10/10/2023
When is Your NDA Illegal?
Have you signed one or written one—a non-disclosure agreement or a non-disparagement agreement (both generally known as an “NDA”)? Perhaps an Employment Contract agreeing not to disclose company confidential information? Or a termination Release Agreement, conditioning pensions or severance benefits on not having disclosed bad facts about your company?
Many of us have, and many of us have wondered whether they are enforceable.
Well, in the United States they aren’t enforceable if they prevent an employee or former employee from whistle blowing to the government about their companies’ illegal acts. And on top of that, your company could be liable for huge fines if it uses them.
To date, though, this hasn’t stopped employers from requiring people to sign them. It’s called an “interrorem clause”—one that the company knows is unenforceable but writes into the contract to cause “terror,” to deter the other side from taking a legally protected action that the company wouldn’t like.
On September 29 this year, the U.S. Securities & Exchange Commission emphasized the illegality of such practices by settling with investment company, D.E. Shaw, for the sum of $10 million. https://buff.ly/3FhmAOx
D.E. Shaw forced its employees to sign NDAs that prevented employees from disclosing any confidential information unless required to do so by law or court order, and requiring employees to notify the company if they did so. The SEC said this is illegal. If your company is doing something illegal, and you learn about during your employment, then the government says you must be able to report it. But if your NDA is enforceable, then you risk a breach of contract suit from your company. And often these NDA agreements contain liquidated damages clauses that essentially insist you should pay a large fine.
After the SEC sued some companies a few years ago for enforcing such NDAs, D.E. Shaw sent an email to its employees saying that the NDAs in their contract were not enforceable. ( “The firm wishes to emphasize that you also have the ability to communicate directly with regulators and other governmental agencies regarding possible violations of law or regulation without notice to the firm.”) Matt Levine, Money Stuff, (Oct 3, 2023) https://buff.ly/45p2kVR
But, Oops: D.E. Shaw didn’t take the language out of their new employment contracts for another two years, and they kept the clauses in their Release Agreements all the way through this year! from “[A]t least 2011 through 2023, D. E. Shaw required approximately 400 of its departing employees to sign releases affirming that they had not filed any complaints with any governmental agency, department, or official in order for them to receive deferred compensation and other benefits sometimes worth millions of dollars.” https://buff.ly/3FhmAOx
Under U.S. law, people who voluntarily disclose their employers’ illegal actions can collect up the 30% of the fine levied against the company. As Matt Levine points out (link above), someone probably got a $3 million dollar whistle blower payment from the government by disclosing that D.E. Shaw was continuing to try to prevent whistle blowing. Ironic, isn’t it.
Guys, if you are subject to SEC jurisdiction, it’s time to review your NDAs!
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