Confidentiality clauses—discussed in news reports of recent celebrity sex harassment scandals—have become a standard provision for parties entering settlement agreements. Attorneys routinely advise clients on the pros and cons of confidential settlements and whether confidentiality should be an essential term or a “deal breaker” for a particular settlement.
A client may prefer a confidential settlement for a variety of reasons. For example, a defendant may seek confidentiality to avoid the perception of the settlement as a “win” for the plaintiff. With public disclosure of a settlement, other potential claimants could be encouraged to bring suit without bearing in mind the facts and issues particular to their claims. A plaintiff, on the other hand, may prefer a confidential settlement as a means to prevent the release of private information, such as any personal or sensitive facts underlying the plaintiff’s claims.
Attorneys handling confidentiality clauses in settlement agreements encounter unique risks, both for themselves and their clients. By taking these considerations into account, attorneys can take steps to preserve confidences in settlement while still meeting their obligations under the rules.
Policy Considerations for Client
The specific circumstances of the settlement may guide the attorney and the client when considering the scope or application of any confidentiality provision as a requisite for settlement.
Confidentiality clauses in settlement agreements can include a range of restrictions. On one end of the spectrum, the clause may attempt to preclude disclosure of the nature of the dispute, the facts underlying the claims and any discovery exchanged. This type of clause may be less effective if litigation has already commenced and publicly available pleadings and documents disclose the parties’ dispute. On the other end of the spectrum, the confidentiality language may refer only to the terms of the settlement itself. This may bar a settling party from divulging the amount of any settlement payment, or it may cover all issues discussed in negotiations.
The recent celebrity scandals involving confidential settlements that purportedly concealed wrongdoing for many years have caused some to question whether confidential settlements strike the appropriate balance between the interests of the settling parties and the public’s right to information identifying potential wrongful actors.
However, in most circumstances, confidentiality is a bargaining chip in negotiations like any other. Public policy concerns can be addressed by counsel representing the accuser, who is additionally entitled to privacy and may believe that confidentiality is in her own best interest as well (in light of the other terms of settlement). This public policy concern merits discussion with clients before entering a confidential settlement. The client can make the ultimate choice.
Ethical Considerations for Counsel
Settlement agreements are generally signed only by the parties in dispute. Still, these agreements often define a party to include agents and representatives, including a party’s attorneys. Therefore, even if not a direct party to the settlement, an attorney may be bound by the confidentiality provisions of a settlement as an agent of the client, in addition to the attorney’s general obligation to maintain client confidences under the ethical rules.
Notably, in some circumstances, the ethical rules that govern attorney conduct may conflict with the terms of a settlement agreement.
For example, Rule 5.6(b) of the ABA Model Rules of Professional Conduct restricts an attorney from offering or making “an agreement in which a restriction on the lawyer’s right to practice is part of the settlement of a client controversy.” The Rule comments explain that Rule 5.6(b) “prohibits a lawyer from agreeing not to represent other persons in connection with settling a claim on behalf of a client.”
Some states have enforced confidential settlements that preclude counsel from disclosing specific terms of settlement but have often stopped short of barring counsel from using general knowledge about the case or the party in representing other clients. Attorneys can be mindful of confidentiality clauses that may attempt to bind counsel to terms that would violate the Rules of Professional Conduct. An overbroad provision may prove ineffective and may leave a gap that the client did not intend.
Liability for Breach of Confidentiality
Attorneys are generally not permitted to be whistleblowers of misconduct they have learned about in the course of representing a client under Rule 1.6 of the ABA Model Rules of Professional Conduct. There are certain exceptions to that Rule in that attorneys may reveal confidential information to prevent harm to another as a result of a client’s criminal conduct. By agreeing to be bound by a confidentiality agreement, however, an attorney who discloses confidential information—even where it is the confidential information of an opponent rather than a client—may face civil liability.
Even a mistaken breach of a confidentiality provision can invalidate an entire settlement, whether the breach is a result of the conduct of the client or the attorney. Many attorneys will discuss with their clients the importance of confidentiality in complying with the terms of settlement, particularly in the age of social media.
Upon a breach, the breaching party could be required to return any settlement proceeds and could be subject to liability for breach of contract. The settlement agreement might even provide for liquidated damages in the event that a party breaches confidentiality.
A confidentiality clause may provide limited situations in which disclosure of the protected information is not actionable. There is generally an exception to confidentiality where disclosure is required by law or demanded by subpoena in another judicial proceeding. In addition, parties often agree that terms of settlement can be disclosed to attorneys, accountants, insurance companies and other professional advisers, as necessary, for business purposes.
Notwithstanding the risks, confidential settlement agreements can protect a client’s interest and lead to favorable result.