Managing Business Reputational Risk: Non- Disparagement Clauses

In the great words of Benjamin Franklin, “It takes many good deeds to build a good reputation, and only one bad one to lose it.”   Public reputation of any business, whether classified as a big corporation or Small and Mediums Enterprise (SMEs), is a defining factor in the success of a business. A positive reputation attracts more employees, clients, business partners and investors to mention a few. In fact, businesses with great public reputation are able to create and maintain a competitive advantage over their competitors by relying solely on their public image to justify the prices set for their goods and services which are perceived as quality. On the flip side, reputational damage is considered a risk and has the potential to negatively impact performance of a business on long term basis.

What is reputational damage?

Reputational damage means damage to the public’s perception of your business resulting to loss of financial capital, social capital and/or market share. With the evolution of the internet and technology including social media platforms, more options exist whereby information about your business may be permanently published. Furthermore, the prevalence of freedom of expression exposes your business to harsh public criticism that you may never recover from. It is therefore important for businesses to put in place measures to control their reputation which is largely placed in the hands of others.

Mitigating reputational damage through non-disparagement clauses

Leading cases of business defamation and disparagement involve employees and former employees. This is because these individuals are or have been directly involved with the business and acquired a lot of information by virtue of their employment. In most instances, where the employment relationship goes sour, the employee may find refuge in ‘exposing the business to the public’. One of the ways through which a business can mitigate reputational risk, is through incorporating non-disparagement clauses in their contracts of employment. Non-disparagement clauses forbid an employee from saying (in speech or in writing) anything negative about the company, its products, services, employees or leaders in any form of communication. Depending on how the clause is drafted and the intention of the employer, the clause shields the company from being portrayed in negative light for a particular period of time. Once a non-disparagement clause is incorporated in an employment agreement, it becomes a binding obligation on the part of the employee, breach of which gives the employer the right to sue regardless of whether the statements made are true or false. It is important to note that disparagement differs from defamation. On the one hand, defamation applies only to false statements made and require some degree of willful intent to damage the other person’s reputation. In a suit for defamation, the law places the burden of proving the truth of allegedly defamatory statements on the defendant, rather than the plaintiff. The plaintiff has no burden to prove its defense. On the other hand, the application of disparagement is wide and broad. It restricts a person from making negative statements about the company regardless of them being true. The advantage then is, in the event of a suit for disparagement, the employer will only need to prove that there was a valid contract, with an unambiguous clause on non-disparagement and that the employee has failed to observe the terms of the contract resulting to damage to the employer.

Incorporating non-disparagement clauses

Non-disparagement clauses may be incorporated at any stage of the employment including at the point of termination of employment. It was may be included as a clause to the contract of employment baring the employee from disparaging the employer during the cause of their employment and upon termination of employment, or executed as a separate Agreement in addition to other employment Agreements. Further, a non-disparagement clause may be included in the Severance Agreement upon termination of the employment contract. It is unfortunate that a great percentage of brands focus their energies on handling sudden and significant threats/ damage to reputation which have already surfaced. This is likened to Crisis management which seeks to deal with an existing negative effect as opposed to Risk management which seeks to identify and prevent the negative event at the earliest opportune time. We, at CM SME Club, guarantee you a pool of experienced Advocates who will help your business mitigate and manage risks such as those associated with reputational of its brand.