Confidentiality Agreement

Congress, in the new Tax Cuts and Jobs Act (the “Tax Act”), has made settlements of sexual harassment cases more expensive for employers who seek to keep these settlements private.

Current tax law allows an employer to deduct the ordinary and necessary expenses it incurs in carrying on its trade or business. This deduction generally includes legal settlements or payments to a plaintiff (including plaintiff’s attorney fees) and any legal fees the employer has incurred in its defense. However, now a provision in the Tax Act deter employers from using nondisclosure agreements in sexual harassment settlements. Internal Revenue Code Section 162(q), prohibits employers from deducting “any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement” or “attorney’s fees related to such a settlement or payment.” Section 162(q) applies to payments made after December 22, 2017.

As a result of Section 162(q) the price for confidentially has increased. The inclusion of a nondisclosure provision in a settlement agreement, will prevent the employer from taking business expense deductions for any payments related to the matter, including the settlement payment and attorney’s fees.

The language of Section 162(q) is broad but unclear as to whether the IRS will consider payments made pursuant to a confidential agreement that does not settle sexual harassment claims, but which contains a broad waiver of claims, including for sexual harassment, or as “related to sexual harassment” will preclude getting the business expense deduction.

It is also unclear exactly which deductions the IRS will preclude in connection with the confidential settlement of a sexual harassment claim. The statute clearly applies to the settlement payment as well as attorney’s fees, but is silent as to costs such as those incurred with investigators and experts to assist with the case. It is presently unknown whether these costs will still be deductible. What if the employer provides outplacement services for the plaintiff or pays the plaintiff’s COBRA premiums, are those costs deductible?

There is also concern for employers who have an Employer Professional Liability Insurance insurer that steps up and defend these actions. It is presently uncertain whether an insurer will be denied a deduction for settlement and/or attorney’s fees payments, if it enters into a settlement on behalf of the employer that contains a non-disclosure agreement.
The statute explicitly provides that attorney’s fees related to the confidential settlement of a sexual harassment or sexual abuse matter are not deductible.

It appears the new statute prohibits any deduction for an employer’s own attorney’s fees incurred for defense, or the payments made to the plaintiff’s attorneys. It also appears to prohibit a plaintiff from deducting any attorney’s fees the plaintiff pays to his or her attorneys. Thus, a plaintiff may now owe tax on income that the plaintiff never received and significantly reduce his or her net recovery.

Employers will now have to carefully evaluate the cost/benefit of confidentiality. The boundaries of this new law are just being developed. It is therefore imperative to analyze with your attorney the real necessity for a non-disclosure agreement as part of a settlement.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

If you want your attorney to be subject to the confidentiality and nondisclosure provisions of your settlement agreement you better get him or her to sign it, not as your attorney, but, as a party.

In Monster Energy v. Schecter, the California Fourth Appellate District Court ruled that an attorneys’ signature under the notation “Approved as to Form and Content” on a settlement agreement did not make the attorney a party to the settlement agreement. Therefore, the attorney was no bound by the confidentiality and nondisclosure provisions in the settlement agreement.

Attorney Bruce Schecter represented Richard Fournier and Wendy Crossland (the Fourniers) in an action against Monster Energy Company (Monster) and a related defendant when their 14-year-old daughter went into cardiac arrest and died in 2011 after consuming two Monster brand energy drinks.

In 2015, Schechter negotiated a settlement for the Fourniers that included a confidentiality provision purporting to bind him and his firm. However, Schechter signed the agreement as “Approved as to form and content.”

Schecter later gave an interview to the website Lawyersandsettlements.com, in which he had handled a recent case against Monster, involving a 14-year-old girl, and had settled it for “substantial dollars for the family.”

Lawyersandsettlements.com then published an online article that included Schechter’s statements.

Monster sued Schechter and his law firm in which it alleged Schecter had breached the terms of the settlement agreement. Schechter and his firm then filed a special motion to strike in which it argued, among other things, that Monster could not show a probability of prevailing on its breach of contract claim because Schecter and his firm were not parties to the settlement agreement.

The trial court granted the motion as to every cause of action other than breach of contact cause of action. Schecter and his firm appealed.

The Appellate Court held, when a settlement agreement provides that a plaintiff and his or her counsel agree to keep the terms of the agreement confidential – and the plaintiff’s counsel signs the agreement under the words “approved as to form and content,” the plaintiff’s counsel could not be liable to defendant for breach of the confidentiality provision. The Court reasoned:

The only reasonable construction of this wording is that they were signing solely in the capacity of attorneys who had reviewed the settlement agreement and had given their clients their professional approval to sign it. In our experience, this is the wording that the legal community customarily uses for this purpose.

The Court instructed that a way to avoid this issue is:

. . . to draft a settlement agreement that explicitly makes the attorneys parties to the agreement (even if only to the confidentiality provision) and explicitly requires them to sign as such.

An attorney’s signature under the words “approved as to form and content” does not impose any specific obligation on the attorney to maintain the confidentiality of the settlement. Thus, if you want to bind opposing counsel to the confidentiality provision of a settlement agreement, the confidentiality provision must be specifically drafted to encompass opposing counsel as well as the party represented by the opposing counsel. The settlement agreement should also include an express statement signed by opposing counsel agreeing to be bound by the settlement agreement’s confidentiality provision.

Settlement Not Deductible If It Includes A Non-Disclosure Agreement

Attorney Not Bound by Client’s Confidentiality Agreement Signed “Approved as to Form And Content”