Nondisclosure Agreements

April 16, 2018
Bob Lawless from the University of Illinois College of Law
University of Illinois College of Law

Nondisclosure agreements – or “NDAs” as they are often called – have figured prominently in the news. Harvey Weinstein had victims of his sexually predatory behavior sign NDAs as part of their legal settlements. Celebrity chef Mike Isabella, who is currently facing allegations of sexual harassment, had employees sign NDAs as a routine part of their employment contracts. Most famously, Donald Trump had an NDA with Stephanie Clifford – better known as Stormy Daniels – in an attempt to prevent her from publicly discussing their relationship.

These cases involve many legal issues, but at the center of each is the NDA. As the name suggests, an NDA is simply an agreement where a person contractually promises not to disclose certain facts.

NDAs can have legitimate commercial purposes and have their origin in employers’ protection of trade secrets. As part of a contract for employment, an employee might promise not to disclose trade secrets the employee learns. This sort of NDA allows employers to protect intellectual property and thereby encourages hiring employees in the first place. Nothing is perfect, of course. An employer could easily abuse an NDA by adopting a broad and aggressive interpretation of what constitutes a “trade secret.”

Someone who breaches an NDA is liable for damages. In a contract case, the damages are what the nonbreaching party would have if the contract had been honored. An NDA seeks to keep a secret, and once the secret is out, it is near impossible to calculate the money needed to compensate the nonbreaching party. If I can mix a metaphor, once the genie is out of the bottle, it is difficult to put Humpty-Dumpty back together or at least calculate the damages caused.

Many NDAs thus provide what the damages will be if the secret is revealed. Such a clause is called a “liquidated damages clause.” Every first-year law student learns that courts will enforce a liquidated damages clause if it is a reasonable estimate of what actual damages would be. Otherwise, the courts will call the clause a penalty for failing to comply with the contract and refuse to enforce it. The Stormy Daniels’s NDA provides that every disclosure triggers $1 million of damages, which surely falls on the unenforceable, “penalty” side of the line. Even if one could argue that the first disclosure caused that much damage to Mr. Trump, the damage caused by later disclosures surely decline quickly once the information gets out.

To enforce an NDA, one is going to have to go to court, and court proceedings are open to the public, which then will defeat the whole purpose of the NDA. For this reason, an effective NDA will be coupled with a clause requiring arbitration if a dispute arises. Arbitrations are private affairs, not open to the public. Donald Trump is trying to force the Stormy Daniels case into arbitration although she has raised defenses to whether he can enforce the arbitration clause. Because NDAs get coupled with arbitration clauses, they can help keep secret information that might be used to prevent harm to others. The secrecy created by the NDAs probably enabled Harvey Weinstein to continue his behavior for as long he did. Legislation has been introduced in four states and even adopted in Washington state to prevent the enforcement of NDAs by employers in sexual harassment cases.

Even in the absence of legislation, the power already rests in the courts to put an end to the secrecy. Under the common law, courts refuse to enforce contracts that are against public policy. As societal values have evolved over time, what constitutes “public policy” has evolved with them. Contracts once considered valuable commercial exchange become odious and unenforceable. In this #MeToo moment, now is surely the time for the courts to consider whether NDAs in sexual harassment cases also belong on the scrap heap of history.