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The Importance of Carefully Crafted Non-Disparagement Clauses in Severance and Settlement Agreements

December 21, 2023

When settling a lawsuit or pre-litigation disputes, parties sometimes insist on including non-disparagement clauses in their settlement or severance agreements. Broadly speaking, these clauses prevent one or both parties to the agreement from making negative comments about each other.

The value of these clauses is up for debate, and whether they should be included in any particular agreement varies from situation to situation. Sometimes, they can be worthwhile in protecting your business or reputation. In other circumstances, these clauses end up buying you more trouble down the road than they can be worth.

And like with all other contractual terms, the devil lies in the details as the Michigan Court of Appeals recently made clear in Neal v Ingham County (Case No. 363136).

In Neal, the plaintiff was employed for several years as an Assistant Prosecuting Attorney before leaving his employment and signing a voluntary resignation agreement after certain “allegations” were made against him. The voluntary resignation agreement contained a non-disparagement clause providing as follows:

“In further consideration for this agreement, [plaintiff] will not directly disparage the Employer in any manner, nor will he encourage anyone else to do so either through direct or indirect means. The Employer agrees that the Prosecuting Attorney and the Employer’s Commissioners, elected officials, managers, agents, and employees will not at any time make any disparaging statements concerning [plaintiff] or activities in connection with his employment.”

Several years later, the plaintiff applied for a job as an Assistant Public Defender with the defendant. During the interview process, the allegations against the plaintiff were discussed and the Chief Public Defender (CPD) investigated the plaintiff’s contentions that he had not received due process following the events leading to his resignation. The CPD concluded that the plaintiff had received due process but was concerned by the discrepancy between the plaintiff’s belief about the degree of due process he received and the degree of due process the CPD concluded that the plaintiff actually received. Because of that, and because the CPD believed he would be expending “political capital,” the CPD did not hire the plaintiff.

The plaintiff eventually filed suit, alleging that the people with whom the CPD spoke violated the non-disparagement clause and caused him not to be hired. The trial court dismissed the plaintiff’s complaint, finding that the non-disparagement clause must have intended to exempt internal communications between defendant’s employees. On appeal, the Court of Appeals upheld the dismissal of the plaintiff’s complaint, but on different grounds than the trial court.

Relevant for non-disparagement clauses moving forward, the Court of Appeals made two important findings that all businesses and individuals should keep in mind:

  1. Where one of the parties is an entity or governmental body, unless there is a specific carveout evidenced by the plain text of the contract or non-disparagement clause, there are no unstated or implicit exemptions for internal communications about the other party.

Stated differently, broad non-disparagement clauses will be enforced as written, even if there is a legitimate business need for the discussion.

  1. However, statements consisting of facts already known to an organization “cannot constitute disparagement” because “communication of facts” from one employee of the organization to another “cannot have the effect of lowering that person’s rank, estimation, esteem, or reputation because those facts were already known to the organization.”

This is because, as the Court of Appeals pointed out, knowledge possessed by an organization’s employees acting within the authority and scope of their duties is imputed to the organization, even if there are personnel changes later.

If you are involved in the negotiation of a settlement or severance agreement, particularly one with a non-disparagement clause, and would like it reviewed, please contact Vincent C. Sallan or the Clark Hill attorney with whom you regularly work.

This publication is intended for general informational purposes only and does not constitute legal advice or a solicitation to provide legal services. The information in this publication is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking professional legal counsel. The views and opinions expressed herein represent those of the individual author only and are not necessarily the views of Clark Hill PLC. Although we attempt to ensure that postings on our website are complete, accurate, and up to date, we assume no responsibility for their completeness, accuracy, or timeliness.

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