed the bravery by speaking openly about the sexual harassment they faced at the workplace would have been unable to do so without breaching their employment contracts. These non-disparagement clauses discourage the employees from speaking out the truth. Non-disparagement clauses possess the power to discourage the would-be whistleblowers from disclosing their employers’ illegal activities.
In 2017 AngelList, a leading company that helps tech start-ups in hiring employees and raising money came in the limelight after its use of non-disparagement clauses in order to hide the allegations of sexual harassment made against its executive. During an office retreat, the founder of AngelList made certain comments, that made a contractor uncomfortable working at the company. However, after a few weeks, the parties signed a settlement agreement that contained a non-disparagement clause in order to guarantee that the details of the retreat do not leak out. This is how various reputed companies misuse the non-disparagement clause to silence their employees.
EVOLUTION OF NON-DISPARAGEMENT CLAUSE
Back in 1800, people of London stood at a podium at Speaker’s Corner in Hyde Park to voice their injustice and grievances to a small group of passers-by, but in the modern times with the increased accessibility to internet and social media, the reach of people to share their thoughts has increased. With the rise of social media, a good business reputation has become essential to retaining customer loyalty and market share. Now in the times of social media, a comment on social media from an average employee of an organisation can spread across a huge mass of people and tarnish the image of the company within minutes.
In the case FreeLife Int’l, Inc. v. Am. Educ. Music Publications Inc., Am. Educ. Music Publications Inc. was sued by FreeLife, an Internet online sales distributorship, for contract breach that he had been seemingly accepted when he pressed “I Accept” button on the FreeLife’s website to become a “marketing executive” for FreeLife. A non-disparagement clause was included in the contract, which stated that “Each Marketing Executive must not disparage other Marketing Executives, FreeLife’s products/services, the Compensation Plan, or company employees to other Marketing Executives or third parties”. Being a marketing executive Educ. Music Publications Inc. got access to FreeLife’s product information and policies, which he later criticized on his own website. The federal Arizona District Court held the defendant guilty of breach of non-disparagement clause as the defendant criticised FreeLife on his own website.
Similarly, in a California based case, Bradbury an engineer staff entered into a severance agreement with employer Biggs Cardosa Associates. The agreement contained a mutual non-disparagement agreement which prohibited both the parties from making any disparaging comments about each other in front of any third party except for reply to court inquiries or governmental agency or testimonial under oath. After entering into the severance agreement Bradbury sent emails to numerous organisations, including other newspapers and engineering firms, and he also published on RipoffReport.com, stating that his ex-employer had improperly designed a building, had overcharged clients, was inept, and linked with criminals and enemies of America. The employer i.e. Biggs Cardosa Associates filed a suit against its former staff Bradbury for the breach of non-disparagement clause. The jury award of $106,300 to the company for breach of the non-disparagement clause was upheld by the Appellate Court.
Thus, with the increase in use of social media and internet, the risk of employee damaging the organisation’s image using social media websites has increased, thus organisations have increased the usage of non- disparagement clauses in the employment and severance contracts of their employees to avoid the possible disparagement from its present or former employees.
NON-DISPARAGEMENT CLAUSE IN OTHER TYPE OF CONTRACTS
Non-disparagement clauses are considered enforceable and routine in context of employment and severance agreements. But other than employment and severance contracts, non-disparagement clauses are seen in various other contracts such as Consumer Contracts and Divorce Settlement Agreements.
- NON-DISPARAGEMENT CLAUSE IN CONSUMER CONTRACTS
Certain goods and services providers include a non-disparagement clause in their consumer contracts. These non-disparagement clauses have been seen in contracts of a variety of companies such as online sellers, food joints, hotels, doctors and dentists. Disparaging reviews on internet can cause significant damage to a business’ reputation and also cause loss of revenue. In the United States of America, it has been observed that goods and services providers include non-disparagement clause in their consumer contracts to stop disparaging and negative comments on various websites over the internet. There have been numerous cases where customers were sued by companies for posting negative comments on websites like Facebook and Tripadvisor.
Consumers usually follow the non-disparagement clause, or if they disparage the company by posting any negative comment or review, they generally remove them when the company threatens to file a lawsuit. However, California in the year 2014 passed a law which prohibited the use of non-disparagement clauses in consumer contracts. This statute applies to all the companies in its dealings with buyers and clients in California. Similarly the Federal Trade Commission (FTC) has been using its power to regulate against the non-disparagement clause. The congress in USA, in order to protect the integrity of online reviews passed Consumer Fairness Review Act, 2016, the CRFA restricts the use of non-disparagement clauses in contracts in a form that it restrict the powers of a buyer or client to speak in respect of the goods or services offered in interstate commerce that were the subject matter of the contract, and for other purposes.
2. NON-DISPARAGEMENT CLAUSE IN DIVORCE AGREEMENTS
For a child whose parents are getting divorced, it is better that his parents do not speak bad against each other and the best way of doing this is including a non-disparagement clause in the divorce settlement agreement. A non-disparagement clause in divorce settlement agreement restricts both the parties from making disparaging statements against each other in front of their children. Certain non-disparagement clauses restrict the parents from making disparaging statements in front of anyone. The use of non-disparagement clause in divorce settlement agreement is mostly prevalent in the United States of America.
Enforcing a non-disparagement clause in divorce settlement agreement is not an easy job, since it requires evidence that one of the parties made a disparaging statement. If the comments are in written form then it is easy to provide any evidence however if the comments were made orally, then it is a bit difficult to prove as it would require a credible witness who could prove it.
However in 2020, the Massachusetts Supreme Judicial Court in the case Shak v. Shak struck down a Probate and Family Court judge’s order restricting both the parties in a pending divorce case from posting derogatory and disparaging comments about each other’s morality or parenting on social media, and from disparaging each other in front of their young child. The court observed that restraint of free speech which is ordered prior to the chance of making any disparaging statement is called “prior restrain” and is unconstitutional.
ENFORCEABILITY OF NON-DISPARAGEMENT CLAUSE IN DIFFERENT COUNTRIES
In New Zealand, non-disparagement clause is included in 90% of the settlement agreements. Non-disparagement clause in employment and settlement or severance agreements is considered legal. If any of the parties disparages the other, it is considered as the breach in terms of section 149(4) of the Employment Relations Act 2000, which says that if any person breaches any of the terms agreed upon of a settlement, then he is liable to pay a fine imposed by the Authority.
In Vice-Chancellor of Victoria University of Wellington v. Sawyer, Dr. Sawyer and the University entered into a settlement which included a mutual non-disparagement clause which included two other individuals linked with the University. Dr. Sawyer was alleged to have sent emails which contained allegations of professional incapability and impropriety, falsifying records, dishonesty and blackmail against the two linked individuals. The university demanded a penalty for each of the 5 breaches which amounted to $50,000. The Authority said that there lies a clear need for punishment, and imposed an overall penalty of $8,500 instead of $50,000 for the breach of non-disparagement clause and even ordered $3,750 each to the individuals against whom the disparaging comments were passed.
In another case Stephen Duggan v. Armaan Dev Enterprises Ltd, Armaan Dev Enterprise Ltd. and Stephen Duggan entered into a settlement agreement after facing certain employment related issues. The agreement included a non-disparagement clause which prohibited both the parties from disparaging each other. After the agreement, Mr. Amit Gulati, a director of the company posted a comment regarding Mr. Duggan on his own Facebook page. After Mr. Duggan came to know about the comment, his representatives called Mr. Amit and he removed that comment. Mr. Duggan filed a lawsuit against the company, and the Authority found the comments disparaging and ordered Armaan Dev Enterprise Ltd. to pay of penalty of $3,000 for the breach of non-disparagement of the signed settlement agreement.
In Hong Kong the use of non-disparagement clause is common in employment contracts and regularly seen in the severance agreements. However, the Employee Ordinance (Cap.57) which provides for the protection of wages of employee and regulates general conditions of employment agencies, employment and related matters, does not talk about the enforceability of non-disparagement clause, however the principles of general principles of law of contract allows parties to enter into contracts that are binding provided consideration is given.
But in 2015, in the case City University of Hong Kong v. Hans Richard Mahncke, where Dr. Mahncke, a legal academic who was employed by City University Hong Kong signed a separation agreement which was signed by both the parties i.e. Dr. Mahncke and City University of Hong Kong, the agreement included a non-disparagement clause which restricted Dr. Mahncke from making any statement which is disparaging about the University or about any employee, officer, agent or council member of the University. The University later contended that the settlement agreement was breached by Dr. Mahncke.
It was held by the Court that the University was entitled to a variety of relief including a declaration that the agreement was valid and binding on Dr. Mahncke. The Court also held that a non-disparagement clause that prohibits a former employee from passing any disparaging comments regarding his ex-employer and its employee is valid and binding on the employee.
This was the first instance where non-disparagement clause in context to employment agreements was subject of Hong Kong Court Judgement. Thus, it can be said that non-disparagement clause in employment contracts are enforceable in Hong Kong.
UNITED STATES OF AMERICA
Non-disparagement clauses are a very common part of employment contracts and there has been a routine enforcement of the non-disparagement clause by the Courts. The primary reason behind enforcement of non-disparagement clause is that the employee agreed to the deal is bound by his own free choice. However the law related to enforcement of non-disparagement law varies from State to State.
In the 2005 case of Cooper Tire & Rubber Co. v. Farese , the United State Court of Appeal, 5th Circuit encountered an argument that non-disparagement clause might be used to prevent ex-employee from revealing occasions where the employer did something illegal. The judges refused to strike down the clause on the basis that the mere probability that former employee could use a non-disparagement clause to conceal the illegal act.
However, the enforceability of the non-disparagement clause depends upon the context in which the disparaging statement was made. In California, in the case of Vivian v. Labrucherie, the plaintiff was a deputy sheriff, against whom his former wife’s boyfriend demanded a restrain order in a prior action. The proceedings resolved and the plaintiff entered into a settlement agreement which his former wife executed. The agreement contained a non-disparagement clause which forbade both the parties from passing any disparaging comments against each other. Subsequently, a lawsuit was filed by the plaintiff, alleging his former wife for breach of settlement agreement when certain disparaging comments and statements were made by her to internal affairs investigators from the sheriff’s department. It was also alleged that the former wife filed papers in family court which repeated allegations in the restraining order application. The former wife brought anti-Strategic Lawsuit Against Public Participation (SLAPP) motion against the breach of contract claim. The motion was denied by the trial court, however, the Court of Appeal reversed it stating that former wife’s statements made in family law proceedings and in front of internal affairs investigator are protected under section 425.16. The court further stated that the protection under section 425.16 hasn’t been waived off because the action was subject to the litigation privilege. Thus, the enforcement of non-disparagement is uncertain where the disparaging statements qualify as an activity which is protected.
Various government agencies and Equal Employment Opportunity Commission have been raising their voices that some non-disparagement clauses are illegally restricting employees and ex-employees from filing legal but disparaging charges with the relevant authorities and as an outcome various non-disparagement clauses currently carve out an exception for filing charges with the relevant authority.
In India non-disparagement clauses are mainly seen in severance contracts and commercial contracts that involves senior executives and these clauses are not inherently illegal. In India, the use of social media is increasing with a rapid speed and a single disparaging comment by an employee or former employee could spoil the image of the company and thus companies have started using non-disparagement clauses in the severance agreements of employees leaving the company and a trend of including a non-disparagement clause in executive employment contracts is also observed.
There are no specific laws related to non-disparagement clauses, however breach of non-disparagement clause attracts consequences under the existing criminal and civil laws that govern defamation and breach of contract. In the year 2018, Infosys in its 2018 Annual Report revealed that 3 board members and the former CEO Vishal Sikka of Infosys were made to sign a mutual non-disparagement agreement. When they decided to quit, they were made to sign it to prevent future disparagement or disclosures about the company. The main point of focus of this case was the letter received by the American and Indian market regulators from a whistleblower who alleged that Vishal Sikka agreed to an enormous payout to a resigning CFO without the official consent of the governance committee, board of directors or the shareholders. The whistleblower in his letter also asked why such non-disparagement clause was signed; he also alleged that the company signed such agreements with the directors only because they discovered some malpractice or corruption in the investigation reports.
However, the non-disparagement clauses are being used sparingly in India because the Indian business is yet to achieve that pitch of professionalism that marks out the western corporate world. Many legal experts believe that non-disparagement clauses are enforceable with regard to corporate governance principles in India as non-disparagement clauses prevent the employees from disclosing true information, malpractices or even information that is good for public. Such clauses which are restrictive in nature will be against the principles of corporate governance and cannot be upheld under criminal or civil law.
In India, under the Companies Act, 2013 it is compulsory for listed companies on stock exchange to set up an audit committee to investigate the complaints made by a whistleblower. Section 177 of the Companies Act, 2013 states that companies should set up a vigil mechanism to report genuine concerns of employees and directors and provide safeguard against the victimization of the person using it. The companies are also required to publish the details of the mechanisms on its official website and in the board of director’s report. Even the Security Exchange Board of India (SEBI) has made it compulsory for listed entities to have a whistleblower policy and the companies should make its employees aware of the policy.
The purpose of setting up a vigil mechanism is to ensure that the employees and directors who are aware of the wrong and illegal activities conducted within a business feel free to bring up the issue to the notice of appropriate authority without any fear. The purpose behind SEBI mandating listed companies to formulate whistleblower policy is to provide a mechanism for all people to approach various committees of the company to report the wrongdoings within the company.
But various big and listed companies include a non-disparagement clause in the employment and severance agreements of its employees. The inclusion of non-disparagement clauses restricts and discourages the employee from speaking up against the malpractices and wrongdoings of the company. This restrictive nature of the non-disparagement clauses itself defeats the purpose of establishing and formulating a vigil mechanism and Whistleblower Policy under Section 177 of Companies Act and Regulation 9A (6) SEBI (Prohibition of Insider Trading) Regulations, 2015 respectively and thus the use of non-disparagement clause in employment and severance agreements may be found to violate the aforementioned section and regulation. However, the scope of non-disparagement clauses are yet to be conclusively defined by the Corporate Law in India and the validity of non-disparagement clauses are yet to be challenged in the Courts of India.
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