NDAs, Taxes, and #metoo—Can Non-Disclosure Agreements Included in Settlement Agreements Stand in the Wake of the #metoo Movement?

Settlement agreements commonly contain confidentiality provisions or non-disclosure agreements (“NDAs”). NDAs attempt to bring a greater sense of closure to a dispute preventing either party from disclosing the settlement terms, and sometimes, the underlying facts of the conflict.

As recently seen in McKayla Maroney’s concerns about speaking out in the face of an NDA with USA Gymnastics preventing Maroney from discussing allegations that she was molested by a former USA Gymnastics team doctor, Larry Nassar, NDAs can be included in settlement agreements concerning sexual abuse complaints. As of late however, the ethics of NDAs and the ultimate enforceability of confidentiality agreements in this context have come into question. Further, pursuant to the 2017 Tax Cuts and Jobs Act, there are new tax implications for amounts paid to settle allegations of sexual misconduct containing an NDA. Can NDAs legally stand in the wake of the #metoo movement? Regardless of the legal answer, properly tailored settlement agreements are more critical than ever.

Ethics

Generally speaking, parties can contract for whatever they want within the bounds of the law. To this end, confidentiality agreements in settlements often contain provisions that expressly dictate what can be said regarding the underlying dispute and the settlement. Carefully drafting what can be disclosed about the dispute may be the only way to control both the accused’s and the victim’s narrative in a way that satisfies the ethical demands of this issue.

One ethical question is obvious. Is it ethical to silence a victim when their assailant may continue this practice post settlement? On the flip side, a (sometimes) less appreciated ethical question should also be asked: is it ethical to silence an innocent accused from correcting the record? As evidenced by the real-world examples of Chrissy Teigen and Kristen Bell offering to pay any liquidated damages (penalties for breach of contract) for McKayla Maroney resulting from Maroney’s breach of her NDA versus HBO’s defense of James Franco in the face of unsubstantiated sexual misconduct allegations, the ethics are challenging. In fact, as illustrated by Kate Upton’s recent allegations against Guess co-founder Paul Marciano, many accused have opted to step away from their companies and positions after being accused of sexual misconduct.

Taxing Settlement Payments

Real world ethics often affect legislation. In the past, amounts paid pursuant to a settlement agreement were (at least partially) deductible as a business expense. The 2017 Tax Cuts and Jobs Act now expressly restricts an employer’s ability to obtain a tax deduction for the settlement of sexual misconduct allegations that are subject to an NDA. As the 2017 Tax Cuts and Jobs Act provides:

Payments related to sexual harassment and sexual abuse – No deduction shall be allowed under this chapter for –

• Any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement; or
• Attorney’s fees related to such a settlement or payment.

In practice, this new provision of the tax code has interesting and somewhat counter-intuitive implications. While this provision of the tax code appears to punish employers for discouraging victims of sexual misconduct to speak, this provision may, in fact, be ultimately bad for victims.

NDAs are often considered to add value to a settlement for employers. If settlements with NDAs are no longer tax deductible as a business expense, the employer may offer less money. Will this create a disincentive for victims to speak? Alternatively, if employers know that any settlement amounts paid pursuant to an agreement with an NDA will no longer be tax deductible, will employers be incentivized to discourage sexual misconduct in the workplace to prevent these allegations from even arising? At the very least, this new provision of the tax code adds an extra layer of complexity to an already complex issue.

Enforceability of NDAs in this Context

Real world ethics sometimes affect judicial rulings. Legally, courts are empowered to invalidate agreements that are against the law, unconscionable, or contrary to public policy. Even in the face of an iron-clad confidentiality agreement, NDAs can nevertheless be invalidated.

By way of example, courts invalidate confidentiality agreements that prevent employees from discussing their wages and working conditions post-settlement. In fact, the National Labor Relations Act (“NLRA”) gives employees the express right to discuss the terms and conditions of employment. Relevant here, the NLRA encompasses the “right to discuss discipline or disciplinary investigations with fellow employees”, giving critics of NDAs in the sexual misconduct context colorable, statutory authority to challenge such an NDA. Alternatively, courts have also stated that where employers have a “legitimate and substan­tial business justification” for requiring confidentiality, employers can legally prohibit employees from discussing an ongoing investigation. In short, a slander-cease-fire embodied in an NDA, if ever litigated, may not preserve the settlement parameters in all instances. Under the right circumstances, a court may invalidate the NDA altogether.

The ultimate implications of the #metoo movement remain to be seen on many fronts. In the context of NDAs and legal settlements however, thoughtful settlement provisions remain key.