Non-disparagement clause

Non-disparagement clauses are contract terms that protect the reputation and business interests of both hedge fund management companies Management company The management company is the entity that employs the investment professionals and staff operating a hedge fund, receives management fees and often incentive compensation, and bears the operational expenses of running the investment management business. and their employees. These clauses prevent either party from making negative public statements about the other. The investment management industry uses these provisions widely. They commonly appear in employment agreements, partnership agreements Partnership agreement A partnership agreement is the primary governing document for a hedge fund structured as a limited partnership. It establishes the relationship between general partners and limited partners. The agreement details rights, obligations, economic terms, and operational provisions for all parties involved. , and separation agreements as key parts of strategies that protect the firm's business franchise.

Investment management professionals typically agree not to make, publish, or communicate negative remarks through any medium. This includes written, spoken, or electronic communications to any person or organization. The restrictions cover statements about the firm's business operations, personnel, investors, investment activities, or related matters.

The term "disparaging" statements generally includes remarks that attack or damage the character, honesty, integrity, morality, or professional competence of the other party. These restrictions specifically apply to statements connected with business operations or professional conduct.

Non-disparagement provisions work together with other protective measures. These include confidentiality obligations, non-competition Non-competition covenant A non-competition covenant is a contractual restriction prohibiting hedge fund professionals from engaging in competitive activities for a specified period after leaving the firm, designed to protect the firm's business interests, investment strategies, and client relationships. restrictions, and non-solicitation Non-solicitation covenant A non-solicitation covenant is a contractual agreement that prevents departing hedge fund employees from recruiting the firm's staff, contacting investors, or reaching out to other business contacts for a specific time period after they leave. These agreements protect the firm's valuable relationships and human resources. agreements. These provisions often appear alongside additional safeguards.

Additional protections typically include publicity restrictions that limit unauthorized media communications. They also include intellectual property protections that establish firm ownership of work product and proprietary information. Investment track record provisions ensure that performance history remains with the organization when employees leave.

This connected system of restrictions creates a strong framework for protecting institutional franchise value. At the same time, it offers mutual protection for personnel.

Non-disparagement provisions can provide legal remedies against current or former employees or partners who violate these restrictions. However, the regulatory environment has changed dramatically since 2022. These changes have fundamentally altered how enforceable these clauses are.

The National Labor Relations Board (NLRB) issued a landmark decision in McLaren Macomb in 2023. This decision established that employers generally cannot offer severance agreements containing broad non-disparagement clauses that restrict employees' Section 7 rights under the National Labor Relations Act. Section 7 rights protect employees' ability to organize and engage in collective bargaining activities.

The Sixth Circuit Court of Appeals enforced this ruling in 2024. The decision applies retroactively and affects both unionized and non-unionized employees. This means that offering overly broad non-disparagement provisions in severance contexts can itself be an unfair labor practice. This is true regardless of whether employees actually sign the agreements.

The Speak Out Act of 2022 also changed the landscape. This federal law makes pre-dispute non-disparagement clauses unenforceable in cases involving sexual assault or sexual harassment allegations. The legislation specifically protects survivors' rights to speak about their experiences. However, it does not affect post-dispute settlement agreements or provisions that protect trade secrets.

Well-drafted agreements must now include appropriate carve-out language. This language protects legally protected communications, including whistleblower activities under various federal statutes. At the same time, it preserves legitimate business interests in reputation protection.

Firm-wide communication restrictions in employee handbooks face increased scrutiny under current regulatory interpretations. The National Labor Relations Board may challenge such policies if they inappropriately restrict employees' rights to engage in protected concerted activity. Protected concerted activity includes communications about workplace conditions, wages, or other terms of employment.

Investment managers must carefully balance legitimate reputation protection interests with employees' federally protected rights to communicate about workplace matters. This requires more precise drafting and narrower scope than was previously acceptable.

The current regulatory framework requires that non-disparagement provisions be narrowly tailored to protect specific, legitimate business interests. They must avoid broad language that could reasonably be interpreted as restricting protected employee communications or whistleblower activities.