New Scrutiny for NDAs in Sexual Harassment Matters

Jennifer Kennedy Park and Lev Dassin are partners and Georgia Kostopoulos is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum.

Legal and regulatory scrutiny regarding the use of non-disclosure agreements by companies to resolve allegations of sexual harassment and misconduct continues to increase in the wake of the #MeToo movement. Such scrutiny featured prominently this month 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.

Wynn Resorts Investigation

In January 2018, the Wall Street Journal first reported repeated allegations of sexual harassment and misconduct by Steve Wynn, the founder and former CEO of Wynn Resorts Ltd. (“Wynn Resorts”), a Las Vegas-based hotel and casino resort operator and developer. Shortly after the allegations became public, Mr. Wynn resigned as chairman and CEO. In the year and a half since, a number of investigations and lawsuits have been initiated against Wynn Resorts, many focused on the board of directors’ potential awareness of multiple allegations of sexual misconduct against Mr. Wynn. Wynn Resorts has already paid $20 million in fines to the Nevada Gaming Commission for its failure to promptly investigate and report sexual misconduct allegations against Mr. Wynn.

Earlier this month, as part of its own investigation into the allegations against Wynn Resorts, the Massachusetts Gaming Commission publicly released a 199-page report criticizing the company’s response to allegations of sexual misconduct, harassment, and abuse against Mr. Wynn. The report found that in a number of instances, senior management appears to have taken steps to conceal the allegations against Mr. Wynn, and that management’s “efforts at secrecy made it exceedingly difficult, if not impossible, for gaming regulators to detect potentially derogatory information through typical regulatory means, which rely heavily on robust and voluntary self-disclosures.”

The report focuses in part on Wynn Resorts’ use of NDAs, and concludes that the company’s efforts to keep the allegations against Mr. Wynn secret—thereby potentially avoid reporting the settlements to the company’s shareholders and to various regulators—included executing various non-disclosure agreements with alleged victims of harassment and sexual misconduct. Critically, with respect to these NDAs, the Massachusetts Gaming Commission’s report concludes that a number of common features of NDAs—such as structuring settlement payments over a period of time to ensure compliance with the NDA and not naming Mr. Wynn or the company as parties to the NDA—appear to have been part of an effort to ensure that the settlement agreement “never surfaced and that neither Mr. Wynn’s nor the Company’s connection to it was exposed.” During its investigation, 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 non-disclosure provisions of any NDAs related to the Gaming 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 the company, after which the Massachusetts Gaming Commission will determine what, if any, penalties to levy against Wynn Resorts.

Weinstein Investigation

Earlier this month, the regulatory body for solicitors in the United Kingdom, the Solicitors Regulatory Authority (“SRA”) announced that an unnamed solicitor at a prominent British law firm would be referred to the Solicitors Disciplinary Tribunal (“SDT”) for disciplinary action following a 10-month investigation into the firm’s use of NDAs on behalf of Miramax and Harvey Weinstein following allegations of sexual misconduct and harassment by Weinstein.

The SRA focused its investigation on an NDA executed in the 1990s between Miramax and a former London-based personal assistant to Mr. Weinstein, following an allegation of sexual harassment in 1998. The probe was focused on whether the attorney under investigation had used NDAs to prevent signatories from reporting alleged sexual misconduct to the appropriate authorities. Based on public coverage of the NDA, it appears to have prevented Mr. 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 Mr. Weinstein’s counsel and use “all reasonable endeavors” to limit any disclosures against Mr. 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.”

Takeaways

Both of these matters mark significant developments and companies thinking through proper responses to allegations of sexual harassment should consider them carefully.

As we have previously noted, in this environment companies should closely reevaluate their current policies and procedures related to sexual harassment and discrimination. 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.

Both the U.K. and a number of state governments in the U.S. have already proposed legislation or guidelines to limit the use of NDAs in sexual harassment and misconduct investigations. [1] In the absence of any legislation, the developments in both of these matters provide some guidance to companies about best practices for NDAs and sexual harassment investigations generally, including:

  • Being attuned to certain power dynamics that may suggest that the NDA was coercive and/or was not executed at arms-length;
  • Avoiding language that interferes with (or appears to interfere with) any regulatory reporting requirements or any future criminal investigations; and
  • Balancing the need for confidentiality with the potential perception that the NDA perpetuates abusive work environments or protects perpetrators.

Endnotes

1In the U.K., the government proposed legislation to ban NDAs. See “New legislation could outlaw non-disclosure agreements,” The Guardian, available at https://www.theguardian.com/law/2019/mar/03/ban-on-gagging-clauses-non-disclosure-agreements-work. The SRA also issued a warning notice on the appropriate use of NDAs. See “Warning Notice: Use of non-disclosure agreements (NDAs),” available at https://www.sra.org.uk/solicitors/code-of-conduct/guidance/warning-notices/Use-of-non-disclosure-agreements-(NDAs)–Warning-notice.page. In the U.S., a number of states have recently introduced legislation limiting the appropriate use and scope of NDAs. See“States Take Action Against Nondisclosure Agreements,” the Society for Human Resource Management, available at https://www.shrm.org/resourcesandtools/hr-topics/behavioral-competencies/global-and-cultural-effectiveness/pages/states-take-action-against-nondisclosure-agreements.aspx.(go back)

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