What Is a Confidentiality Provision?
A confidentiality provision is a clause included in a legal agreement that prohibits the parties to that agreement from disclosing information designated in the agreement as confidential without proper authorization. Confidential information has been defined by courts as information not generally known to, or readily ascertainable by, the public . The purpose of a confidentiality provision is to ensure that the parties remain instructors of the confidential information. As large sums of money are often at stake in settlement agreements, inclusion of a confidentiality provision can be critical to ensuring the information at issue remains confidential and damaging information is not released by the other party.
The Elements of a Confidentiality Clause
Typically, a confidentiality provision will include the following elements: a definition of the confidential information, a scope which sets out what information is confidential, the duration of the confidentiality obligations, exceptions to the confidentiality obligations, and consequences for breach of the provision.
Definition of Confidential Information: While the interpretation of which information is confidential can be the subject of a dispute in itself, typically the definition used will either be all information disclosed by one party to another which is indicated as being confidential or that which is marked confidential. Another way to deal with the definition of confidential information is to have an exhaustive list stipulating precisely which information is to be treated as confidential. Obviously, the broader the definition, the greater the risk that the confidentiality obligations will not be complied with.
Scope: Confidentiality provisions can be drafted very narrowly or very broadly depending on the parties’ requirements. For instance, some agreements will include confidential information within the scope of the agreement while others will exclude it explicitly (i.e., "Information received by receiving Party through public domain, disclosure of which is required by law, court order, or a governmental regulation where the receiving Party can give the other Party sufficient notice of such requirement."). Such provisions are typical to ensure that the confidentiality obligations do not interfere with the receiving party’s regulatory and statutory obligations. However, the scope can also be used by the disclosing party to ensure that certain information will not be disclosed should the receiving party become privy to information which is marketed to them (i.e., "Any information marked as confidential by disclosing Party, and any information identified to receiving Party as confidential prior to the execution of this confidentiality purpose shall be deemed confidential.").
Duration: Depending on the sort of relationship the parties were involved in or the nature of the information that is confidential, the parties may attempt to limit the duration of confidentiality obligations to something more than five years. For example, a company may wish to set the duration of its obligations upon termination of a joint venture to one year following termination. On the other hand, a strategy might be to provide that the purpose of the confidentiality obligations does not expire even though the relationship is over (i.e., "The parties agree that the purpose of the confidentiality obligations and restrictions contained in this Article do not automatically terminate as a result of the termination of this Agreement.").
Exceptions to Confidentiality Obligations: While the premise of a confidentiality provision is to ensure that information shared between the parties is protected, in practice it is sometimes acceptable that disclosure of confidential information is permissible, such as where the information becomes public knowledge through no fault of the disclosing party or is required to be disclosed by law. Other exceptions to confidentiality obligations are the return of information upon a party’s request, time limitations from initial receipt of information, and the ability to disclose information to affiliates and representatives of the receiving party involved in the confidentiality purposes.
Breach of Confidentiality Obligations: Typically, relief for breach of a confidentiality obligation will be injunctive relief although it is also possible that the agreement will include specific monetary damages should the confidentiality obligations be breached.
The Benefits of Including a Confidentiality Clause in a Settlement
Parties often ask why they should include a confidentiality provision when settling. There is, of course, the common situation when parties want settling a case to be kept private for fear of publicity, but the use of confidentiality provisions extends well beyond that scenario.
Confidentiality provisions are risk management tools. For example, a party settling a contract dispute often wishes to prevent the other party from making public disclosures about similar disputes. By allowing the disclosure of a future similar dispute, the disclosing party exposes itself to a claim of breach of the settlement.
Likewise, parties settling personal claims may want to keep the amounts of the settlements confidential, not to mention the details and circumstances surrounding them. Providing for these limitations in the confidentiality agreement can prevent a situation where the disclosing party must make public disclosures concerning matters which may be embarrassing or otherwise damaging to their reputation.
Even when there is no concern for publicity, a confidentiality provision can address the situation where a party discloses a settlement to an IRS agent or a state tax official, in the hope of paying less taxes on the settlement. Without careful drafting, it could be some (or all) of the payment is not taxable or partly taxable. In this situation, the seller may expose itself to liability for its taxes.
The receiving party may benefit from such provisions as well. For example, a confidentiality provision which permits public disclosures to the receiving party’s tax advisor may allow the parties to avoid a claim by the tax advisor that the receiving party is hiding settlement proceeds. On the other hand, the disclosing party may wish to prohibit disclosing settlement amounts to its accountants.
Potential Downsides and Legal Implications
Although confidentiality provisions in settlement agreements offer many advantages, they are not without their downsides and potential legal challenges. One of the most significant challenges is whether a court will enforce the provision. While "public policy" is tied to the particular state, most courts recognize the public’s interest in knowing about possible dangers to their health and safety. For this reason, most courts will not enforce confidentiality agreements which are in violation of a statute or which compromise the "public interest".
In a case brought under the Federal False Claims Act (FCA), courts have declined to enforce a confidentiality provision where the provision could potentially impede a relator from revealing evidence to the Government that is critical to a FCA suit. For example in United States ex rel. Landis v. Tailwind Sports Corp., 951 F. Supp. 2d 1103 (N.D. Tex. 2013), the district court declined to enforce a confidentiality clause between the relator and his former employer where the agreement prohibited the relator from discussing his allegations that led to a FCA suit. The court stated "[the relator] has a statutory right and duty to disclose evidence of . . . fraud to the government." Finding that the relator’s allegations of fraud presented an "indisputably important public policy", the Court held "[i]n light of this statutory right and duty, the parties’ ability to enter into restricted contracts must yield to the public’s right and interest in knowing how its government spends its money." Similarly, in United States v. Epic Medical Management, Inc., 20-CV-1619, 2023 WL 2821815 (E.D.N.Y. Feb. 24, 2023), the Distict Court invalidated a confidentiality provision that sought to further silence a relator who had alleged violations of the FCA and failed to comply with the "seal" restrictions of the statute. The Court stated "[u]nder the plain language of the FCA, an action ‘shall’ be filed under seal . . ." and "[t]he statutory text makes clear that once the complaint is filed, the relator may share information with the Government, [the third-party defendant] and/or participate in interviews, and may talk publicly about the alleged fraud . . . The confidentiality clause . . . impedes, if not defeats" this right, and is therefore unenforceable.
However, the relator’s ability to disclose the information may be limited by the terms of the settlement agreement. In United States ex rel. Lutz v. Firstsource Advantage, LLC, No. 17-1197, 2023 WL 3723522 (W.D. Pa. June 28, 2023), the District Court held that such settlements are not in the "interests of justice" and will not be approved if they contain "terms which contravene strong public policy," citing Tailwind Sports and Epic Medical Management as examples of District Court cases holding otherwise. However, the Lutz court rejected a Relator’s attempt to exclude certain terms from a renewed settlement agreement, including non-disclosure of documents. The court held the Relator did not show the confidentiality provision infringed on her rights. The court also found that the confidentiality term was not for the sole benefit of [the defendant] and was supported by consideration – that the confidentiality provision was mutual and the relators were compensated for their cooperation. Nevertheless, as described below, even where a District Court has declined to approve a settlement agreement with a confidentiality provision, a confidentiality provision may be deemed enforceable if it "pass[es] [a] close scrutiny analysis." In United States v. BMC Stock Holdings, Inc., No. 6:20-CV-1376, 2023 WL 1768588 (M.D. Fla. Feb. 16, 2023), this test requires a court to determine (1) whether the legitimate purpose of the agreement outweighs the harm of enforcement; and (2) the duration and scope of the restriction are reasonably tailored to the desired effect.
Penalties for Breach and How to Enforce
Confidentiality provisions are typically contractual in nature and breaches are routinely handled with a damages award in the form of liquidated damages. An award of liquidated damages is a method of compensating a plaintiff designed to completely cover all of their damages without the necessity of proving actual damages; it functions as an agreed-to sum and acts as a deterrent to deter a defendant from misconduct. However, a term in a settlement agreement that calls for liquidated damages is not necessarily enforceable, and whether it is can depend on the circumstances, the triggering language, and the jurisdiction.
States differ on the enforceability of liquidated damages and so do settlement agreements. As an example, a court in Texas recently held that a confidentiality provision in a settlement agreement requiring a payment of "any and all reasonable fees and costs to enforce this Agreement including, but not limited to . . . [a]ttorneys’ fees reasonably incurred in the enforcement of this Agreement" was unenforceable even though the payor had breached the agreement. In that case the judge stated that he found the settlement unenforceable on the additional ground that "the parties did not address my ability, if any, to award fees and were silent whether such an award would be reviewed on an abuse of discretion basis." The judge concluded that the silence of the parties was "probably the best evidence . . . that the imposition of fees on the breaching party would be impermissibly punitive, in violation of Section 41.0059 of the Civil Practice and Remedies Code." Other state courts have come to directly the opposite conclusion . For example, a Pennsylvania court held that liquidated damages are enforceable and did not penalize the breaching party, stating that:
"[t]he reason liquidation of damages has been recognized is because, absent an adequate foreknowledge of damages, they could not be readily or adequately ascertainable, thus making available to a party a suit for breach of contract to recover for all damages sustained by reason of that breach." (O’Brien v. Toll Bros., 705 A.2d 827, 834 (Pa. Super. Ct. 1997)). Further, Pennsylvania courts have found that the fact that liquidated damages are greater than the amount of actual damages sustained does not render them a penalty. (Kelley v. Medical Prof’l, Ltd., 540 Pa. 276 (Pa. 1995)).
Yet other states have held that liquidated damages are enforceable but are more harsher on the breaching party than liquidated damages normally are. For instance, a court in the Ninth Circuit found that liquidated damages were permissible even though the payment of those liquidated damages was meant solely as a penalty, stating:
"We hold that a possible payment of over $250,000 in liquidated damages to The Daily O is not so drastically disproportionate to the damages suffered as to constitute an unlawful penalty." (The Daily O Debt Structured Liquidating Trust v. GTI Capital I, Ltd., 778 F. Supp. 2d 1146 (N.D. Cal. 2011)).
Factors that may affect the enforceability of a confidentiality provision include the language used, whether the agreement restricts the waiver of public policy, and whether the agreement is unconscionable; any of which can render an agreement void, or at least, unenforceable.
How to Write a Strong Confidentiality Agreement
When drafting a confidentiality provision in a settlement agreement, the parties’ expectations and context should be heavily considered. Are the terms going to be public record, or filed conventionally under seal with a motion? If the latter, parties should consider including language regarding what procedures should be followed, as opposed to leaving the procedure open to interpretation in the future. Printed provisions are not as useful as custom provisions that address the parties’ goals of protecting trade secrets, confidentiality of surgery procedures or other unique information. A boilerplate provision for confidentiality typically owes its utility to uniformity, but adding some unique language that is specific to medical practices in which the settlement agreement may be relied upon by a provider, hospital or employee, can prove helpful as a purely practical matter. Even should a party be willing to allow for certain disclosures, the questions of who is going to be speaking and to whom should be clearly delineated. Will parties be allowed to speak to members of the press? Public statements about the case? The settlement? "We agree to make no public statements about the case or the settlement" is fine boilerplate, but adding a specific carveout for press inquiries, such as "in the event of a press inquiry, both parties will simply state that ‘the matter has settled,’" can help prevent miscommunications and potential contempt of negotiated settlement terms. Just as each situation is unique, so should be confidentiality provisions. Parties should not rely on the work of others, but should instead carefully draft their forceful provisions in light of their own unique needs, including consideration of all possible interpretations of their intent and terms.
Confidentiality in Famous Cases
Confidentiality in high-profile cases must be weighed against public interest
High-profile cases often draw significant media attention and can become explosive in nature, such as in cases involving celebrities or elected officials. As a cautionary example, when a well-known radio personality announced his resignation on-air amid allegations of sexual harassment, it was reported that the matter would be covered by an NDA. While many NDAs are intended to silence further public disclosure about the subject matter of the agreement, can they ever be held up in instances where the matter at issue involves the public interest? In the recent case of Laird v. Tatum, the California Supreme Court was asked to decide this very issue, where one of Hollywood’s biggest stars agreed to settle her on-set injury lawsuit with Summit Entertainment, agreeing to not publicly disclose details of her claim (which included the fact that she was injured at all), for an undisclosed sum. The Court considered whether Ms. Laird breached her NDA when she goaded Tatum into making harassing comments about her publically on the red carpet and was accused by Summit Entertainment of reneging on the settlement agreement. The Court held that while the presumption of confidentiality is that NDA’s are binding—relying heavily on the privacy provisions of the California Constitution—the enforceability of NDAs will depend upon the true nature of the information that is the subject of the agreement against the plaintiff’s right "to disclose information concerning a matter of public interest…" In this case, the Court held that Ms. Laird did not breach the NDA "as a matter of law" , since the settlement agreement prohibited her from disclosing that she had made an injury claim, and under California law, injury claims facts are of significant public interest. This case speaks to the tension present in many high-profile cases, where one party (often the person with the biggest megaphone) wants to tell his/her side of the story, and the other (often the party with the most to lose) wants to stay silent and protect their privacy interests. This tension is the reason why cases involving NDAs often have global or multi-jurisdictional elements, to try to enforce the NDA outside of the court system and in the public domain (courts typically cannot enforce an NDA absent another cause of action, such as theft of proprietary information, since they don’t have jurisdiction outside of their country’s borders, but we are seeing more and more attempts at this now as businesses and film production companies operate globally). In high-profile cases, media attention can escalate differently, and with different implications. Where a company, for example, is the subject of a class action suit with thousands of claimants, the payout or loss is not going to escalate to the same degree in a matter where a famous entertainer is lobbying angry fans with accusations about an injury claim, and who may be the one with the most to gain. In the end, litigation involving NDAs should balance the ease of enforcement of an NDA (versus the right to bring the dispute in court, sometimes even under seal), with the public interest that can sometimes lie at the heart of a dispute, when determining appropriate settlement terms.