Hollywood celebrities, prominent business executives, and political figures have all been in the news in recent months regarding attempts to conceal salacious allegations made against them by entering into settlements containing confidentiality clauses. As part of the outcry in response to such reports, some have suggested that the public's right to information identifying potential misconduct should take precedence over attempts to hide misconduct in exchange for payment.

However, while the stakes may be especially high for public figures, confidentiality can be an issue for any settlement, even if the subject matter might not make the nightly news. Indeed, attorneys routinely advise clients on the pros and cons of settlements and confidentiality can be an essential term in many instances.

In particular, as demonstrated by the recent news reports, a primary motivation for the settlement of pre-litigation disputes may be the desire to avoid the public disclosure of the plaintiff's allegations that would typically occur through the filing of a complaint. However, confidentiality can be important to both parties, even after a lawsuit is filed. For example, a defendant may want to avoid the perception of the settlement as a “win” for the plaintiff. In some circumstances, public disclosure of a settlement can motivate other potential claimants to bring suit with the hope of obtaining a similar settlement, even if the facts particular to each claim might be distinguishable.

For plaintiffs, a confidential settlement can be equally important to protect private or sensitive information, which can include the particular facts underlying the plaintiff's claims. Thus, in some cases both sides might readily agree to a confidentiality clause in order to address the potential risks of disclosure. Below are some considerations when using confidentiality clauses in settlement agreements, including the ethical issues that can arise.

Public Policy Concerns

While some attorneys may have their own preferred language to include in confidentiality clauses, courts may require a more uniquely-tailored approach.

Indeed, confidentiality clauses in settlement agreements can include a range of restrictions. On one end of the spectrum, the clause may attempt to preclude disclosure of the nature of the dispute, the facts underlying the claims, and any discovery exchanged between the parties. This type of clause may be less effective if litigation has already commenced and publicly available pleadings and documents disclose the parties' dispute. On the other end of the spectrum, the confidentiality language may refer only to the terms of the settlement itself. This may bar a settling party from divulging the amount of any settlement payment, or the term may cover all issues discussed between the parties prior to settlement.

In light of the potential breadth of confidentiality clauses, the recent scandals involving confidential settlements that purportedly concealed wrongdoing for many years have caused some to question whether confidential settlements strike the appropriate balance between the interests of the settling parties and the public's right to information identifying potential wrongful actors.

However, in most circumstances, confidentiality is a bargaining chip in negotiations like any other. Public policy concerns can be addressed by counsel representing the accuser, who is additionally entitled to privacy and may believe that confidentiality is in his or her own best interest as well (in light of the other terms of settlement). This public policy concern merits discussion with clients before entering a confidential settlement. The client can make the ultimate choice.

Ethical Concerns for Attorneys

While settlement agreements are generally signed only by the parties in a dispute, the agreements often define a party to include agents and representatives, which can include a party's attorneys. Therefore, even if not a direct party to the settlement, an attorney may be bound by the confidentiality provisions of a settlement as an agent of the client, in addition to the attorney's general obligation to maintain client confidences under the ethical rules.

Notably, in some circumstances, the terms of a settlement agreement may implicate the ethical rules that govern attorney conduct. Attorneys can be mindful of confidentiality clauses that may attempt to bind counsel to terms that would violate the Rules of Professional Conduct. An overbroad provision may prove ineffective and may leave a gap that the client did not intend.

Liability for Breach of Confidentiality

The ethical rules also address the limited circumstances in which attorneys may properly reveal client confidential information. However, by agreeing to be bound by a confidentiality agreement, an attorney who discloses confidential information—even where it is the confidential information of an opponent rather than a client—may face civil liability.

Even a mistaken breach of a confidentiality provision can invalidate an entire settlement, whether the breach is a result of the conduct of the client or the attorney. Many attorneys will discuss with their clients the importance of confidentiality in complying with the terms of settlement, particularly in the age of social media.

Upon a breach, the breaching party could be required to return any settlement proceeds and could be subject to liability for breach of contract. The settlement agreement might even provide for liquidated damages in the event that a party breaches confidentiality.

Many confidentiality clauses do provide for limited situations in which disclosure of the protected information is not actionable, such as where disclosure is required by law or demanded by subpoena in another judicial proceeding. In addition, parties often agree that terms of settlement can be disclosed to attorneys, accountants, insurance companies and other professional advisers, as necessary, for business purposes.

While there may be increased scrutiny on the use of confidentiality clauses in settlement agreements as a result of recent developments, as it stands confidentiality clauses can help protect the interests of all parties when utilized properly.

Shari L. Klevens is a partner at Dentons US and serves on the firm's US Board of Directors. She represents and advises lawyers and insurers on complex claims, is co-chair of Dentons' global insurance sector team, and is co-author of “California Legal Malpractice Law” (2014). 

Alanna Clair is a partner at Dentons US and focuses on professional liability defense. Shari and Alanna are co-authors of “The Lawyer's Handbook: Ethics Compliance and Claim Avoidance.”