A recent DC Circuit decision contains cautionary lessons for drafting severance agreements and opens the door to personal liability for negative characterizations of the reasons for employee departures.

TAKEAWAYS

• A mutual non-disparagement clause “directing” officers, directors, and employees to not disparage former employees may be treated by courts as an ongoing promise by an employer not to make disparaging remarks.
• An employer may also violate Section 1981’s prohibition against race discrimination where breach of a severance agreement appears discriminatory.
• Discussing reasons for employment actions with those outside of an organization may not be protected by the common interest privilege.

On May 23, 2023, the U.S. Court of Appeals for the District of Columbia issued a decision in the matter Wright v. Eugene & Agnes E. Meyer Foundation, et al., No. 22-7004 (May 23, 2023, D.C.Cir.), reversing a district court’s dismissal of a former employee’s breach of contract, 42 U.S.C. § 1981 (“Section 1981”), and defamation claims, in relation to an employer’s alleged violation of a severance agreement’s mutual non-disparagement clause. The Wright decision serves as a reminder that employers must carefully craft the scope of non-disparagement clauses and ensure that post-separation statements by officers and employees regarding any former employee are neutral and circumscribed. Executives and board members who try to explain away rumors or criticisms by making unfavorable comments about departed employees also expose themselves to potential personal liability for such remarks. The Court’s decision yields important lessons for how employers and associations can minimize the risk of finding themselves in similar legal jeopardy.

The Case
The Court of Appeals decision was based on the facts alleged by the plaintiff, Dr. Terri Wright, in her complaint; the Court assumed, for purposes of its review, that the alleged facts were true. Wright had been employed as Vice President of Program and Community of the Eugene and Agnes E. Meyer Foundation, a nonprofit in the Washington, DC, area. She alleged that despite receiving largely positive feedback and a raise during her tenure, she was terminated by the CEO, Nicola Goren, after less than two years of employment. The Foundation told Wright that the termination was due to Wright’s interpersonal and communication-related issues. Wright, who is African-American, alleged that these stated reasons were pretext to mask discriminatory animus. Seeking to avoid litigation, Wright and the Foundation signed a severance agreement, under which Wright agreed to release employment-related claims against the Foundation and its employees, and which contained a mutual non-disparagement clause stating in relevant part that the “Foundation will direct those officers, directors, and employees with direct knowledge of [the settlement agreement] not to make any false, disparaging or derogatory statements to any person or entity regarding [Wright].”

About a month after Wright’s termination, Goren, who served as chair of the board of another philanthropic organization, allegedly told the CEO of that other organization, Dr. Madye Henson, that Goren “was feeling backlash from abruptly terminating Dr. Wright,” and, in response, “Henson shared that many leaders in the community [were] questioning [Goren’s] decision and believe[d] that” the decision was “discriminatorily motivated.” Goren allegedly “acknowledged that she sensed this was the perception but claimed that she had no option” because Wright was “toxic,” fostered a “negative climate” at the Foundation, and “had to be fired or two-thirds of the staff would leave.” Wright filed suit against the Foundation and Goren personally, asserting that these statements breached the severance agreement, were racially discriminatory in violation of Section 1981, and constituted defamation. A district court initially granted the Foundation’s motion to dismiss Wright’s claims in their entirety, but on appeal the DC Circuit reversed the decision and remanded the case back to district court for the breach of contract and civil rights claims against the Foundation and the defamation claim against the CEO to go forward.

Decision and Reasoning
The Court of Appeals’ explanation for its ruling serves as a guide to danger zones for employers that enter into separation agreements or discuss the exits of employees.

First, as to the breach of contract claim, the Court found that the severance agreement, read as a whole, was ambiguous and reasonably capable of Wright’s interpretation that the Foundation itself had implicitly agreed to not disparage her, at least in statements by its CEO who signed the severance agreement, when the Foundation promised to “direct” certain officers, directors, and employees to not disparage Wright. Although the Court noted that the Foundation’s argument that its duty “began and ended” with its promise to direct its employees was not necessarily untenable, the Court could not find as a matter of law that the Foundation’s interpretation was the only reasonable one. The Court also found that the CEO could not be held personally liable for breach of contract because she was not a party to the contract in her individual capacity and therefore was not bound by it.

Second, as to the Section 1981 claim, the Court held that Wright had plausibly alleged a prima facie case that the Foundation, through its CEO, breached the severance agreement due to racial animus. The Court cited Wright’s allegations that the Foundation did not defame Wright’s predecessor, a white man who also separated from the company, nor any other non-African-American employee. Two other sets of allegations pushed Wright’s Section 1981 claim farther over the plausibility threshold, according to the Court’s opinion, as follows: 1) allegations related to the CEO’s praise of Wright’s performance prior to Wright’s termination; and 2) allegations that there was a general culture of racial inequity at the Foundation which, according to the complaint, “negatively impacted” the working experience of employees of color. However, the Court affirmed the dismissal of the Section 1981 claim as to Goren personally because Wright and Goren did not have a contractual relationship.

Finally, the Court, analyzing DC common law, found that Wright had plausibly alleged a claim of defamation against Goren personally. The Court held that, on the facts alleged, a jury could find that Goren’s statements were made with reckless disregard for the truth and for discriminatory reasons. For that reason, Goren could not block the claim based on the common interest privilege, which requires a showing of good faith on the part of the speaker. The Court noted it had “reasons to doubt that the purpose of the statements was to further the privilege[,]” citing the allegations that Goren’s statements were made “unprompted” and could be characterized as ad hominem and unprofessional in describing Wright. Moreover, the Court held that at least two of the three alleged statements made by Goren had an implicit factual basis (i.e., were not opinion). The alleged statement that Wright fostered a negative climate at work could “easily imply” that Goren had personal knowledge of specific actions or behaviors of Wright’s leading to that conclusion, such as complaints about her, high turnover, or testimony from colleagues. Moreover, the alleged statement that two-thirds of the staff would leave if Wright stayed was a straightforward assertion of fact.

Recommendations for Employers for Avoiding Legal Pitfalls
Although the Court of Appeals decision still leaves the plaintiff with the burden of bringing forth evidence in support of her allegations, most employers would prefer not to have to face the disruption, expense and negative publicity of going through the discovery phase of litigation and potentially even a trial. There are no ironclad protections against an employee initiating litigation, but careful handling of employee terminations can greatly increase the likelihood of success in dismissing such lawsuits. The following best practices can help employers avoid a ruling similar to the Wright decision:

• Avoid mutual non-disparagement provisions in separation agreements. Employees often ask for mutual non-disparagement provisions, both on the principle of fairness (what’s good for the goose is good for the gander) and because they are concerned that unfavorable statements may hurt their prospects of finding new employment. But employees are in very different situations from employers or other organizations when it comes to disparagement.

Individuals who agree to a non-disparagement provision control their own statements and thus can ensure compliance. An organization, by contrast, cannot control or police what its employees say, and most employees will not even be aware of the existence of a mutual non-disparagement obligation. In the Wright case, the parties tried to address this challenge through a provision that the Foundation would “direct” to avoid disparaging statements only those officers, directors, and employees with “direct knowledge” of the settlement agreement. The decision of the Court of Appeals demonstrates, however, that failure of those officers to follow the non-disparagement instruction may create liability for the organization for breach of contract.

An alternative that provides an easier path to compliance and that addresses employees’ concerns about harm to their future employment prospects is to agree that inquiries from prospective employers should be directed to the organization’s human resources department, and to have a policy that the organization will not provide any qualitative reference, but will only provide basic employment facts, such as dates of employment and positions held.

In addition, if including any non-disparagement provision binding on the employee, employers should include carve-outs for protected disclosures, such as under the federal Speak Out Act, similar applicable state or local laws, or as may be protected by the National Labor Relations Act. (Pillsbury’s February 28, 2023 Client Alert discusses a recent NLRB decision that a non-disparagement provision in a severance agreement was unlawful.)

• Document and provide feedback to employees about performance concerns. This is a familiar refrain from employment lawyers and human resources professionals, but the Wright decision underscores its importance. In holding that Wright’s Section 1981 race discrimination claim could go forward, the Court cited allegations describing a “combination of specific and factually detailed praise, vague and subjective critiques that conflicted with that praise, and an unexpected termination.” Employment at will does not mandate progressive discipline or documentation of specific performance deficiencies, but leap-frogging from a positive performance review to termination for poor performance opens the door to claims of discrimination or other unlawful motivations. Employees who are blindsided by a termination that appears abrupt and unwarranted to them may ascribe unsavory or illegal motivations to the decision-maker. Managers who have praised an employee and failed to communicate significant concerns to the employee should generally be cautioned against moving forward with termination until the employee is provided notice of the concerns and an opportunity to improve, except in cases of serious misconduct or other circumstances justifying more urgent action.
• Resist the temptation to justify or defend employment decisions to anyone outside of the organization. The alleged situation described in the Wright case is a familiar one: an executive faces criticism or expressions of concern over the exit of an employee and feels the need to defend the decision—and, in doing so, directly or impliedly portrays the exited employee in an unfavorable light. For associations, members may voice concerns and seek explanations. For any executive, whether at a nonprofit or for-profit company, peers at other organizations or other professional connections may ask about what happened. Sometimes, the exit of an employee captures media attention, and a reporter will call seeking comment on a one-sided and distorted account of events. As frustrating as it may be not to correct misimpressions, sharing specifics about the reasons for the employee’s exit to anyone outside the “need to know” cohort inside the organization risks a defamation claim. At most, a cautious employer will state that the employer disagrees with the characterization of events, or can express confidence that, in the speaker’s opinion, the decision was in the best interests of the organization. Beyond that, however, the employer should state that they don’t consider it appropriate to discuss the details of the decision.

Finally, it is always good practice to consult with employment counsel to review separation agreements and to seek advice on termination decisions if the basis for the decision is not well-documented or the exit of the employee is likely to be controversial or high profile.