What Is a NDA or Nondisclosure Agreement and Why Is It Important?

Last month, I wrote about The Weinstein Co. seeking bankruptcy protection after revelations of serious sexual assault and misconduct on the part of board member, Harvey Weinstein.  This misconduct occurred over decades, and remained a well-kept secret due to a document known as a Nondisclosure Agreement, or NDA.

Victims of Harvey Weinstein were required to sign nondisclosure agreements in return for receiving monetary settlements arising from claims of sexual misconduct against Mr. Weinstein. Because the victims were required to stay silent after receiving settlements from the Weinstein Co., per the nondisclosure agreements, the actions of Harvey Weinstein were never brought to light until just recently. Upon announcing its plans to seek Chapter 11 bankruptcy protection, The Weinstein Co. announced further that all nondisclosure agreements entered into with victims of Harvey Weinstein will be canceled.

According to an article in USA Today, “today, the Company also takes an important step toward justice for any victims who have been silenced by Harvey Weinstein. Since October, it has been reported that Harvey Weinstein used non-disclosure agreements as a secret weapon to silence his accusers. Effective immediately, those ‘agreements’ end.”

Why Is This Important?

The Weinstein Co. could have taken the position in the Chapter 11 proceeding that the nondisclosure agreements signed by Harvey Weinstein’s victims amounted to an enforceable executory contract that the company, and any future buyer, assumed in the bankruptcy proceeding. Assuming an executory contract in a bankruptcy proceeding means the continuation of the enforcement of the terms of the executory contract. This could have potentially kept the victims from speaking out regarding the egregious conduct of Mr. Weinstein. By not taking this position in its Chapter 11 bankruptcy, The Weinstein Co. has taken the brave step of allowing justice to move forward for the victims of Harvey Weinstein without complicating the issue of an enforceable agreement to silence the victims.

Nondisclosure Agreements a Hot Topic in the News

The primary reason nondisclosure agreements is a hot topic today is the ongoing dispute between Stormy Daniels and POTUS Donald Trump. Ms. Daniels signed a NDA on the eve of the 2016 presidential election, thereby buying her silence as to allegations of a sexual affair with Donald Trump while he was married and within months of his child, Barron, being born. Stormy Daniels and Donald Trump's attorney, Michael Cohen, are currently engaged in heated litigation over the effectiveness and legality of the NDA. If ruled enforceable, Stormy Daniels’ able legal representatives could consider the use of a bankruptcy proceeding to reject the nondisclosure agreement and free Ms. Daniels up to speak just as the victims of Harvey Weinstein have been freed to speak out. But would this plan work?  It would ultimately come down to a decision by a bankruptcy judge as to whether the nondisclosure agreement actually constituted an executory contract subject to rejection in a bankruptcy proceeding.

This is not a cut and dried issue. It will depend largely on the language of the agreement and what test of “executoriness” the bankruptcy court decides to follow.  I just love that word “executoriness." But effectively, the bankruptcy judge would determine whether the NDA constituted an executory contract based on one of two tests generally used by bankruptcy courts on this issue:

1. The “Countryman” test - Is there still performance remaining under the contract for both sides and is the contract so under-performed that nonperformance by either party would constitute a material breach of the nondisclosure agreement; OR
2. The Functional test – whether a contract is “executory” will be determined by the benefits assumption or rejection of the agreement will bring to the bankruptcy estate.

As you can see there would not be an easy answer to this conundrum even within a bankruptcy setting.   If you are considering a filing for bankruptcy relief and wish to consult with a qualified bankruptcy attorney about your options, please contact one of our locations nearest you in Alabama, Mississippi or Tennessee for a free, confidential consultation.