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Non-Disclosure Agreements: What do we learn from the Legal Services Board’s Summary Report?

01.03.24

The Legal Services Board (“LSB”) issued a report in February 2024 on the misuse of non-disclosure agreements (“NDAs”). This article distils that report and provides practical tips for law firms and legal practitioners in its wake.

Background

Non-disclosure agreements (“NDAs”) typically occur in a variety of settings, including:

  • Commercial transactions – to protect trade secrets and other commercially sensitive information.
  • Employment contracts – to prevent employees disclosing confidential information belonging to employer during employment and following termination.
  • Settlement agreements – to prevent the parties from disclosing information about the nature of the matter to which the settlement agreement relates, and the existence and terms of the settlement agreement itself.

Longstanding concerns exist about the misuse of NDAs to conceal wrongdoing, particularly where there is a power imbalance between the parties to the NDA. Such concerns have intensified in recent years, with the #MeToo movement, Harvey Weinstein and media coverage raising awareness in this regard.

On 2 May 2023, the Legal Services Board (“LSB”) issued a call for evidence to understand the scale, extent and nature of misuse, consider why some legal professionals may fail to adhere to their professional ethical obligations when engaged with the misuse of NDAs, and explore the role regulation can play in making sure NDAs are only ever used appropriately.[1]

In February 2024, the LSB published a summary report of the evidence it received (the “Summary Report”).[2]

The Summary Report

The LSB received evidence from a number of legal and charitable organisations, lawyers, and affected individuals.

It grouped its analysis of the evidence into the following key themes:

  1. The misuse of NDAs
  2. Imbalance(s) of power
  3. The impact of NDAs
  4. The role of legal professionals in NDAs
  5. Suggestions for action

The misuse of NDAs

The LSB was provided with evidence of both legal but (allegedly) unethical acts and (allegedly) illegal acts concealed by NDAs. Much of the evidence concerned NDAs relating  to employment disputes, including workplace bullying, accusations of harassment and discrimination, and sexual assault and abuse.

Certain NDAs are unenforceable under existing laws. These include:

  • NDAs seeking to prevent ‘protected disclosures’ – i.e., disclosures made in the public interest relating to, inter alia: (a) criminal offences, (b) failure to comply with legal obligations, (c) the miscarriage of justice; (d) health and safety; and (e) the environment.[3]
  • NDAs which constitute, promote, or provide for discriminatory treatment under the Equality Act 2010.[4]

The LSB noted that some of the responses it received indicated a lack of awareness of these existing legal limits on the use of NDAs.

Imbalances of power

The LSB noted that the most frequently cited dynamic in the evidence it received was between employer and employee, where the employee was dependent on the employer for financial compensation or a reference, after allegedly experiencing misconduct and then (voluntarily or through dismissal) leaving his or her employment. Some responses indicated that employers would have no incentive to enter into settlement agreements with (current or former) employees without an NDA.

The LSB also received evidence concerning power imbalances between the parties to NDAs in cases of divorce, construction conflicts, and public administration.

The impact of NDAs

A recurring sentiment amongst respondents to the LSB’s call for evidence was that parties to NDAs could not seek support from family and friends due their NDAs preventing them from discussing the matter, as well as the sensitive nature of their situations. One respondent reported the results of a survey they carried out which found that 95% of those who signed an NDA said they have ongoing mental health problems. Other respondents reported that they felt “isolated” from friends and colleagues thereby enduring long-term suffering.

Other respondents reported that their NDAs made it harder (or even impossible) for them to find work in their industries due to not being able to discuss why they had left previous employment or respond to any speculation.

The LSB also noted a concern that NDAs can enable individual employers to engage in repeated acts of discrimination without public exposure.

The role of legal professionals in NDAs

The LSB was troubled by reports that:

  1. Many signatories to NDAs lacked access to independent legal advice (32% of Employment Tribunal claimants in 2019/20 had no legal representation recorded – although this is not likely to impact NDAs entered into in the context of termination of employment, given one cannot enter into a valid compromise with legal advice);
  2. Many individuals lack understanding about their legal rights regarding NDAs (as discussed above); and
  3. Even amongst individuals who received legal advice, the terms and effects of an NDA were not fully explained to them, and/or they were advised in a manner which lacked sensitivity to the individual’s vulnerabilities. There were cases where legal representatives allegedly did not obtain clients’ consent and obtained NDAs where the client was under duress or failed to reference existing regulatory guidance in their advice to clients.

Suggestions for action

Some respondents to the LSB’s call for evidence reported that they considered existing regulatory guidance fell short of adequately supporting legal professionals in understanding their ethical obligations. For instance, the Solicitors Regulation Authority (“SRA”) reported identifying a low level of knowledge among solicitors about the content and issues raised in its warning notice on the use of NDAs[5], and the reporting obligations attached to it. There were also concerns as to the sufficiency of the SRA’s warning notice, and suggestions that law firms should have their own internal guidelines when NDAs are discussed.

The SRA suggested regulations should be strengthened so as to (inter alia): (i) expand public education to ensure that individuals are better informed of their rights, the enforceability of key clauses in an NDA, and the obligations of the legal professionals advising them; and (ii) harmonise cross-sector guidance across the legal professions together with consistent enforcement action.

Another suggestion that the LSB received was that regulators should adopt whistleblowing rule measures similar to those in the financial services sector, which require firms to include text in settlement agreements clarifying that the individual is not precluded from making protected disclosures.

The government responded to the LSB’s call for evidence by suggesting the creation of an independent body to review complaints about workplace misconduct. Other respondents called for legislation to better address the content of NDAs and the role of legal professionals, as well as the introduction of reporting requirements about the impacts of NDAs. One respondent proposed a dual enforcement system where the two roles of compensating the individual and upholding the public interest are clear and separate. The LSB noted that suggestions such as these are matters for government.

Practical tips for legal firms and practitioners

There may be some scepticism of how representative the evidence the LSB received is of the general operation of NDAs. There is an obvious selection effect at play: individuals and organisations with bad experiences of NDAs are more likely to have responded to the call for evidence than others. Nevertheless, given the government itself has proposed strengthening protections for complainants about workplace misconduct, the topic of NDAs is likely to remain high on the public agenda and at the forefront of regulators’ minds.

To comply with their existing professional and ethical obligations, legal firms and practitioners should:

  1. Be vigilant about ensuring clients are properly advised about the terms and effects of their NDAs before they sign them, and are not under any duress;
  2. Advise clients where an NDA is unlikely to be legally enforceable;
  3. Warn their clients about the fact that, depending on the terms of the NDA, they may not be able to discuss the matter with family, friends, and potential future employers, as well as the possible impacts this may have on their mental health and careers;
  4. Inform their clients that a lack of publicity of a counterparty’s misconduct may enable that counterparty to continue engaging in misconduct; and
  5. Ensure that, where the other party to an NDA is not legally represented, that party understands what it is they are signing, as well as the law as to the enforceability of NDAs.

Legal firms and practitioners should also prepare for the possibility of stronger rules regarding NDAs being introduced in the future. As scandals covered up by NDAs continue to be uncovered by the media, the government and/or the courts will likely feel compelled to act. One easy target for reform is the scope of protected disclosures. As discussed above, certain categories of disclosure cannot be prevented by means of an NDA where that report is in the ‘public interest’. Legislation or judicial precedent which reduces the threshold which needs to be met for a disclosure to be deemed in the public interest could invalidate scores of NDAs which would be enforceable under existing law. For instance, a report of workplace sexual harassment committed by members of senior management against more junior employees could come to be regarded as not only relating to the specific individual victim identified in the report, but to the culture of the workplace more broadly – and thereby potentially a matter of public interest.

Littleton Chambers will continue to closely monitor developments relating to NDAs.

Asfandyar Qureshi is a junior tenant at Littleton Chambers, having taken tenancy in March 2023. He is a member of its commercial, employment, and sports teams and accepts instructions across the range of Littleton’s practice areas, including cases involving harassment, discrimination, sexual misconduct, and whistleblowing.

[1] https://legalservicesboard.org.uk/news/legal-services-board-launches-call-for-evidence-on-the-misuse-of-ndas-and-the-role-of-lawyers

[2] https://legalservicesboard.org.uk/wp-content/uploads/2024/02/NDA-call-for-evidence-themes-and-summary-Feb-2024.pdf

[3] Section 43A-B, Employment Rights Act 1996

[4] Section 142, Equality Act 2010

[5] https://www.sra.org.uk/solicitors/guidance/non-disclosure-agreements-ndas/

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