Liquidated Damages in NDAs
An NDA or nondisclosure agreement protects a company’s sensitive information, trade secrets, and intellectual property. The agreements prohibit employees, vendors, contractors, and other parties from disclosing the company’s confidential information. The agreements also outline when a party can disclose information and the guidelines for doing so.
Maryland business attorneys use these agreements to help protect their client’s best interests.
However, an NDA does not prevent a party from disclosing information. For that reason, a nondisclosure agreement includes consequences if a breach occurs, including liquidated damages clauses.
What Are the Consequences of Breaching an NDA?
The party with access to the sensitive information is generally called the “receiving party” because they received the information from the disclosing party. The receiving party may be an employee, contractor, or another party.
The disclosing party is the employer or the business that hired the contractor or vendor. The company could be working with a third party on a joint venture that requires disclosing confidential information.
If a receiving party breaches the NDA, the disclosing party may seek an injunction from the court. An injunction is a court order prohibiting a person from taking specific actions or requiring them to take specific actions.
Typically, the NDA contains language that makes it a mutual agreement by the parties that any breach of contract regarding confidential information causes irreparable harm to the disclosing party. When irreparable harm is presumed, the court is more likely to grant the disclosing party’s request for an injunction.
Another common consequence of breaching a nondisclosure agreement is liquidated damages. Before agreeing to a liquidated damages clause in an NDA, seek legal advice. There are benefits and disadvantages of agreeing to liquidated damages for the disclosing and receiving party.
What Are Liquidated Damages in an NDA?
A business may experience losses because a receiving party discloses intellectual property of sensitive information. Therefore, the company may include terms in the NDA to legally enforce recovery of business losses in the event of a breach.
The total of liquidated damages is a specific amount the receiving party must pay if it breaches the NDA. It could be difficult to calculate the actual damages if a party breached the NDA. Therefore, the disclosing party is assured of receiving the amount specified as liquid damages to compensate for losses caused by the disclosure of sensitive information.
Unfortunately, there is a problem with liquidated damages. The disclosing party could receive much less than the actual damages caused by the disclosure of confidential information. Likewise, the receiving party could be required to pay more than the actual damages if it agreed to liquidated damages.
Are Liquidated Damages a Deterrent to Prevent Breaches of NDAs?
Liquidated damages are stipulated amounts agreed to by the parties to a nondisclosure agreement. The benefits of a clause for liquidated damages include:
Quick resolution
No need for litigation for a breach of contract
Disclosing party need not prove actual damages
The receiving party has a monetary incentive to keep sensitive information confidential
However, the liquidated damages clause is not a penalty. The receiving party is not guaranteed payment of the liquidated damages. The receiving party could refuse to pay the amount. If so, the disclosing party must pursue a breach of contract action against the receiving party.
The court might not enforce the liquidated damages clause contained in the nondisclosure agreement unless the disclosing party can prove:
Placing a monetary amount on actual damages is not practicable, and,
The amount of liquidated damages agreed upon by the parties is a reasonable estimate of the actual damages.
For liquidated damages to be reasonable, it cannot be an arbitrary amount. The disclosing party must base the amount of liquidated damages in an NDA on a realistic estimate of what the business losses would be if the sensitive information were disclosed.
However, for liquidated damages to function as a deterrent, the amount must be sufficient enough to motivate the receiving party to keep sensitive information confidential. Unfortunately, the benefit of disclosing the information could outweigh the liquidated damages. If so, the receiving party may choose to pay the fee liquidated damages amount because they benefit more by disclosing the sensitive information.
Businesses should consult their lawyers about the terms of an NDA before entering into one with a receiving party. Liquidated damages can be beneficial in a nondisclosure agreement. However, it depends on the other factors relevant to the nondisclosure agreement and the proposed amount of liquidated damages.
Contact Our Maryland Business Attorney for More Information
Do you have questions about a confidentiality agreement or other disclosure agreements? Contact Steve to discuss your rights and obligations regarding business and employment contracts.
