Inside Track: Ethical Dilemmas: Does a Non-Disparagement Clause Violate the Rules of Professional Conduct?:

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  • January
    21
    2015

    Ethical Dilemmas: Does a Non-Disparagement Clause Violate the Rules of Professional Conduct?

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    Jan. 21, 2015 – This month's Ethical Dilemmas explores whether a non-disparagement clause in a proposed agreement in a sexual harassment case violates a lawyer’s right to practice as guaranteed by the Rules of Professional Conduct.

    Question

    I recently negotiated a settlement on behalf of a plaintiff in a sexual harassment case. The settlement agreement, drafted by the defendant’s attorney, includes the standard confidentiality clause requiring the parties to maintain the confidentiality of the terms and amount of the settlement. The proposed agreement also contains a non-disparagement clause that provides:

    Plaintiff and plaintiff’s counsel will not directly or indirectly make any negative or disparaging statements in any form against the Company maligning, denigrating or otherwise speaking ill of the Company and its business affairs, practices, policies or reputation that relate to this Agreement and factual allegations made in the litigation or any matter covered by the release within this Agreement.

    Does this non-disparagement clause violate the Rules of Professional Conduct?

    Answer

    Parties who have settled a dispute “often wish to protect their reputational interests and to minimize the prospects of future litigation against them.”1 The most common way to so do is a clause that requires the parties to maintain the confidentiality of the terms and amount of the settlement. With increasing frequency, however, parties have negotiated non-disparagement clauses. These clauses prohibit plaintiffs and lawyers who settle a dispute with a company from directly or indirectly maligning the company by making negative statements in any form about the factual allegations made in the litigation. The primary rule of professional conduct that is implicated by these non-disparagement provisions is SCR 20:5.6.

    SCR 20:5.6(b) prohibits a lawyer from participating in the offering or making of “an agreement in which a restriction on the lawyer’s right to practice is part of the settlement of a client controversy.” The rationale for this prohibition is three-fold:

    First, permitting such agreements restricts the access of the public to lawyers who, by virtue of their background and experience, might be the very best available talent to represent these individuals. Second, the use of such agreements may provide clients with rewards that bear less relationship to the merits of their claims than they do to the desire of the defendant to “buy off” plaintiff’s counsel. Third, the offering of such restrictive agreements places the plaintiff’s lawyer in a situation where there is a conflict between the interests of present clients and those of potential future clients.2

    Moreover, ethics opinions from the ABA and several state bar associations have considered whether other types of restrictions in a settlement agreement violate Rule 5.6(b). For example, ethics opinions from both the ABA and other bar associations have concluded that a portion of the confidentiality clause prohibiting an attorney from “using” any information gained from the case in future cases violates the Rule because such a provision “effectively would restrict the lawyer’s right to practice.3

    Whether a non-disparagement clause that is binding on the attorney violates SCR 20:5.6(b) depends on how broadly such a clause is drafted and interpreted. If the non-disparagement clause is interpreted to ban the filing of a new action against the defendant or to ban statements made in the course of such an action because the statements made in a complaint or made in the course of the litigation are disparaging, then the agreement would clearly violate SCR 20:5.6(b).4 Such a ban effectively would restrict the lawyer’s right to practice just like the prohibition from “using” any information gained from the case in the future cases.

    Even if a non-disparagement clause applies only to statements that the attorney might make outside the context of a future action against the defendant, the agreement may still violate SCR 20:5.6(b). Ethics opinions from other jurisdictions have concluded that settlement provisions prohibiting an attorney from advertising that the attorney has handled a particular type of case or cases against a particular opposing party violate the rule.5 SCR 20:5.6(b) is also violated by a clause that prohibits a lawyer from advertising that he or she handles or has handled a particular type of matter. Such a clause would restrict the access of the public to lawyers who, by virtue of their background and experience, might be the very best available talent to represent these individuals.6

    Moreover, SCR 20:5.6(b) would prohibit clauses that limit a lawyer's ability to discuss his or her past experience against a particular defendant especially because the lawyer must be able to truthfully tell the client or prospective client about the lawyer’s relevant experience.7

    The non-disparagement clause presented by the question is broadly drafted and can be broadly interpreted to prohibit the lawyer from filing a new action against the defendant, to prohibit the lawyer from advertising that the lawyer has handled a particular type of case against a particular company, and to prohibit the lawyer from discussing his or her relevant experience with a client or prospective client. If so interpreted, the lawyer would be prohibited by SCR 20:5.6 from entering into that agreement.

    At the same time, the non-disparagement clause presented by the question is ambiguous and could be interpreted narrowly to apply only in those circumstances where the lawyer could properly agree to refrain from making disparaging statements. For example, the lawyer may properly agree not to make statements to the media condemning the company’s hiring practices or not to write a law review article criticizing the company’s business practices. If the non-disparagement clause is so interpreted, the lawyer would not be prohibited by SCR 20:5.6(b) from entering into that agreement.

    To avoid the risk that a non-disparagement clause would be interpreted to prohibit the lawyer from filing a new action or from advertising that the lawyer has handled a particular type of case against a particular company, the lawyer should clarify the scope of the clause. For example, the lawyer could add a statement that “nothing in the agreement shall be interpreted to restrict the lawyer’s right to practice in violation of SCR 20:5.6(b).”

    Endnotes

    1 Indiana Ethics Op. No. 2014-1.

    2 ABA Formal Op. 93-371.

    3 ABA Formal Op. 00-417; Arizona Ethics Op. 90-6; Colorado Ethics Op. No. 92 (1993).

    4 Indiana Ethics Op. No. 2014-1.

    5 South Carolina Ethics Op. 10-04 (2010); San Francisco Bar Association Ethics Op. 2012-1.

    6 Indiana Ethics Op. No. 2014-1.

    7 Indiana Ethics Op. No. 2014-1. In making such statements, the lawyer must be careful to avoid revealing information relating to the representation of a former client in a way that would violate SCR 20:1.9(c)(2).




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