Less than 3% of civil cases reach a trial verdict. While some cases are dismissed by the court or a party, the majority of civil litigations are settled by mutual agreement between the parties. As a result, almost all parties to civil litigation likely will be faced at some point with the decision to settle their dispute and, if so, under what terms.  A settlement can occur before a suit is filed, after a suit is filed, before the trial begins, during the trial or even after a verdict is rendered.

Regardless of when the settlement occurs, the terms of a settlement can lead to ramifications long after the case is dismissed. One term that parties and attorneys will often discuss at length is whether to include a confidentiality clause. For some, confidentiality is a necessary term for any settlement, while others may want the right to discuss the terms or conditions of settlement publicly.

Confidentiality clauses in settlement agreements present unique risks to both attorneys and their clients. Where an agreement contains a strict confidentiality clause, there can be almost interminable obligations on parties and their lawyers. Keeping the below considerations in mind, attorneys can work to meet client expectations while maintaining their ethical obligations under the Rules of Professional Conduct.

Considerations for Clients

Whether to include a confidentiality provision in a settlement is generally considered to be the client’s decision to make, with the advice of counsel. Confidentiality can be a bargaining chip like any other in negotiations.

A client may prefer a confidential settlement for a variety of reasons. For example, defendants may want a confidential settlement so as not to encourage additional claims or impair their reputation due to the perception of guilt that could accompany a settlement. The common perception is that plaintiffs most often do not seek out a confidential settlement, but plaintiffs may agree to a confidentiality provision because they want to get the matter resolved or because they do not want the details of the settlement (such as their claimed harm or amount of money they received) to be public knowledge. 

The specific circumstances of the settlement may guide the attorney and the client when considering the scope or application of any confidentiality provision as a requisite for settlement. 

Considerations for Attorneys

Confidentiality clauses in settlement agreements can include a range of restrictions. Many confidentiality provisions will prohibit the parties from revealing the terms of the settlement. Others may go further, to preclude disclosure of the nature of the dispute, the facts underlying the claims and any discovery exchanged. While many states have enforced confidential settlements that preclude counsel from disclosing specific terms of settlement, various state bar associations have issued ethics opinions prohibiting settling parties from agreeing to keep confidential information already in the public record.

Another issue relates to determining who is “bound” by a confidentiality clause. Settlement agreements are generally signed only by the parties in dispute. Still, if the agreement defines a “party” to include agents and representatives, that could be read to create binding obligations on the party’s attorneys. Therefore, even if not a direct party to the settlement agreement, an attorney may be bound by the confidentiality provisions as an agent of the client, in addition to the attorney’s general obligation to maintain client confidences under the ethical rules.

The terms of a settlement agreement may also conflict with the Rules of Professional Conduct by creating obligations that are not sustainable at law. For instance, Rule 5.6(b) of the ABA Model Rules of Professional Conduct prohibits attorneys from offering or making a settlement agreement that restricts an attorney’s right to practice. The comments to the rule explain that this prohibition includes an attorney “agreeing not to represent other persons in connection with settling a claim on behalf of a client.” Multiple state bar associations have also released ethics opinions indicating that their versions of Rule 5.6 prohibit not only express restrictions on an attorney’s right to practice, but also settlement terms whose practical effect is to restrict the attorney from undertaking future representations.

Risks of Breaching Confidentiality Clauses

Even a mistaken breach of a confidentiality provision can lead to damages, whether the breach is a result of the conduct of the client or the attorney. Therefore, many attorneys discuss with their clients the importance in complying with the confidentiality provisions of the settlement agreement, particularly in the age of social media. In situations where a large number of client representatives have knowledge of a settlement, it may be advisable to incorporate terms into the agreement whereby only a disclosure of particular detailed settlement terms can be deemed a violation of the agreement. Otherwise, upon a breach, the breaching party could be required to return any settlement proceeds or to pay other damages.

Because proof of damages for breach of confidentiality tends to be difficult, settlement agreements may specify remedies including monetary liquidated damages, injunctive relief, costs and/or attorneys’ fees. 

Handling Limited Disclosure

There is generally an exception to confidentiality where disclosure is required by law or demanded by subpoena in another judicial proceeding. Many settlement agreements will specifically address what should happen if confidential settlement information is demanded by subpoena or otherwise required by law, including by offering the non-subpoenaed party an opportunity to object to the disclosure of information. 

Even where settlements are confidential, parties will often agree that the terms of settlement can be disclosed to party’s attorneys, accountants, insurance companies and other professional advisors, as necessary for business purposes.

Considerations for Changing Standards

In response to the #MeToo Movement, a number of states have enacted legislation aimed at prohibiting employers from using nondisclosure provisions in settlement agreements that resolve allegations of sexual harassment, discrimination, and other forms of harassment. These changes are indicative of how public policies can have an impact on the law. Further, these developments highlight the importance of keeping apprised of the changing standards and statutes that can influence the structuring of settlements (and, sometimes, the ultimate decision of whether to settle claims).

Notwithstanding the risks, confidential settlement agreements can protect a client’s interests and lead to a favorable result for all parties involved. By being aware of the ethical risks, attorneys can help ensure that a dispute does not get reanimated after its resolution.