Private to Public: Deterrent Effects of Bans on Confidential Settlements

Nondisclosure agreements are common in the settlement of legal disputes but are controversial as they suppress information that could prevent harm to others. But until the 2017 #MeToo movement, there had been little legislative effort to prohibit the practice in any context, and consequently no evidence on whether public disclosure of harms would be effective as a deterrent to wrongdoing. Following the #MeToo movement, more than 10 states enacted bans on NDAs in the settlement of employment discrimination claims. In addition to reputational harm to the employer, public airing of misconduct was expected to encourage other victims to come forward, which would have direct financial costs to the employer through litigation costs as well as in possible damages payments. We leverage variation in state legislation in timing and coverage to test the effects of these bans on employment discrimination court filings and outcomes in federal court, the most public forum for exposing acts as illegal. Supporting the prediction that bans could have a deterrent effect in the long term, we find an initial increase in filings, a decrease in settlement after filing, and an increase in the probability that the plaintiff prevails for cases without harassment allegations.