What's the Deal with Non-Disparagement Provisions?
A lot of founders sign non-disparagements without thinking much about it, even though they can be absurdly broad and virtually impossible to comply with.
There are four major issues that I see in many non-disparagement clauses:
1) Who Are The Beneficiaries? When an employee is asked to sign a non-disparagement, they usually are prohibited from disparaging not only the company itself, but often its officers, directors, employees, and shareholders. I’ve seen many such provisions in public company agreements. How can someone agree not to disparage any shareholder of a public company? How do you even known who they are?
2) Is It A Backdoor Non-Compete: Most non-disparagement provisions make it difficult to compete with the former employer. Two examples:
“Z agrees that neither Z nor anyone under Z’s control or at Z’s direction will take, support, encourage, induce or voluntarily participate in any action or attempted action that would negatively comment on, disparage, or call into question the business operations, policies, or conduct of the Company, or act in any way with respect to such business operations, policies or conduct that could likely damage the Company’s reputation, business relationships, or present or future business.”
Wouldn’t any competitive activity “damage the Company’s . . . business relationships, or present or future business?”
How do you compete with a company where you have agreed to this? Say that the “Company” makes widgets and you want to make better widgets. How can you tell potential customers that your widgets are better than theirs? Isn’t that a negative remark about the Company’s “products?”
4) Non-Mutuality: Companies are reluctant to agree to mutual non-disparagement clauses. When they do, the company’s obligations are traditionally watered down. And it’s never the case that a company is going to agree that, say, no employee or stockholder will disparage the founder/employee signing the agreement – even though the founder/employee is being asked not to disparage any employee or stockholder of the company. Note that rarely are there carveouts for responsive statements. So, for example, if you sign the traditional unilateral non-disparagement and a beneficiary of that non-disparagement (say the CEO of the company) disparages you, you are restricted in what you can do. You probably can’t say they are lying. You certainly cannot accuse the CEO or the company of anything negative at all. But think of the situation in #2 above regarding non-disparagements being a backdoor non-compete. Again, let’s assume the company with which you signed a non-disparagement created widgets and you started a competing company creating widgets. The old company then advertises their widgets are better than yours. How do you refute that without saying something negative about their widgets? Or without implying that they are being dishonest?
One of my big questions is how founders out there have responded to non-disparagements in practice? Do you refuse to sign them? Or if you do sign them, how do you think about complying with them? And are you concerned you might inadvertently violate such a term?