Risk Update

Evaluating Ethics Risk: Non-Competes and #MeToo NDAs

Posted Dan Bressler

Interesting intersection of issues. Here in California, many point to the prohibition against non-competes as a significant factor in the rise of Silicon Valley. But there have always been clever workarounds, some of them “golden handcuff”/incentive based in nature. But the practice of including uneforceable terms is facing the spotlight: “A Call For An Ethics Opinion On California Lawyers Drafting Non-Competes” —

  • “The center’s letter says including a non-compete clause in an employment contract could deceive a California employee into thinking the language is enforceable in court, prompting them to change their behavior.”
  • “The center claims such concerns are not just theoretical. It cites academic research indicating that 19 percent of employees in California are subject to non-compete clauses, roughly the same percentage as workers in states where such contract provisions are permissible.”
  • “The Center for Public Interest Law also wants the State Bar committee to examine the propriety of attorneys assisting employers with the drafting or reviewing of arbitration clauses with unenforceable terms, such as requiring that arbitration must occur in an out-of-state forum or allowing for the employer to unilaterally select the arbitrator.”
  • “‘A lawyer advising a client to adopt an illegal or unenforceable term, who knows or should have known about its unenforceability, would seem to be in violation of Rule 8.4(c) prohibiting conduct involving dishonesty, deception, and fraud,’ the letter states.”
  • “The center argues that a lawyer engaging in such activity would also seem to violate Rule 1.2.1, which prohibits counseling a client to engage in conduct that the lawyer knows is fraudulent or a violation of law. The group backs up this claim by noting it is a violation of California’s Labor Code to ‘require any employee or applicant for employment to agree, in writing, to any term or condition which is known…to be prohibited by law.'”

“New Scrutiny For NDAs In Sexual Harassment Matters” —

  • “In the wake of the #MeToo movement, legal and regulatory scrutiny regarding the use of nondisclosure agreements by companies to resolve allegations of sexual harassment and misconduct continues to increase. Such scrutiny has recently featured prominently in two high-profile sexual harassment matters: the Wynn Resorts investigation and the various legal proceedings following the allegations against Harvey Weinstein.”
  • “Both in-house and outside counsel for companies with senior executives facing such allegations should take note of these developments, as they call into question whether the use of NDAs could in certain circumstances amount to investigatory obstruction, or a violation of ethical obligations.”
  • “The report focuses in part on Wynn Resorts’ use of nondisclosure agreements. It concludes that the company’s efforts to keep the allegations against Wynn secret — thereby potentially avoiding reporting the settlements to the company’s shareholders and various regulators — included executing various NDAs with alleged victims of harassment and sexual misconduct.”
  • “As detailed in the commission’s final report, the Massachusetts Gaming Commission took the extraordinary step of requesting that Wynn Resorts waive both its confidentiality rights and any rights to recover for breach of the nondisclosure provisions of any NDAs related to the commission’s investigation, which Wynn Resorts agreed to do. Following the release of the report, the Massachusetts Gaming Commission announced that it would be initiating adjudicatory proceedings against Wynn Resorts, after which the commission will determine what, if any, penalties to levy against the company.”
  • “Weinstein Investigation… Based on public coverage of the NDA, it appears to have prevented Weinstein’s former personal assistant from discussing the allegations with her friends, family, colleagues, medical practitioner or legal representative, and required her to provide advance notice to Weinstein’s counsel and use ‘all reasonable endeavors’ to limit any disclosures against Weinstein in any future criminal proceedings. She also stated that she was not permitted to retain a copy of the agreement. While the NDA has not been publicly released, the former assistant described the NDA as ‘a morally lacking agreement on every level.'”
  • “This month’s developments reinforce the need for companies to reevaluate the use of NDAs as part of this process, suggesting that even in the absence of any legislation, companies and their counsel may risk significant legal and regulatory exposure for their use of NDAs. In particular, both the Wynn and Weinstein investigations feature careful scrutiny of the terms of the respective NDAs, the manner in which the NDAs were ultimately negotiated and whether the confidentiality provisions of the NDA were designed to thwart future criminal investigations.”