Can You Keep A Secret?
The Ethical and Practical Issues of Confidential Settlement Agreements
By David Grossbaum, Hinshaw & Culbertson LLP, Boston, Massachusetts and Providence, Rhode Island
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Confidentiality clauses in settlement agreements are the rule these days. Defendants want to avoid the bad publicity and do not want the reputation of being a soft target for marginal claims.
Defendants typically have leverage to force plaintiffs into confidential settlements. Most plaintiffs will have no interest in publicizing a settlement, especially where a sizeable monetary recovery is contingent upon a confidentiality provision. Because lawyer is duty bound to promote the client's best interest, a lawyer can hardly insist on the right of self-promotion at the expense of the client.
Although plaintiffs and defendants are typically required to sign these settlement agreements, lawyers rarely sign them. Lawyers are, however, the ones who are most likely to discuss the case with the news media and to use large settlements as a way to advertise their practices and reel in future plaintiffs.
For these reasons, defendants may insist that the plaintiff's lawyers sign a confidentiality agreement that will prevent the lawyer from discussing the facts of the case and the terms of the settlement with anyone, including future clients. Even if the lawyers do not sign these agreements, defendants may argue that the lawyer, as an agent of the plaintiff, is bound by the confidentiality clause. These agreements, however, raise ethical and practical issues for lawyers.
TYPES OF CONFIDENTIALITY CLAUSES
Confidentiality agreements can take a number of different forms. At the least restrictive extreme, these may only bar the plaintiff from discussing the monetary terms of the settlement with the news media. More restrictive forms can prevent the plaintiff from disclosing to anyone the facts of the complaint, any facts or documents produced during discovery, legal theories of the plaintiff or the defense, all expert reports of the parties, and the terms of the settlement. Such agreements may also require the plaintiff to return all documents and other discovery produced by the defendant in the case.
Because proving hard damages from the breach of a confidentiality clause is difficult, some agreements may contain liquidated damages provisions. They may also allow the prevailing party to recover attorney's fees from the breaching party in a suit to enforce the clause.
The fact that the lawyer does not actually sign the settlement agreement does not mean that the lawyer can ignore the confidentiality clause. Many confidentiality clauses apply to the "plaintiff and its agents or representatives." This could easily be interpreted by a court as applying to the plaintiff's lawyer. Moreover, the defendant may require that the plaintiff's lawyer actually sign the confidentiality clause.
There are a number of ethical rules that may impact the ability of the lawyer to sign a restrictive confidentiality agreement that would prevent the lawyer from discussing the plaintiff's allegations, the defendant's theories of defense, and the discovery in the case. These rules may also limit the ability of a lawyer to purge his or her file of any documents or reports produced by the defendant during the action.
For example, Model Rule of Professional Conduct 5.6 provides that a lawyer shall not participate in "an agreement in which a restriction on the lawyer's right to practice is part of the settlement of a client controversy." The comments to the Rule state that the Rule "prohibits a lawyer from agreeing not to represent other persons in connection with settling a claim on behalf of a client." Restrictive confidentiality agreements can actually limit the lawyer's ability to practice law. Consider how inefficient and impracticable it would be for a lawyer to take on a new case that is just like one the lawyer has just settled, and not discuss with the new client anything the lawyer learned through the prior case, or use that information in representing the new client.
Similarly, Model Rule 5.4(c) states that "a lawyer shall not permit a person who recommends, employs or pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering such legal services." Arguably, a lawyer working on a contingent fee is receiving his payment from the defendant and the defendant should not be able to regulate the lawyer's professional judgment in rendering future legal services.
There is also Model Rule 1.3, which states that "a lawyer will act with reasonable diligence and promptness in representing a client. The lawyer shall represent a client zealously within the bounds of the law," and Model Rule 1.1 states that "competent representation requires legal knowledge, skill, thoroughness, and preparation reasonably necessary for the representation." A confidentiality clause could prevent the lawyer from discussing with future clients what they can reasonably expect from bringing a lawsuit against a particular defendant. The lawyer may know from past experience the best way to get a quick and lucrative settlement. If a lawyer cannot share this information, this seriously inhibits the lawyer's ability to zealously and effectively advise clients, and the lawyer is not using all the available skill and legal knowledge. Restrictive confidentiality agreements force a lawyer who has extensive experience in an area of law to act as if he or she has no such experience.
Additionally, the rules governing trial publicity may also have a bearing on the lawyer's right to publicize settlements. Although Model Rule 3.6 prohibits a lawyer from making extra-judicial statements that are likely to prejudice the proceeding, lawyers are specifically authorized to discuss "the claim, offense, or defense involved and, except when prohibited by law, the identity of the persons involved". A lawyer is also permitted to talk about the "result of any step in litigation" and provide "a warning of danger concerning the behavior of a person involved, when there is reason to believe that there exists the likelihood of substantial harm to an individual or to the public interest."
The exceptions to the "no publication" rule are based on the important social interests in having information about certain lawsuits disseminated to the public. As the comments to Rule 3.6 state: "there are vital social interests served by the free dissemination of information about events having legal consequences and about legal proceedings themselves. The public has a right to know about threats to its safety and measures aimed at assuring its security. It also has a legitimate interest in the conduct of judicial proceedings, particularly in matters of general public concern. Furthermore, the subject matter of legal proceedings is often of direct consequence in debate and deliberation over questions of public policy."
Model Rule 1.16, requiring that a lawyer provide the client with the file upon termination of the representation, as well as simple risk management considerations, should make lawyers reluctant to give defendants back critical discovery materials in the case. The lawyer may need these materials later if the client complains about the way the lawyer handled the case.
Courts have occasionally refused to enforce confidential settlement agreements when they frustrate important public policy goals. Brockport v. Calandra, 745 N.Y.S. 2d 662 (2002)("where a confidentiality clause subverts public policy, it is unenforceable").
THE CONSEQUENCES OF VIOLATING CONFIDENTIALITY CLAUSES
If the clause only purports to bind the plaintiff, he or she could be held liable for the lawyer's violation of the agreement, through principles of agency. A lawyer's decision to publish the terms of a settlement may cause a settlement agreement to become void, causing the client to forfeit the settlement amounts. It could also trigger liquidated damages. If this happens, the client will almost certainly sue the lawyer.
The lawyer's violation of a confidentiality clause could also result in a lawsuit against the lawyer by the settling defendant. If this violation has caused significant additional litigation against the defendant, the defendant may sue the lawyer for breach of contract, intentional interference with its contractual or advantageous economic relationships, or violations of state unfair practices laws. Moreover, this could result in the lawyer being reported to the local disciplinary board.
BEST PRACTICES FOR CONFIDENTIAL SETTLEMENT AGREEMENTS
If you are representing a defendant, and it is important to you that the plaintiff and the attorney not disclose certain provisions in the settlement agreement, it is best to set this out clearly in writing and to insist that the lawyer for the plaintiff sign the agreement in his or her own name and on behalf of his or her firm. Do not try and be overbroad with the confidentiality clause so as to create ethical issues for the clients and the lawyers. An acceptable confidentiality clause would prevent the parties and their attorneys from disclosing the specific amounts and other terms of the settlement agreement. If a defendant wants to prevent the plaintiff's lawyer from publicizing facts that were generated during discovery in the case, it may be possible to obtain an agreement that the lawyer will not discuss these matters in the news media, but may be ethically problematic to prevent the lawyer from discussing these facts with future clients.
If you are a plaintiff's lawyer and you know in advance that you are intending to submit an article to a legal publication or talk to the media about the case, it is best to specifically discuss this with the defendant before the settlement is finalized, and as early as possible in the negotiations. You may even want to agree on the specific wording of the press release with the defendant. You must always be mindful that the client's wishes come first, and if you are required to forego publicity in order to consummate a settlement, you must do so as long as you are not being asked to do anything unethical.
When drafting a confidentiality agreement it is also important to make sure that all parties have the right to make disclosures of the settlement terms as necessary for their business purposes, such as seeking financial or tax advice. Defendants may have to disclose the amount of settlements to their insurers or shareholders. Settlements may also become relevant in subsequent litigation, and the parties should be allowed to make disclosures in response to a subpoena. The agreement can require the plaintiff to give the defendant an opportunity to move to quash any such subpoena. It is also prudent to make allowances for the plaintiff to discuss the settlement and the case with immediate family.
In order to avoid problems and lawsuits later on, lawyers should consider exactly how confidentiality agreements affect them and address those issues at the time the settlement agreement is being drafted.