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13 December 2023

Non-Disclosure Agreements: A reputational asset or liability?

At their most straightforward, non-disclosure agreements (“NDAs”) are simple legal contracts governing the confidentiality of information. NDAs serve various important and legitimate purposes. They are perhaps most often used by businesses to protect trade secrets and to protect against exiting employees disclosing confidential information.

They are also commonly used to compromise claims or threatened claims of exiting employees including in cases where there is a threat of publication of confidential information, private information or where the employee is threatening to publish defamatory allegations. Often the business will prefer to settle on contractual terms providing for confidentiality regardless of whether a claim is likely to be successful because of the inevitable associated management time, legal costs and reputational risk of defending a claim. In this context, it is worth bearing in mind that cases in the Employment Tribunal are often public and the general rule is that costs are not recoverable by the winning party (in contrast to many other types of litigation).

Politicisation of NDAs
Public perception has made the term ‘NDA’ synonymous with high-profile individuals – think Weinstein, Green, Trump – being accused of covering up some form of serious wrongdoing in return for the payment of large sums of money. The Weinstein revelations and the associated #metoo movement have created an environment in which NDAs have become highly politicised.

The question of NDAs being used to cover up wrongdoing was thrust into public consciousness in 2018. The Daily Telegraph had sought to publish allegations that Sir Philip Green had sexually harassed and racially abused some of his employees. Sir Philip initiated anonymised legal proceedings on the basis that the paper had received the allegations in breach of confidence (i.e. in breach of NDAs). Ultimately, the case did not reach trial; Lord Hain invoking parliamentary privilege to name Sir Philip in connection with the allegations rendering an injunction worthless. It is noteworthy that even though the Court of Appeal ultimately granted the interim injunction sought by the claimants (two companies and Sir Philip) to stop publication, in its interim judgment it acknowledged “the important public concern about misbehaviour in the workplace as well as the legitimacy of non-disclosure agreements and other legal devices for ‘gagging’ disclosure by victims”.

Following hot on the heels of this case, the government launched a consultation in 2019 seeking to “crack down on misuse of Non-Disclosure Agreements in the workplace”, including those seeking to cover up sexual harassment, racial discrimination and assault. The government described the responses as expressing a variety of opinions but overall supporting enhanced protection for vulnerable individuals. It does not appear further substantive progress has been made towards this legislation but there are still strong efforts being made by those campaigning for it.

In parallel, there has been a drive to reduce the numbers of NDAs and to make sure the restrictions in NDAs are reasonable. The Solicitors Regulation Authority has been particularly alive to this issue and published warnings that solicitors should ensure that the terms of NDAs do not prevent reporting to regulators, law enforcement agencies or from disclosures being made that are protected by law. Solicitors have been reminded of the potential imbalances of power between employers and employees, and not to take advantage of unrepresented third parties.

Issues for Employers
It is now more common for those who have willingly signed NDAs to speak publicly in breach of the terms. Not only do people often wish simply to share their own story freely, there can be a desire to give a voice or support to others who have experienced similar serious conduct. This can cause problems for employers.

So, how enforceable are these sorts of contracts and what is the reputational risk for the company of entering into an NDA or indeed trying to enforce it in the event of a breach?

Legally, the starting point is that the principles that apply to contract law apply to an NDA. Therefore, in theory, an exiting employee who has signed an NDA and then speaks to the media and others about material protected by the NDA would be in breach. They are therefore liable for damages under the contract, such as compensation for financial losses caused by the breach (or an account of profits, where the recipient has made commercial use of the information), and the employer may also consider seeking an injunction to avoid disclosure of information protected by the NDA. There are also other claims which can be considered as employees often owe other obligations outside of the NDA together with breach of confidence and defamation, depending on what is said.

However, it is unlikely that an exiting employee will be prevented from speaking out in circumstances where they are reporting what they perceive to be a serious wrong especially where these disclosures are made to the police or proper authority, in accordance with the Employment Rights Act 1996.

There is also the reputational issue of suing an employee for breach of a NDA. Indeed, the public perception is that these agreements are only used where a company is seeking to cover up wrongdoing which has created something of a stigma around enforcing NDAs even in the most straightforward cases. The stigma is strengthened by the perception of an uneven battle between an employer and an individual. In addition, the employer itself may think twice about enforcement as information which is not in the public domain may come out through the Court process.

It is important to seek advice and consider options as to whether to enter into an NDA and if so in what terms. There are various considerations which can limit the legal and reputational risk of such agreements.

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Hanna Basha
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