What is a "Non-Disparagement" Clause and Why You May Not Want to Sign One
By David Farren
You settle your case, and the defendant agrees to pay you a lot of money. All that’s left to do is to sign a “standard” settlement agreement prepared by the defendant’s attorney. You get to page 10 and see a paragraph titled “No Disparagement.” You see that this means neither party will “disparage” the other . . . ever. You call your attorney, who tells you not to worry about it, that it’s a common provision and probably doesn’t really mean anything. He is not even sure what “disparagement” is, and wouldn’t it be really hard to prove anyway? Most clients, often on the advice of their legal counsel, sign these things every day.
But wait! It turns out your attorney may have been wrong. It means a lot to agree not to disparage someone. Non-disparagement clauses have been enforced by a vast majority of state and federal courts, and proving that you have disparaged someone is not as hard as you think.
Contract Law and the Definition of Disparagement
In all fairness to your attorney, most of us would agree that “disparagement” is, or at least should be, in the eye of the beholder. The word seems much too vague to meet the traditional contract law test of knowing exactly what it is the parties have agreed to – a “meeting of the minds,” as we like to say. What is “disparagement” anyway? How do you do it? How can someone make us not do it? And what about our precious First Amendment right of free speech? These seem like slam dunk defenses to being sued for disparaging someone, even if you agreed to not do it.
Not so. Although there is no reported state court decision on point, the federal Arizona District Court addressed these issues in FreeLife Int’l, Inc. v. Am. Educ. Music Publications Inc., 2009 WL 3241795 (D.Ariz. 2009). FreeLife, an Internet on-line sales distributorship, sued the defendant for, among other things, breach of a contract that he apparently had “accepted” when he pushed the “I Accept” button on the FreeLife website to become a “marketing executive” for the company. This contract included a boilerplate non-disparagement clause, which said:
Each Marketing Executive must not disparage other Marketing Executives, FreeLife’s products/services, the Compensation Plan, or company employees to other Marketing Executives or third parties.
2009 WL 3241795, 2. As a “marketing executive,” the defendant had gained access to FreeLife’s policies and product information, and he later criticized those policies and products on his own website.
The Court found that a valid contract was formed when the defendant pressed the “I Accept” button on the FreeLife website and that the boilerplate non-disparagement clause was a part of that contract. It held, somewhat surprisingly, that the clause was not unconscionable and that it did not exceed the defendant’s reasonable expectations. The defendant thus lost Round One. Round Two, attacking the substance and validity of the non-disparagement clause itself, was a more likely victory. But the defendant lost Round Two as well.
The Court rejected the defendant’s intuitive argument that the FreeLife non-disparagement clause was unenforceable because was it was too vague to tell exactly what it was the parties had agreed to – the “what does ‘disparagement’ mean and how do you do it?” issue. Unfortunately, the Court had no problem telling the defendant what the word means and how he did it. It looked no further than the Oxford English Dictionary:
Disparage means “[t]o bring discredit or reproach upon; to dishonour, discredit; to lower in credit or esteem.”
2009 WL 3241795, 6, citing Oxford English Dictionary (2d ed. 1989). This rather scholarly definition seems as vague and slippery as the word itself. Nevertheless, the Court found the word to be “well defined” and “easily understood.” What the parties intended when they agreed to not disparage each other was for the jury, not the Court, to decide. 2009 WL 3241795, 6-7.
The 1st Amendment Argument Fails
The Court also rejected the defendant’s First Amendment argument. It held that a First Amendment right of free speech does not apply in a private setting absent some kind of state action. Moreover, you are free to waive your First Amendment rights anytime you want to, as the defendant did when he agreed restrict his own free speech rights in the FreeLife contract. It was a virtually unlimited gag order of his own making.
This is a very troubling case from a lawyer’s perspective. And you should know that it is not a unique case among most state and federal courts in the country. It seems that, regardless of where you are, agreeing to a non-disparagement clause in a contract, such as a settlement agreement, may expose you to dire consequences if you say anything to anybody that may in some way “disparage” the other party to the contract. It could be anything. Your words do not have to be false or defamatory or even mean spirited. You could say or write something to anyone – to friends or family or on social media – and if it can be construed as “disparaging,” you may find yourself in breach of your settlement agreement. You can be sued and, depending what the agreement says, you may have to pay back the settlement proceeds and any damages the disparaged party may be able to prove you caused by the disparagement. Even worse, under Arizona law, because the claim arises out of a contract, you could get hit for paying the costs and attorney fees of the party who sued you.
Non-Disparagement Clauses in Employment Contracts
Non-disparagement clauses are prevalent in employment contracts and severance agreements. The same risks and advice apply, although the EEOC and other government agencies have recently voiced concerns about whether some disparagement clauses may go too far by illegally prohibiting employees or former employees from filing legitimate, but “disparaging,” charges with those agencies. As a result, many disparagement clauses today carve out an exception for filing such charges, and you should ask for that and any other exception that might apply to you if you sign one.
If you are thinking about signing any agreement with a non-disparagement clause, ask questions about it, understand it and get competent legal advice, especially if you are the one who is, let’s say, more likely to disparage the other party to the contract.
And in all cases never ever sign any contract without reading it and understanding what you are agreeing to do or not to do. Hiring an attorney to review and explain any contract before you sign it is, as Benjamin Franklin said over 200 years ago, an ounce of prevention that is worth a pound of cure. That could not be any more wise or true today when the cure you wish to prevent is to defend a costly lawsuit that weighs thousands of pounds by the time it gets to court. Just ask the FreeLife defendant.
About the author: David Farren is an attorney at the Phoenix law firm of Jaburg Wilk and works in employment law, antitrust, and commercial litigation. Got a question for David? Contact him directly here.
This article is not intended to provide legal advice and only relates to Arizona law. It does not consider the scope of laws in states other than Arizona. Always consult an attorney for legal advice for your particular situation.