Liquidated Damages in NDAs: What Business Owners Need to Know

Updated June 2026

A liquidated damages clause can streamline breach recovery or backfire entirely. The outcome depends on how it is drafted.

Key Takeaways

• Liquidated damages in an NDA set a pre-agreed dollar amount or formula that the breaching party must pay if confidential information is disclosed.

• Courts in Maryland, Virginia, and D.C. will not enforce a liquidated damages clause that functions as a penalty rather than a reasonable estimate of losses.

• Maryland courts apply a two-part test requiring that damages were difficult to estimate at the time of contracting and that the agreed amount was a fair forecast.

• The Defend Trade Secrets Act of 2016 (DTSA) requires employers to include a whistleblower immunity notice in NDAs or similar agreements that cover employees, contractors, or consultants and govern the use or disclosure of trade secrets or confidential information. Without that notice, the employer may be barred from recovering exemplary damages or attorney fees under the DTSA against that individual.

• Because liquidated damages typically compensate for past harm, business owners should also include injunctive relief provisions in NDAs to obtain court orders stopping further disclosure of confidential information.

A liquidated damages clause in a nondisclosure agreement (NDA) sets a specific dollar amount or formula that the breaching party agrees to pay if confidential information is disclosed. For business owners in Maryland, Virginia, and Washington, D.C., these clauses offer a way to recover losses without proving exact financial harm. But they only work if the clause is drafted to meet specific legal standards. An amount that a court views as a penalty rather than a reasonable forecast of losses will not be enforced.

This guide from our Alexandria business attorney explains how liquidated damages work in NDAs, what courts look for when deciding whether to enforce them, and how to structure these provisions to protect your business.

How NDAs Protect Confidential Information

A nondisclosure agreement is a contract that prohibits one or more parties from sharing confidential business information. The party sharing the information is typically called the disclosing party, and the party receiving it is the receiving party. NDAs are commonly used in employment agreements, vendor contracts, joint ventures, and business acquisition discussions.

An NDA alone does not physically prevent someone from disclosing sensitive information. It creates a legal obligation not to disclose and outlines the consequences if that obligation is breached. Those consequences typically include two main remedies: injunctive relief and monetary damages, including liquidated damages.

What Are Liquidated Damages in an NDA?

Liquidated damages are a pre-determined dollar amount or formula agreed upon at the time of contracting, to be paid in the event of a breach. In an NDA, this means the receiving party agrees to pay a specified dollar amount or formula if it improperly discloses the disclosing party’s confidential information.

The primary advantage is efficiency. If a breach occurs, the disclosing party does not need to prove the exact dollar amount of its losses in court. The agreed figure serves as a substitute for actual damages. This is particularly useful in NDA disputes because the financial harm caused by leaked trade secrets, client lists, or proprietary processes is often difficult to calculate after the fact.

That said, liquidated damages can cut both ways. The disclosing party may recover less than its actual losses if the pre-set amount is too low. On the other hand, the receiving party may owe more than the actual harm caused if the amount is set too high, though courts often step in to prevent that outcome.

When Courts Will and Won’t Enforce These Clauses

Courts in Maryland, Virginia, and D.C. will enforce a liquidated damages clause only if it meets specific requirements. A clause that functions as a punishment for breach rather than a fair estimate of anticipated harm is considered a penalty and will not be upheld.

Maryland courts apply a well-established two-part test from Barrie School v. Patch, 401 Md. 497 (2007). First, the clause must provide a fair estimate of potential damages at the time the parties entered into the contract. Second, the damages must have been difficult or impossible to estimate at the time of contracting. To increase the likelihood of enforcement, the clause should specify a fixed dollar amount or formula that reflects this reasonable estimate and not be altered after the fact to match actual damages.

Virginia follows a similar framework. Courts evaluate whether the pre-set amount represents a genuine attempt to estimate damages or is designed to punish breach. In Sagatov Builders LLC v. Hunt, a Fairfax Circuit Court found that an optional liquidated damages clause was unenforceable because the option itself suggested a punitive purpose rather than a legitimate effort to fix anticipated losses.

For business owners operating across the DMV region, these standards mean that arbitrary dollar amounts included in an NDA without supporting rationale are unlikely to hold up in court. The burden of proving that a liquidated damages clause constitutes an invalid penalty falls on the party seeking to invalidate it.

Best Practices for Drafting Enforceable Clauses

Several practical steps can improve the chances that a liquidated damages clause will survive judicial scrutiny.

• Include language explaining why actual damages would be difficult to calculate if a breach occurred.

• Base the dollar amount on a documented, reasonable estimate of anticipated losses rather than a round number chosen for deterrent effect.

• Reference the types of harm considered when setting the amount, such as loss of competitive advantage, reputational damage, or re-procurement costs.

• Pair the liquidated damages clause with an injunctive relief provision so a court can order the breaching party to stop further disclosure.

If your NDA or similar agreement covers employees, contractors, or consultants and governs the use or disclosure of trade secrets or confidential information, federal law requires a whistleblower immunity notice. Without that notice, your business may be barred from recovering exemplary damages or attorney fees under the Defend Trade Secrets Act against that individual.

Taking these steps at the drafting stage is far easier and less expensive than litigating enforceability after a breach has already occurred.

Talk to a Business Attorney About Your NDAs

An NDA with a poorly drafted liquidated damages clause can give you a false sense of security. If the amount is too low, you may be locked into inadequate compensation. If it is too high, a court may strike the clause entirely. Contact Thienel Law to schedule a consultation about your business contracts and confidentiality agreements.