Non-Disparagement Clause in Settlement Agreements: Enforceable or Not?0 Comments
As experienced litigators know, most lawsuits settle before trial. When settling, the parties often seek mutual promises to keep the terms confidential and not make any further disparaging comments about each other. Enforcement of these provisions promotes settlement of disputes, an important public policy of this state. Monster Energy Co. v. Schechter (2019) 7 Cal.5th 781, 794 (noting “strong public policy of this state favoring settlement of actions”). In Monster Energy, the California Supreme Court held that attorneys who agree “as to form and content” of settlement agreements can be bound by the confidentiality clause since excluding counsel would “chill the parties’ ability in many cases to settle the action before trial” and “risk undermining an important term of the agreement.” (Ibid.) Next year, the high court will decide another case involving settlement agreements: the enforceability of non-disparagement clauses. Doe v. Olson, 2019 Cal.App.Unpub. LEXIS 5841 (Cal. App. 2d Dist., Aug. 30, 2019), rev. granted, 2019 Cal. LEXIS 8793 (Nov. 20, 2019). The Court’s ruling may have broad implications for civil litigants.
Issues Under Review in Doe v. Olson
The issues under review in Olson are twofold. First is the question whether the litigation privilege of Civil Code section 47(b) applies to breach of contract claims, and if so, in what circumstances. A second question is whether a mutual non-disparagement clause bars a later civil lawsuit for damages arising from the same wrongdoing alleged in a prior settled case.
The Litigation Privilege
Civil Code section 47(b) provides that “a privileged publication or broadcast is one made in any judicial proceeding.” The principal purpose of the litigation privilege “is to afford litigants and witnesses the utmost freedom of access to the courts without fear of being harassed subsequently by derivative tort actions.” Silberg v. Anderson (1990) 50 Cal.3d 205, 213. Although originally designed to limit liability for defamation, courts have extended the privilege to tort liability based on other theories, such as abuse of process, intentional infliction of emotional distress, intentional inducement of breach of contract, intentional interference with prospective economic advantage, negligent misrepresentation, fraud, invasion of privacy, and even claims of unfair competition. Feldman v. 1100 Park Lane Associates (2008) 160 Cal.App.4th 1467, 1485-1486.
Over the years, the Legislature has excluded certain conduct from the privilege, such as spoliation of evidence, intentional concealment of insurance policies, filing a lis pendens without identifying the underlying action and making allegations in a dissolution action if specific criteria are met. Civ. Code § 47, subd. (b)(1)-(4). The Supreme Court created an exception as well, determining that the privilege does not apply to claims for malicious prosecution. Albertson v. Raboff (1956) 46 Cal.2d 375, 382, abrogated in part by Civ. Code, § 47(b)(4). Albertson simply deemed the “policy of encouraging free access to the courts . . . is outweighed by the policy of affording redress for individual wrongs when the requirements of favorable termination, lack of probable cause, and malice are satisfied.” Id.
Breach of Contract and the Navellier Case
In Olson, the Supreme Court will have occasion to engage in policy balancing, akin to Albertson, and, in the process, clarify an earlier case suggesting the privilege would not cover liability for breach of contract. See Navellier v. Sletten (2002) 29 Cal.4th 82 (Navellier I), and, on remand, Navellier v. Sletten (2003) 106 Cal.App.4th 763 (Navellier II).
The Navellier case arose in the context of an anti-SLAPP motion to dismiss. SLAPP is an acronym for “strategic lawsuit against public participation.” Equilon Enterprises v. Consumer Cause, Inc. (2002) 29 Cal.4th 53, 57. In ruling on SLAPP motions, the trial court engages in a two-step process. First, the defendant must establish that the challenged claim arises from protected activity, i.e., an act in furtherance of the right of free speech or petition on a public issue. If the defendant makes the required showing, the burden shifts to the plaintiff to demonstrate the merit of the claim by establishing a probability of success. Navellier I, 29 Cal.4th at p. 88, citing Equilon, 29 Cal.4th at p. 67.
In Navellier, the Court clarified that in meeting the first prong—“arising from”—the defendant does not need to show that plaintiff subjectively intended to or did chill protected speech or petitioning activity. In the underlying action, the defendant (Sletten) was sued for breaching a release of liability provision in an earlier settlement agreement. The breach allegedly occurred when he filed counterclaims in federal court. The constitutional right of petition encompasses the basic act of filing litigation. Navellier, supra, 29 Cal.4th at p. 90. The plaintiff (Navellier) sued Sletten because he filed counterclaims. The lawsuit thus fell “squarely within the ambit of the anti-SLAPP statute’s ‘arising from’ prong.” Id., citing Code Civ. Proc., § 425.16, subd. (b)(1).
Navellier argued the anti-SLAPP statute “was not enacted to or intended to protect someone from being sued for breaching his/her agreement not to sue.” The Court disagreed. “Nothing in the statute itself categorically excludes any particular type of action from its operation, and no court has the ‘power to rewrite the statute so as to make it conform to a presumed intention which is not expressed.’ (citation.) For us to adopt such a narrowing construction, moreover, would contravene the Legislature’s express command that section 425.16 ‘shall be construed broadly.’” Code Civ. Proc., § 425.16, subd. (a). Applying the anti-SLAPP statute does not mean that Sletten cannot be sued for breaking his promises simply because his alleged breach was in filing claims in court. “The anti-SLAPP statute neither constitutes–nor enables courts to effect–any kind of ‘immunity’ for breach of a release or of other types of contracts affecting speech. Id. at p. 93.
Whether an action for breach of a release is allowed to proceed will depend on whether plaintiff meets his or her burden in the second prong by establishing a legally sufficient claim supported by a prima facie factual showing, i.e., minimal merit. Code Civ. Proc. § 425.16, subd. (b)(1). The Court then made the following observation: “Indeed, as the statute is designed and as we have construed it, a defendant who in fact has validly contracted not to speak or petition has in effect ‘waived’ the right to the anti-SLAPP statute’s protection in the event he or she later breaches that contract.” Id. at p. 94. The Supreme Court remanded with directions that the Court of Appeal determine whether the merit prong had been met. Relying in part on the “waiver” language in Navellier I, and policy-balancing, the appellate court assumed, without deciding, that the litigation privilege would notbar the breach of contract claim. Navellier II, 106 Cal.App.4th at 774.
Navellier To Olson
Navellier II provided fertile ground for litigation over violations of settlement agreements. Olson is the latest case. It presents a typical scenario, albeit involving a non-disparagement clause, not a release of liability. The facts are straightforward. The parties engaged in contentious litigation. In a mediation, they arrived at a settlement. The settlement included a standard promise “not to disparage one another.” But respect for that promise did not last long.
Within nine months of signing, Doe filed a complaint with the United States Department of Housing and Urban Development (HUD). Doe alleged the same grievances as were claimed in the settled civil action, that defendant engaged in stalking, sexual harassment, and violations of privacy, while acting as landlord. HUD referred the matter to the California Department of Fair Employment and Housing, which agreed to investigate. Doe also brought a civil action for damages making allegations similar to those in the previously settled and dismissed action.
Olson cross-complained for breach of the Settlement Agreement’s non-disparagement clause. Olson’s cross-complaint triggered an anti-SLAPP motion, which the trial court granted. Regarding the second prong, whether there was minimal merit, the court found the litigation privilege barred the non-disparagement claim as a matter of law. Therefore, the court did not analyze whether Olson showed a probability of prevailing.
The court of appeal affirmed in part and reversed in part. The court first noted that “application of the litigation privilege to the breach of contract claim requires consideration of whether doing so would further the policies underlying the privilege.” Id. at pgs. *19-20, citing Vivian v. Labrucherie (2013) 214 Cal.App.4th 267.
Litigation Privilege Bars Claims Based on Criminal or Administrative Complaints
In Vivian, a deputy sheriff alleged that his disparaging statements made by his ex-wife in an internal affairs investigation, violated the non-disparagement clause of a written settlement agreement. The deputy agreed that statements in the course of an internal affairs investigation or family court proceedings would ordinarily be privileged. He argued, however, that the “agreement not to disparage waived section 425.16 [anti-SLAPP] and the litigation privilege, rendering [ex-wife’s] defense inapplicable.” The court disagreed.
Vivian applied the litigation privilege to bar the claim on grounds it would further the strong public policy of investigating misconduct by law enforcement personnel. The court noted that a policy underlying the litigation privilege is to assure “utmost freedom of communication between citizens and public authorities whose responsibility it is to investigate and remedy wrongdoing. . . . The importance of providing to citizens free and open access to governmental agencies for the reporting of suspected illegal activity outweighs the occasional harm that might befall a defamed individual.” Vivian, supra, 214 Cal.App.4th at p. 277.
Olson followed Vivian. Housing discrimination is a significant public concern and the Fair Employment and Housing Act (FEHA) was codified “to provide effective remedies that will eliminate these discriminatory practices.” Konig v. Fair Employment & Housing Com. (2002) 28 Cal.4th 743, 747-748. The court thus applied the litigation privilege to immunize Doe from liability for repeating disparaging allegations in her HUD/DFEH complaints. This holding was “warranted and necessary, as it promotes full and candid discourse with a public agency whose purpose is to protect the public from illegal activity.”
Olson argued that Vivian was distinguishable because unlike the ex-wife in Vivian, Doe was not responding to an investigation; instead, she affirmatively initiated the investigation and went “out of her way” to disparage him. The court was unmoved, affirming dismissal of the HUD/DFEH claim.
Litigation Privilege Does Not Bar Private Civil Complaints for Damages Based on Breach of Non-Disparagement Term
The Olson court reached a different result about Doe’s civil complaint for damages. For this portion, the court followed Wentland v. Wass (2005) 126 Cal.App.4th 1484, 1492. Wentland involved the settlement of litigation against a real estate developer who believed he was falsely accused of bribery and fraud. In settling, the plaintiffs agreed not to make any statement or charge that “may have the effect of impugning the honesty or integrity” of the developer in his management of the real estate investment partnerships. The agreement also had a confidentiality provision. Wentland at p. 1489. The developer sued when plaintiffs authorized their CPA and attorney to file declarations accusing the developer of wrongdoing. The declarations were used to oppose a motion for summary judgment in related litigation.
As stated earlier, whether the litigation privilege applies to an action for breach of contract turns on whether its application furthers policies underlying the privilege. The litigation privilege’s purpose is to ensure free access to courts, promote complete and truthful testimony, encourage zealous advocacy, give finality to judgments, and avoid unending litigation. Id. at p. 1492, citing Silberg, at pgs. 213-14.
Wentland noted the cause of action for breach was not based on wrongful conduct in litigation, but was based on breach of a separate promise independent of the litigation. Further, in reaching settlement, “the parties presumably came to an acceptable conclusion about the truth of [one party]’s comments about [the other’s behavior]. Allowing such comments to be made in litigation, shielded by the privilege, invites further litigation as to their accuracy and undermines the settlement reached in the [prior] matter.” Id. at p. 1494. In sum, the sanctity of contracts, the need to promote settlement and the desire to avoid derivative litigation counseled against applying the litigation privilege to shield a subsequent civil lawsuit that allegedly violated the non-disparagement clause.
Special Statutory Protections for Employment Cases
The #MeToo movement generated changes in California employment law. The Legislature adopted a new statute on the confidentiality of settlement agreements. A provision within a settlement agreement that prevents disclosure of factual information related to claims for sexual assault, sexual harassment, discrimination or retaliation is prohibited and void. Code Civ. Proc., §§ 1001-1002, eff. 1/1/19.
The Legislature also clarified that a contractual provision that waives an alleged victim’s right to testify in an administrative, legislative, or judicial proceeding concerning alleged criminal conduct or sexual harassment by the agreement’s other party, or by agents or employees, when the alleged victim is required or requested to attend the proceeding pursuant to a court order, subpoena, or written request, is void and unenforceable. Civ. Code, § 1670.11, eff. 1/1/20.
The litigation privilege is not absolute. A tort action for malicious prosecution is excluded. The Supreme Court has suggested, though not directly held, that a breach of contract action is excluded. As a result, appellate courts have declined to bar lawsuits alleging breach of a settlement agreement, particularly, breach of a release of liability, covenant not to sue, confidentiality or non-disclosure provision and even a non-disparagement clause.
The ability to sue parties to settlement agreements generated backlash during the #MeToo movement. The Legislature enacted special provisions that voided as against public policy any provision that prevents disclosure of facts alleged in sexual assault and harassment lawsuits.
Much has transpired since 2002 when the Supreme Court suggested that those who “validly contracted not to speak or petition” waived the protections of the anti-SLAPP statute (and perhaps the litigation privilege). It remains to be seen whether the #metoo movement will have any effect on how the Supreme Court views the litigation privilege in preventing breach of contract claims outside the employment arena.