Bar News - December 13, 2013
Business Law & Business Litigation: Shh! Managing Confidentiality in Settlements
By: Bruce W. Felmly and Jennifer L. Parent
The thought first hit the company’s in-house counsel late that evening, after the kids had been put to bed. They had settled the case at mediation earlier that day and had signed a term sheet. Neither side had actually mentioned a confidentiality agreement as part of the deal. “But mediation is a confidential matter, so it’s implied...,” she mused hopefully. A late-night call to her outside counsel was not reassuring. “Let me see what I can do with opposing counsel tomorrow. Maybe adding a confidentiality agreement won’t be a problem.”
Agreements to keep settlement results confidential are common in the resolution of commercial or business disputes. Plaintiffs and defendants settle cases for a variety of reasons, and it may be in the best interests of one or more of them to keep terms or aspects of the dispute from becoming public. The amount of settlement payments, the specifics of licenses of patents or intellectual property, provisions governing employee separation terms, and language to be added to personnel files are all examples of provisions parties may find important to keep confidential.
This privacy interest can drive the resolution of a dispute. The fact that settlement discussions or even mediation may be “confidential,” or at least inadmissible, does not necessarily mean the terms or outcome of the final settlement agreement are also confidential.
Scope and Exceptions to Confidentiality
There are a variety of common circumstances impacting the scope of, or exceptions to, confidentiality provisions in settlement of business disputes.
Who needs to know and to what extent? Confidentiality provisions often include carve-outs for the usual professional consults with counsel, accountants, or tax advisors. Even if not mandated, settlements with individuals may practically require that close family members be informed of the terms. But there are other aspects of a business dispute that require consideration when determining the scope of privacy.
Not only are financial terms likely essential knowledge for the company’s accounting or tax advisors, but the company’s board of directors/trustees or shareholders may need to be advised of certain terms, given their fiduciary obligations.
Courts or governmental authorities or agencies, with or without jurisdiction over the entities, may need to be informed of certain terms or may be able to compel disclosure by law.
In cases where judicial or administrative settlement demands an approval process, the confidentiality of a transaction or resolution may require special terms setting forth what efforts will be made to seal the record or limit access.
Settlements with entities subject to the Right-to-Know Law or Freedom of Information Act may demand transparency.
Cases involving patents, trade secrets, or other proprietary information may include return or destruction of document provisions. If a court has entered a protective order, terms should comply with those obligations, and parties may incorporate the enforcement terms for contempt.
Federal or state laws may require disclosure of confidential information in other related or unrelated proceedings. This should also be considered where one defendant settles in a multi-defendant litigation.
Enforcement of the agreement is also excluded from nondisclosure.
Attempts to limit litigation counsel from using settlement or case information in the representation of other parties with similar cases raises important issues of professional ethics.
Additionally, exceptions to confidentiality rarely demand or call for disclosure of every element of the transaction. Determine who needs to know and what needs to be disclosed.
When to Allow Statements to Third Parties, the Public, or the Press
Companies may not want to preclude all public disclosure. There are also practicalities to consider when people already know about the litigation. In certain cases, a short statement explaining the status may be sufficient, such as: “In response to any inquiries or in any communication regarding the conclusion or resolution of this matter, Acme shall state or indicate only that the matter was resolved amicably.”
High-profile or bet-the-company disputes require consideration of the company’s public image or a product or service and a plan for strategic communications. “No comment” or the above statement won’t work. Groups handling message development can assist with creating and delivering a message to the public or media during the resolution process. Will there be a joint statement or individual statements? This all needs to be worked out at the time of negotiation, so that there are no misinterpretations.
Enforcement of Confidentiality Agreements
Parties entering into a transaction providing for confidentiality should incorporate specific terms describing the penalties for breach and the mechanisms of enforcement. These provisions can be “deal killers,” but, in a significant matter, leverage is lost if they are left for resolution at a later day following the formation of an agreement in principle. Not only does enforcement often become a key provision in the settlement agreement, but non-compliance with confidentiality agreements is common.
Risk of non-compliance increases significantly when the sanctions or compensation for breach are vague or weak. There are a host of options available for enforcement (in descending levels of in terrorem effect) – substantial liquidated damages; forfeiture of deferred settlement payments; rescission of the entire settlement agreement (with all of the attendant impracticality that brings); injunctive relief with low burdens of proof and stipulated irreparable harm; judicial enforcement in a specific forum in conjunction with an award of attorney’s fees to the prevailing party; notice of breach and demands for further assurances (or threats to tell Dad or Mom when they get home from work...).
Protective orders entered by a court also allow remedies for enforcement of improper disclosure of documents or information produced in discovery. Consider incorporating the court order into the settlement.
Vagueness and uncertainty in confidentiality clauses can be costly in many ways. Carefully consider the nature of the dispute and resolution desired. Parties negotiating a deal should anticipate and plan for the scope and limits of confidentiality, before the final handshake on the principal terms of the settlement.
Bruce Felmly and Jennifer Parent serve as chair and vice chair of the litigation department at McLane, Graf, Raulerson & Middleton and are members of the firm’s commercial litigation group. They can be reached at 603-625-6464 or via email at firstname.lastname@example.org or email@example.com.