The Evolution of NDA Enforceability and Settlement Carveouts
For decades, broad non-disclosure agreements (NDAs) and non-disparagement covenants were routinely embedded in employment contracts, dispute settlements, and separation agreements as impenetrable barriers to public disclosure. Parties facing allegations of misconduct, workplace abuse, or harassment relied on sweeping confidentiality definitions to silence victims under the threat of forfeiture, liquidated damages, and protracted civil litigation.
However, the legal landscape surrounding confidentiality has undergone a tectonic shift. State and federal legislative reforms, alongside administrative rulings from the Equal Employment Opportunity Commission (EEOC), Securities and Exchange Commission (SEC), and National Labor Relations Board (NLRB), have established that non-disclosure terms cannot lawfully suppress disclosures of unlawful acts, sexual harassment, criminal conduct, or communications with regulatory authorities.
Key Statutory Frameworks Governing Settlement NDAs
When reviewing or drafting separation agreements and settlement releases, attorneys and corporate counsel must account for multiple overlapping statutory safe harbors:
| Statute / Rule | Jurisdiction | Protected Subject Matter | Legal Consequence of Non-Compliance |
|---|---|---|---|
| Speak Out Act (42 U.S.C. § 19401 et seq.) | Federal (US) | Sexual assault & sexual harassment disputes entered into before the dispute arises. | Confidentiality & non-disparagement clauses are rendered unenforceable as a matter of federal law. |
| Silenced No More Act (Cal. SB 331) | California | All FEHA-protected categories: harassment, discrimination, retaliation, and unlawful workplace acts. | Clause is unlawful; agreement must include affirmative statutory disclosure notice. |
| SEC Rule 21F-17(a) | Federal (US) | Communications with SEC regarding potential securities law violations; whistleblower bounties. | Substantial civil penalties against drafting entity; invalidation of restrictive covenants. |
| NLRB McLaren Macomb (372 NLRB No. 58) | Federal (US) | Section 7 NLRA rights: discussions of wages, working conditions, and collective actions. | Proffering the overbroad severance agreement itself constitutes an unfair labor practice. |
| Defend Trade Secrets Act (18 U.S.C. § 1833) | Federal (US) | Immunity for trade secret disclosures to government officials solely for reporting violations. | Failure to include statutory notice waives attorney fees and exemplary damages in trade secret suits. |
Anatomy of an Overbroad Settlement Clause
The high-profile resolution of civil litigation between musical artist FKA twigs (Tahliah Debrett Barnett) and actor Shia LaBeouf underscored how non-disclosure disputes often center on the exact scope of an alleged settlement or pre-existing release. When one party asserts an absolute gag, modern courts scrutinize whether the clause impermissibly restricts testimony in criminal proceedings, reports to law enforcement, or constitutionally protected statements regarding alleged domestic or sexual violence.
Overbroad agreements typically exhibit three fatal structural flaws:
- Blanket Confidentiality Definitions: Defining "Confidential Information" to include "any and all facts, events, occurrences, communications, or circumstances arising out of the relationship," without exempting illegal acts, personal safety disclosures, or communications with healthcare providers and legal counsel.
- Unilateral Gag on Non-Disparagement: Forbidding any statement that "may cast the other party in a negative light," which effectively criminalizes reporting truthful misconduct or filing an administrative charge with the EEOC, DFEH/CRD, or local police.
- Punitive Liquidated Damages Clauses: Imposing exorbitant flat-rate penalties (e.g., "$100,000 per violation") that function as unenforceable in terrorem penalties under state contract laws rather than genuine pre-estimates of actual compensatory harm.
Model Statutory Carveout Language
To preserve enforceability of legitimate trade secret and commercial protections without running afoul of public policy, modern agreements incorporate clear, affirmative carveout language. Counsel frequently utilize the following baseline standard:
Frequently Asked Questions
Can a settlement agreement still keep the monetary settlement figure secret?
Yes. In almost all jurisdictions, including under California's SB 331, parties retain the legal right to keep the financial terms and monetary amounts of a settlement strictly confidential, provided that the underlying factual disclosures regarding unlawful conduct are not suppressed.
Does the federal Speak Out Act invalidate all non-disclosure agreements?
No. The Speak Out Act specifically applies to pre-dispute NDAs and non-disparagement clauses regarding sexual assault and sexual harassment. It does not automatically void post-dispute settlement agreements entered into after a legal claim or formal dispute has already arisen, though state statutes (such as New York's Section 5-036 or California's Silenced No More Act) impose substantial restrictions on post-dispute terms.
What occurs if an agreement lacks the mandatory DTSA whistleblower notice?
Under 18 U.S.C. § 1833(b)(3), if an employer fails to provide the required statutory notice of whistleblower immunity in an agreement governing trade secrets, the employer cannot recover exemplary (punitive) damages or statutory attorney fees in an action against an employee under the Defend Trade Secrets Act.
Are liquidated damages clauses enforceable in confidentiality breaches?
Liquidated damages must represent a reasonable endeavor to estimate fair, average compensation for a loss that is difficult to calculate. When the sum is arbitrary, grossly disproportionate, or designed to intimidate an individual from speaking out, courts classify the provision as an invalid penalty under common law and statutory principles.