NYLJ “No Breach of Settlement Agreement Where Conduct Not Prohibited by Non-Disparagement Clause”
By Thomas E.L. Dewey
Parties frequently use settlement agreements to restrict or prohibit potentially harmful conduct, such as disparagement. While non-disparagement provisions in settlement agreements are commonplace, the specific language used in such provisions is critically important, because it is the text of those provisions that determines which specific conduct is restricted or prohibited.
In SA Luxury Expeditions v. Schleien, a tour operator who had entered into a settlement agreement with a competitor sued the competitor, alleging breach of a non-disparagement clause in their settlement agreement. Specifically, the tour operator alleged that the competitor had published online reviews that cast doubt on the value of the tour operator’s services. The tour operator also asserted unfair competition claims against the competitor based on an allegedly high volume of fraudulent clicks and leads that had imposed higher costs on the tour operator.
In its Aug. 29, 2022 decision, the district court (Caproni, J.) granted the competitor’s motion to dismiss the tour operator’s complaint. As to the breach of contract claim, the court explained that, while the parties’ settlement agreement prohibited the competitor from making disparaging statements describing the tour operator “in a manner that could reasonably be construed to portray [it] in a negative light”—including, for example, by describing the tour operator as “dishonest, incompetent, [or] corrupt”—the alleged online reviews undisputedly contained no negative description of the tour operator’s services and, thus, were not in and of themselves disparaging. Thus, even if those reviews had lowered the tour operator’s aggregate rating on a third-party review platform, the competitor’s conduct did not breach the parties’ settlement agreement. The court also held that the tour operator’s unfair competition claims, which sounded in fraud, failed to satisfy Federal Rule of Civil Procedure 9(b)’s heightened pleading standard.
This decision is significant because it makes clear that conduct that may have the intent or effect of disparagement—but is not itself disparaging—may not breach a settlement agreement’s non-disparagement clause unless such conduct is expressly prohibited by that clause.
This article first appeared in the New York Law Journal on October 14, 2022. Christopher P. DeNicola, a counsel of the firm, assisted in the preparation of the article.