Confidentiality Clauses In Settlement Agreements Under Legislative Attack

Consider this possible litigation scenario:

You are general counsel to a New England company, assisting it in dealing with a poorly-performing employee who responds to warnings about his work by claiming that the “sick” building in which he works affects his performance.

Company tests of the building are within normal limits, but the employee remains unconvinced and is threatening to sue the company, to file complaints with OSHA and state authorities, and take his story to the press. The company wants to fire the employee for poor performance, but is concerned the employee’s unfounded accusations will result in panic, burdensome government investigations, and negative press coverage.

You recommend a negotiated separation, and in exchange for the employee’s resignation and agreement not to talk about his complaints, he gets severance pay and a neutral reference. The employee accepts, and you memorialize the deal in a settlement agreement that includes a standard confidentiality clause.

The employee leaves, the client breathes a sigh of relief, and you’re a hero. End of the matter — or is it?

The confidentiality clause — a standard item in the in-house counsel’s tool kit — is under attack. The last few years have seen bills proposed in several New England states that would regulate or severely restrict its use.

This movement is part of a national trend that began in the late 1980s and early 1990s with a series of newspaper articles that blamed confidential settlements of cases involving products liability and toxic contamination for hiding health and safety risks from the public.

The plaintiffs’ bar mounted a vigorous effort to enact legislation to limit the use of confidential settlements with some success, most notably with a Florida statute, Fla. Stat. ch. 69.081 and a Texas court rule, Tex. R. Civ. P. Ann. 76(a). The defense bar responded with equally vigorous opposition, so that by the mid-1990s efforts to enact further legislation stalled.

However, two recent events gave the movement to ban confidential settlement new impetus: Firestone’s use of confidential settlement agreements to shield information about safety problems with its tires, and the Catholic Church’s use of confidential settlement agreements to resolve sexual molestation claims against priests.

An avalanche of newspaper editorials called for an end to the practice, and state legislators rushed to introduce bills.

Judicial ‘Openess’

Even before this current assault, confidential settlements have not been inviolate. Courts have denied enforcement of confidentiality provisions that impair ongoing investigations or discovery.

For example, the 1st U.S. Circuit Court of Appeals, in EEOC v. Astra USA, Inc., 94 F.3d 738 (1st Cir. 1996), upheld an injunction preventing Astra USA from enforcing a confidential settlement agreement with former employees preventing them from filing charges with the Equal Employment Opportunity Commission or assisting others in doing so.

The court found that the public policy “strongly” favoring settlement was outweighed by the public policy in favor of “the free flow of information between victims of harassment and the agency entrusted with righting the wrongs inflicted upon them.” EEOC, 94 F.3d at 744-745.

Similarly, when former clients of a law firm challenged the adequacy of the firm’s representation, a federal trial judge in Massachusetts allowed discovery of a confidential settlement agreement the clients had obtained with successor counsel.

“It is my view,” wrote Judge ——-, “that when private parties to a civil action enter into an agreement providing for the non-disclosure of settlement terms, the privilege from disclosing those terms…must yield to a request for discovery by a third party attorney in an independent action …[when] the terms and conditions of the prior settlement are central to the third party cause of action.” McCullough v. Nichols, No. 9404CV0093, 1995 WL 679265 at *2 (Mass. Dist. Aug. 3, 1995).

Even in the absence of legislation, a company’s attempt to shield information through a confidential settlement agreement may fail if a party subsequently claims breach of the agreement.

In another case involving Astra USA, an employee who had confidentially settled her sexual harassment claim against the company sued for breach of contract, claiming Astra and its former president were the sources of a Business Week article identifying her. In ruling on cross-motions for summary judgment, the court disclosed and exhaustively discussed both the terms of the settlement agreement and the events giving rise to the claim. Zortman v. Bildman, No. 962529B, 1999 WL 1318959 (Mass. Super. Jan. 15, 1999).

Judges may also decline to approve even assented-to confidentiality agreements, as did a Massachusetts Superior Court judge when he ruled in a products liability case that the defendant’s privacy rights were outweighed by the public’s right to know about a potentially dangerous product. Gleba v. Daimler Chrysler Corp., No. 98230, 2001 WL 1029678 (Mass. Super. Aug. 6, 2001).

Finally, confidentiality provisions in settlement agreements involving parties subject to public disclosure laws can also be unenforceable. See, e.g., Providence Journal Co. v. Silva, No. C.A. 87-1930, 1987 WL 859793 (R.I. Super. Oct. 28, 1987) (allowing access under the Rhode Island Public Records Act to a confidential settlement agreement between a city and claimants in a personal injury suit); Guy Gannett Publishing Co. v. Univ. of Maine, 555 A.2d 470 (Me. 1989) (allowing access under the Maine Freedom of Access Act to a confidential settlement agreement between a university and its former basketball coach).

Proposed Legislation

Proposed legislation in Connecticut, Massachusetts, and Rhode Island would add another layer of uncertainty to the enforceability of confidential settlement agreements, and could complicate life for companies operating in multiple jurisdictions with different or conflicting requirements.

Connecticut has seen four bills in the last two years. Two — HB 5743 (2002) and SB 0954 (2003) — arguably would have invalidated the “sick building” settlement outlined above. Although SB 0954 would have allowed a nondisclosure order upon a court finding that privacy interests outweighed the public interest in disclosure, it tipped the balance in favor of disclosure by creating a presumption that the public interest outweighs the privacy interests of a party.

Both bills died in committee, as did SB 0625 (2002), which would have voided confidential settlement agreements that concealed information about “defective consumer goods or services in a lawsuit,” and SB 0361 (2003), a vaguely worded requirement that the Attorney General “monitor” out-of-court settlements agreements in order to investigate patterns or practices that may be harmful to the public.

Massachusetts legislators have also proposed bills in the last two sessions that would threaten confidential settlements. The current proposal, SB 1021, declares that the public has a “right” to information about alleged hazards to the public and would void confidentiality agreements in actions alleging personal injury, wrongful death, or monetary or property damages allegedly caused by a public hazard or financial fraud.

One need only apply this proposal to the “sick building” settlement to see that it raises more questions than it answers.

Is a pre-litigation settlement an “action,” or does the bill apply only to filed litigation? If a “public hazard” is any device, instrument, person, procedure, or product “that is alleged to have caused or is likely to cause injury or financial loss,” do the former employee’s allegations make your client’s building a “public hazard” when you have evidence that refutes those allegations?

If the former employee is free to breach the confidentiality agreement to discuss his allegations about the building, is the company then free, in its defense, to breach the agreement and discuss his performance problems? The proposed bill would allow a court to order confidentiality upon finding an “overriding interest” that overcomes the right of public access to information and a “substantial probability” that the overriding interest will be prejudiced by public knowledge. Would your company’s concerns about employee panic, meritless government investigation, and adverse publicity be an “overriding interest” justifying a court order?

Rhode Island would further complicate the mix with HB 5292 (2003), a pending bill replete with internal inconsistencies. It is not clear whether it applies just to filed litigation, as the word “actions” in section 9-9.1-4 of the bill suggests, or to pre-litigation settlements as well, as the phrase ” any litigation or dispute” in that same section suggests.

Similarly, one sentence of section 9-9.1-4 appears to limit its scope to claims of personal injury, wrongful death, or damages caused by a defective product or an environmental hazard or a financial fraud, while the next sentence provides that any agreements made by private litigants to conceal documents “shall be void and unenforceable as against public policy.”

The bill proposes an elaborate procedure for obtaining protective orders for confidentiality agreements that can include representatives of the public interest including the attorney general, government officials, the media, and “other persons” to participate and provides that they are unenforceable without such an order.

In-house counsel throughout New England would be well-advised to keep tabs on this recent legal trend, lest overzealous legislatures deny companies one of the most effective tools in their arsenal of dispute settlement.

These piecemeal legislative proposals suggest this area strongly needs a uniform rule that allows litigants to settle disputes without unnecessary intrusion while ensuring that true public dangers are not removed from public scrutiny.

Christine Hughes is general counsel of New England Legal Foundation and the author of the Foundation’s recently released White Paper on the issue of Confidential Settlements. She gratefully acknowledges the assistance of Daniel Lyons, Harvard Law School 2005, in the preparation of this article.