The most damaging attacks against presidential candidate Mike Bloomberg since he joined the Democratic debates have concerned his and his company’s use of nondisclosure agreements to reach settlements of an untold number of sex discrimination and harassment claims. The attack launched by Sen. Elizabeth Warren was particularly impactful.
But these arrangements, known as NDAs or sometimes “gag” provisions — which bar claimants from discussing their concerns in exchange for payment of money, often quite substantial sums, or other emoluments — are among the most beneficial yet misunderstood devices available to resolve legal disputes.
They deserve to be viewed in a more favorable light.
Warren has stayed on the attack after Bloomberg’s initial debate debacle, offering him a form of “contract” that she, a former Harvard Law School professor, drafted to extricate the women who wanted to be freed to talk about their experiences.
Bloomberg has continued to retreat, announcing that he would cease using gag clauses in the future and that three of the existing NDAs would be rescinded.
Actually, Bloomberg does not have to cease future use of NDAs because since late in 2018 a law in New York, Bloomberg’s headquarters, has banned the use of NDAs by employers in connection with settlement of sexual harassment claims.
But NDAs deserve better treatment than the indecent burial Bloomberg is giving them. Rather than being apologetic or ambivalent about them, he should have praised them.
NDAs serve pragmatic purposes for both employers and employees. Few claimants would turn down a robust cash settlement conditioned on keeping quiet. Most lawyers, usually paid a fee based upon the amount of the recovery, would advise their clients to accept an NDA overture or risk going unpaid. And there are reasons claimants themselves might desire confidentiality — not wanting creditors or ex-spouses to know about the money they’re receiving, or worry that prospective employers might hesitate to hire employees who have sued prior employers.
If a client feels it is sufficiently important to disclose details about the controversy, she (or he) is always free to decline the overture to keep quiet, bypassing the money or other benefits that accompany NDAs.
Without NDAs, employers would be less inclined to settle claims, aggrieved employees and their attorneys would be less likely to receive compensation, and courts would be more clogged with litigation.
But claimants, lawyers and judges aren’t the only ones who benefit. Employers are relieved from the prospect of “dirty laundry” being aired in public, which they can pay for as a business expenditure. If the other side does not abide by the gag, the employer can sue to seek return of some or all of the money paid, as occurred in a case decided in 2013 by the Eighth Circuit Court of Appeals, the tribunal overseeing federal litigation in Minnesota and six other Midwest states. In a case entitled Hallmark Cards v. Murley, it ordered a former greeting card executive to return all $735,000 of the severance she had been paid due to breach of a keep-quiet provision.
There are, to be sure, some negative consequences of using NDAs, such as concealing wrongdoing and preventing its rectification. But businesses that buy their way out of these cases will often figure out ways to prevent the recurrence of such costs.
While most provocative in discrimination and harassment cases, NDAs are not confined there. Variations exist in many other genres of legal disputes, for much the same purposes.
The most concerning uses of NDAs may well be in other kinds of cases — particularly cases involving dangerous or defective products or lapses in safety practices — where the agreements may, by covering-up corporate wrongdoing, expose the broader public to heightened risks.
The law is not oblivious to some of these concerns. In Minnesota, it has been the law for more than two decades that gag provisions may not be used in settlement of public sector employment disputes. That proscription arose out of use of an NDA in 1994 by the University of Minnesota in the case of an ousted women’s volleyball coach, Stephanie Schleuder, in connection with concerns she had raised about alleged improprieties in the program.
The prohibition of NDAs in the public sector is sensible because it fosters the public’s right to know how its tax dollars are being used, a concern lacking in private sector settlements.
Federal law can come into play, too. The 2017 Fair Tax and Jobs Act proscribed business tax deductions for payment of settlements and legal fees for sex harassment and sex abuse claims if accompanied by an NDA. Its purpose is to prevent companies from reaping the benefits of tax deductibility for concealment of alleged wrongdoing.
Their negative effects are no reason to dispose of NDAs altogether. Another solution may be to require judicial approval for some, perhaps all, NDAs, or at least the ones that raise the most serious potential side effects for the public.
These and other steps can be deployed to make NDAs worthwhile for all parties. If used properly, they can warrant approbation rather than the wrath of Warren.
Above all, as candidate Bloomberg has learned, gag clauses are no laughing matter.
Marshall H. Tanick is a Twin Cities constitutional and employment law attorney.