Confidentiality Provisions: A Primer
Confidentiality provisions are both a quintessential and a complicated part of most settlement agreements.
Parties agree to them and lawyers draft them all the time. At the same time, the nuances in confidentiality also have been the subject of numerous judicial opinions. It is probably safe to say that we all know what confidentiality in settlement agreements are, but we also know there are different kinds and different ways they can attach to settlement agreements.
Confidentiality has a simple definition, which you have probably heard from the time you were old enough to understand it: keeping something secret, or being secretive about something.
A confidentiality provision is simply a portion of a settlement agreement that provides for the duty to treat certain information as confidential. A typical provision would agree that a party would not disclose certain information without the written consent of the other party.
Confidential provisions are important in many settlements because they help protect sensitive , private and confidential information. They are often vital to help encourage parties to explain the circumstances that caused them to enter a dispute with one another or to help a party explain questionable matters without the fear that it would become widely known.
In general, we think of a confidential provision for a settlement agreement as applying to the information exchanged in connection with the agreement. For example, the confidential communication and related information that are exchanged during the course of a mediation. The same is true for information any party provides to support confidential matters or to support a claim for damages.
A longer term application of confidentiality provisions would include keeping documents, the information contained in those documents and communications among the parties confidential.
Typical Components of Confidentiality Clauses
The confidentiality clause in a settlement agreement commonly will contain some or all of the following components:
Scope
The scope of the confidential information that is protected by the settlement agreement is typically broad; it will include a general catchall term such as "any and all information relating to the parties." However, confidentiality provisions could also carve out sources of information that certain parties expect to be able to publicize – such as generally available information or information acquired from a source other than the parties.
Duration
In many cases, the confidentiality obligations last for a period of time; in some cases, there is no express time limit (which means that the confidentiality obligations could last indefinitely). An example of a time-limited provision is clause in an employment contract that specifies that the employer’s trade secrets will be protected for five years after termination of employment. The timing of the confidentiality obligations also can be flexible. An explicit disclosure of confidential information in a court filing, for example, could serve as a trigger point for the start of a period of time within which the information must be kept confidential.
Exceptions to Confidentiality
In addition to emergency exceptions for disclosures authorized by a court (or otherwise compelled), settling parties might wish to carve out exceptions to the provisions of a settlement agreement.
Legal Consequences of Disclosing Confidential Information
The legal implications of breaching confidentiality provisions in a Settlement Agreement can be significant. Again, it is very important to consult with an attorney experienced with the enforceability of confidentiality provisions in New York State prior to signing the Settlement Agreement. The parties may agree to the imposition of specific penalties in the event that either party violates the provision including liquidated damages, indemnification as applicable, and injunctive relief.
Liquidated damages should be an agreed amount to be paid for each occurrence rather than a multiple of the damages incurred. For example, the provision could state that if either party breaches the confidentiality provision, that party will pay the other party $50,000.00 for each occurrence plus any out-of-pocket expenses and attorneys fees incurred as a result of the breach.
If the confidentiality provision is breached, indemnification could be a requirement that the indemnifying party compensate the non-breaching party for the damages incurred as a result of the breach, including out-of-pocket expenses and attorneys fees. For example, the provision could state that if either party breaches the confidentiality provision, that party agrees to indemnify the other party for all out-of-pocket expenses and reasonable attorneys fees incurred by the non-breaching party in an amount not to exceed $50,000.00.
As to injunctive relief, a court may enforce an injunction prohibiting disclosure of information as long as that information is proprietary and/or commercially sensitive, not violative of the First Amendment, and limited in both temporal and geographic scope to the extent necessary to protect the interest sought to be protected.
Utility of Confidentiality in Settling Disputes
The use of confidentiality provisions in settlement agreements is a common practice in dispute resolution. They serve numerous purposes and are particularly valuable in fostering an environment where the parties can speak freely. Confidentiality provides assurance that discussions aimed at reaching a settlement and characterized by candor, cannot be later used against a party.
Settlements often involve some form of concession between the parties. When the particulars of a settlement are confidential, significant concessions – which may assist other litigants, are shielded from disclosure. The objective of most litigation is to achieve advocacy for the client’s position. It is counter-intuitive for counsel to suggest to their client that part of their case has weaknesses which it would be in the client’s best interest to concede. Confidentiality allows that message to be conveyed openly and candidly between counsel and to a mediator without fear that the information will come out into the public domain.
By the time matters have settled into a mediation, the parties’ matters have probably become fairly entrenched and each partner has likely made a strong and lengthy argument in support of their own position. Without the assurance that these arguments and the information supporting them will remain confidential , neither party would be open to discussing areas of agreement (without feeling vulnerable about what they’ve given up). Confidentiality provides an additional layer of protection to the process.
In many cases, disclosing the settlement of a case in public would be a substantial injustice to the parties in circumstances that are not fundamental to a decision by the court. As a general rule, the proceedings in a court, once begun, are presumed to be public. However, the court has discretion to make an order prohibiting the publication of the evidence or information presented in those proceedings. Section 135(2) of the Courts of Justice Act, RSC 1985, c 41 and Rule 39.1(1) of the Rules of Civil Procedure, RRO 1990, Reg 194 provides that the court may make an order prohibiting any person from publishing any evidence or information adduced in the proceeding or trial. A common use of the discretion to seal is to require the parties to a proceeding to keep the settlement confidential. There have been several applications before the courts to seal settlement agreements and orders have been made. Examples of factors considered in the decisions are:
Transparency versus Confidentiality
When To Waive The Cloak
The struggle between openness and confidentiality in settlement agreements is a common challenge for lawyers. Federal courts, in particular, will not approve a settlement agreement involving a minor child unless there is "good cause" for keeping the terms secret. When it appears that the minor’s best interest is to seal the Agreement, the focus is on whether the proposed material is an unwarranted invasion of personal privacy. Carpenter v. County of Santa Clara, No. 5:12-CV-5808 EJD (HRL), 2014 U.S. Dist. LEXIS 177771 at *3-4 (N.D. Cal. Dec. 17, 2014) (sealing releases, medical records and tax returns of minor children involved in County child welfare action). In addition to protecting minors, concerns about public safety could justify overcoming a settlement agreement’s confidentiality provisions in an appropriate case. See, e.g., Doe 1 v. Abbott Labs, 67 F. Supp. 3d 1008, 1019 (N.D. Cal. 2014) ("the court believes that while the re-dacted settlements do contain disclosures that arguably invade the grantees’ privacy, those disclosures are outweighed by the public interest in accessing the re-dacted agreements because the re-dacted agreements shed light on the FDA’s past and current investigative efforts.").
In Doe 1, the court concluded that "public interest in disclosure not only outweighs the competing interests in nondisclosure, but also outweighs plaintiffs’ privacy interests." Id., at 1019. The court found that the redacted information was already publicly available, and that "the court is not persuaded that the information in the re-dacted agreements is especially sensitive or would be of unique concern to individuals seeking to avoid unwanted publicity." Id.
In Rodriguez v. County of Los Angeles, No. CV 05-00328-RGKPJWX, 2011 U.S. Dist. LEXIS 110049 (C.D. Cal. Sept. 27, 2011), the court similarly concluded that the public interest in knowing the facts surrounding a jail inmate’s death outweighed the plaintiff’s privacy interests in the settlement agreement. As in the Doe 1 case, the court observed that the information was already public. Id., at *10-11. The court further reasoned that there was "a strong public interest in the identity of the witnesses and the settlement amounts investigation." Id., at *11-12.
The "public interest" exception was also the basis for the court overriding a confidentiality agreement in Florida. The plaintiff sued Palm Beach County and Sheriff Ric Bradshaw, alleging § 1983 civil rights violations in the shooting death of his son. The parties entered into a settlement agreement after filing the motion for summary judgment, where the defendants agreed to pay a total of $100,500 in exchange for "a full and final release and stipulation of dismissal with prejudice." Bradshaw, sheriff of Palm Beach County, Fla., and Palm Beach Cnty., Customs Enforcement Corp. v. Doe, 280 F. App’x 925 (11th Cir. 2008).
The settlement also entered into with "respect to their documents, which shall continue to be confidential." Id. The district court originally granted the plaintiff’s request to lift the confidentiality provisions in the agreement, but the appellate court reversed. Id.
The appellate court found that while the settlement agreement was confidential, "those portions of the agreement containing the facts surrounding the incident and disposition of the incident are matters of public interest." Id., at 926. The court based its reasoning on the "clear Tennessee public policy favoring the open examination of public records." Id.
As for the confidentiality provision, the court states that "to the extent that the parties intended by their settlement agreement to enter into a confidentiality agreement that would violate the Tennessee Public Records Act (T.P.R.A.), Tenn. Code Ann. § 10-7-101 et seq., such an agreement would be void." Id. The court, therefore, "conclude[d] that, pursuant to T.P.R.A., the district court was required to strike the confidentiality provision from the parties’ settlement agreement." Id.
Provisions for Confidentiality
A well-drafted settlement agreement results from a careful negotiation of key deal points. Parties should be careful to avoid sloppy or less than comprehensive drafting, particularly when it comes to certain important provisions like confidentiality.
In practice, confidentiality provisions typically define what, if any, information a party can or cannot disclose about the case’s facts, its outcome, and/or the settlement. A well-drafted provision would identify specific types of information that are, or are not, confidential, including information exchanged in discovery, facts underlying the parties’ agreement, and the settlement’s terms.
Parties should consider if their confidentiality provision needs an exception for disclosure to the parties’ financial and tax advisors, or other "allied" parties. In addition to identifying the individuals or roles that are "allied" parties, their necessary need to know the parties’ information should be factored into the analysis of whether disclosure is preferable or mandatory.
The provision should also address the parties’ ability to disclose information to the extent mandated by a court order, applicable law, or similar legal disclosure obligation. Drafting should anticipate the necessity for the parties to disclose information (1) in connection with a judicial enforcement action or discovery dispute, (2) to governmental bodies charged with enforcing relevant laws, or (3) to comply with accounting rules or tax requirements. Consideration of one’s state’s exceptions to the attorney-client privilege is also sensible, albeit outside the scope of this discussion .
A narrowly drafted confidentiality provision addressing a limited number of facts may, in reality, limit the parties’ ability to fully participate in other, directly related transactions. For instance, in a merger, providing some of what will be publicly-released information to lenders or buyers under confidentiality agreements would benefit the parties’ deal and expand the settlement’s terms, rather than limit its effect.
Drafting should also anticipate the possibility that a party will voluntarily disclose confidential information to other parties after the agreement is executed. Some agreements include a release from liability for disclosing in furtherance of mutual objectives, and some merely require written consent of the disclosing party. Drafting alternatives necessitates an understanding of the parties’ likely business dealings.
As with many topics, clarity is essential to drafting an effective confidentiality provision. Vague or unclear provisions will result in risk that a party may interpret its obligations differently from the other party. And parties should carefully consider what information may be disclosed in the future, to avoid repealing the protection afforded by the agreement. Repeatedly, the parties should be encouraged to clarify the provision in such a way to avoid future disagreements. By approaching the provision with an eye toward the future, the parties may avoid a costly, time-consuming, and distracting challenge to the settlement’s integrity.