September 11, 2019

Why nondisclosure agreements may not be enforceable

Posted in Employment Law by Eugene Killian, Jr. |

As I write this, it’s just after Labor Day, and we’ve had a busy summer bad-news-wise, from trade wars with China, to distressing gun violence, to the sickening story of Jeffrey Epstein.

Epstein, of course, was the financier, pedophile, and sex-trafficker who was found dead in his cell at the Manhattan Correctional Institute this summer of an apparent suicide.  (I’m not going to get into the various conspiracy theories here.) At the time of his death, he was worth $577 million, but no one seems to know where he got the money from.  He left behind a trail of victims, and an army of lawyers has now descended on his estate (both prosecutors and civil litigators).

In this post,  I’d like to focus on just one small aspect of the debacle.  Apparently, Epstein may have asked certain people around him, including those who allegedly participated in or were aware of his crimes, to sign nondisclosure agreements.  Some of the victims apparently signed NDAs as well.  As litigation against his estate unfolds, one of the issues may be the enforceability of these agreements.

In general, the bottom line is:  If a contract is specifically about something illegal, that contract cannot be enforced. (For example, an NDA that gives you $1 million in exchange for promising to keep quiet about a murder is clearly void, since it’s against public policy to cover up murder.) As such, any contract that involves illegal activities, including an NDA clause in a contract, would not necessarily stop someone from testifying about the illegal conduct to which the contract refers.

Many NDAs, in fact, specifically state that the signer may testify if subpoenaed. Normally the clause will require the person or organization subpoenaed to provide notice of the subpoena, so the other person or company has a fair opportunity to fight it. But generally, once you’re required to testify…well, you’re required to testify. (If you yourself committed an illegal act, there could be Fifth Amendment issues, of course.)

How does this apply to business?  Here’s one example. Before they accept a job, many employees are asked to sign an NDA. An NDA can cover a wide range of subjects, from trade secrets to company policies. Increasingly, employers include an NDA in other paperwork, such as a company handbook that employees are asked to sign. Some employees may not fully understand what they’re signing and may sign an NDA without realizing it.  

The #MeToo movement exposed the fact that some employers have relied on NDAs to negotiate settlement agreements with employees who have been sexually harassed or sexually assaulted in the workplace. In most of these cases, the employer agrees to pay the employee a settlement amount in exchange for the employee signing an NDA that prevents him or her from speaking out about the assault.  As a result, some employees have stayed silent for years because they feared legal repercussions, such as a costly civil lawsuit, if they reported the sexual assault to the police or appropriate authorities in the workplace, such as the human resources department.   

As we’ve previously reported in this blog, though, NDAs in connection with the settlement of certain employment claims are now specifically unenforceable in New Jersey.  (See here.) And, awhile back, the ACLU issued an interesting bulletin explaining why NDAs may generally be unenforceable in connection with sexual harassment or sexual assault claims.  You can read that here.  

Especially given the current climate, many judges are unlikely to look kindly upon NDAs that may apply to unsavory or wrongful behavior, as opposed to legitimate purposes such as the protection of confidential data.  

So, if you’re an employer, you’d be well advised to refocus on proper risk management and training, to prevent problems from happening in the first instance. (Also, if you don’t have employment practices liability insurance, get it.) Don’t think for a moment that you’ll be able to escape liability by silencing witnesses under an NDA. And it’s a good idea to conduct business by the New York Times rule:  Namely, if you wouldn’t want to see something on the front page of the New York Times, then don’t do it. 

To avoid running afoul of the New York Times rule, it’s often useful to analyze any option in business from a moral perspective, to find what cadets at West Point refer to as “The Harder Right.” In his excellent little 1993 book called “The West Point Way of Leadership,” Larry Donnithorne proposes the following construct when considering business issues: 

  1. What are the relevant facts of the situation?
  2. What are the alternative actions available?
  3. Who will be affected?
  4. What moral principles are involved? (In other words, are there any morally debatable aspects to the choices you are about to make?)
  5. How would these principles be advanced or violated by each alternative action? 

If more businesspeople (and politicians) guided their behavior by these questions, the world would be a better place.

Finally, if you’re an employee who signed an NDA, keep in mind that you may not necessarily be bound by it.