Non-Disparagement Clause

In general conversation "disparage" means to speak poorly about someone, but in a legal context "disparagement" involves a false statement.

Non-Disparagement clauses are increasingly common in settlement agreements. Their efficacy and the wisdom of including them is open to question.

Litigation involving such clauses is governed by state law, and you should determine which state law applies, since it is not necessarily your home state law. That being said, a few general observations suggest that these clauses are less of a legal issue than they may first appear; they are often more a tool to enforce silence upon the less-wealthy signatory.

“Defamation” is a cause of action which is well-defined by case law in most states. “Disparagement” is a much broader concept which is often ill-defined or undefined in the contract itself. In the New World Coffee case, the court relied on definitions from Black’s Law Dictionary suggesting that in order to be “disparaging” the statement must be untrue (though the court avoided making a ruling on this, the majority of subsequent NY cases have held that truth is an absolute defense to a disparagement claim).

“Injurious falsehood” is also known as “Product Disparagement” and this seems to be what the drafters of settlement agreements have in mind. I should note that strictly speaking the former term is broader and can refer to the business entity in general while the latter term refers to a specific product or service; but this is a distinction not followed by the general public nor many courts.

Further confusing matters is the use of “Trade Libel” for injurious falsehood, and the use of libel in the name causes many commentators to avoid it since it suggests conflation with the tort of defamation. In fact a well-respected treatise refers to "trade libel or defamation" in the first paragraph, refers to "trade libel" as synonymous with "product disparagement" in the second paragraph, and then proceeds to draw a "distinction" between "defamation" and "product disparagement". Go figure! [NY Jur Defamation 273]

“Product Disparagement” requires:

1. Falsity,
2. Publication to a third party,
3. Malice,
4. Special Damages

The last of these requirements brings up an important point. Any contract (and settlement agreements are a subset of contracts) requires that to sustain a claim for breach of contract (which is what a violation of a “non disparagement” clause would be) that you need to show:

1. Valid and enforceable contract,
2. Performance by the Plaintiff,
3. Breach by the Defendant,
4. Damages flowing from the breach

In the real world, showing damages is difficult enough. “Special damages” is a particular subset, and some of the further difficulty is that you must “plead with particularity” the losses and that they must be a “natural and immediate cause” of the disparaging statements.

In many cases, what the franchisor seeks is not to prevent falsehoods from being told but to prevent the franchisee from talking about the zees experience. It may be successful in deterring blogging where the zee is afraid of litigation, but if litigation does ensue there is a serious question as to who would prevail.

And of course, the Internet allows for anonymity, and reporters protect their sources. Moreover, where someone with a “non disparagement” clause is subpoenaed, the clause is unlikely to dissuade a judge from ordering otherwise relevant testimony be given.

To the extent that a "non disparagement" clause is popularly perceived as silencing the speech of the weaker party, the mere existence of such a clause creates perceptual issues which may be more detrimental to the stronger party than any gain by inclusion of the clause: for members of the public, it looks as though the stronger party has something to hide. That perception may be wrong, but that is the perception all the same.

Finally there is the pragmatic aspect. Given the ability of the internet to shield the identity of person(s) making objectionable statements, and the risk of ham-handed lawyering bringing attention to an otherwise unread blog posting, the best recourse for an aggreived party may well be to retain a public relations firm skilled in dealing with the public fallout of the posting.

Note: As a stockbroker, I participated in the IPO of New World Coffee, but the discussion here is solely drawn from public documents.