Updated November 4, 2020:

Liquidated damages clause in confidentiality agreement obligates one party to pay the other party a predetermined amount of money if there is a breach of contract. While the purpose is to avoid possible litigation and to quickly handle any breaches, the reality has not shown this to be true. Estimating losses due to a breach can be difficult because future earnings are unknown. What is known is that any future breach will hurt and damage the business.

Liquidated Damages in the Cavendish Judgment

The Supreme Court determined in the Cavendish judgment that when assessing the liquidated damages clause, the fine paid cannot be out of proportion to any business losses that have been incurred and should protect legitimate interests. Legitimate interests include intangibles, such as:

  • goodwill
  • brand reputation
  • confidential information
  • trade secrets
  • customer loyalty
  • employee relationships
  • licensee relationships

The Court also found that the contract was between well represented and knowledgeable entities. The entities were also of similar stature and, therefore, competent to determine the terms of the contract and that the court didn't need to interfere. The judgments in Cavendish offered brand owners a wider range for determining liquidated damages when a contract breach occurs. This is important to the survival of the business because determining damages caused by a breach is difficult. The liquidated liability clause is beneficial when applied to brand licensing. In instances where the brand owner is the dominant party, the liquidated damages clause may not be as easy to enforce.

How to Limit a Breach

The liquidated damages clause acts as a deterrent but will not fully prevent a breach of contract. The clause should make anyone considering violating the terms of the contract rethink that decision based on the financial penalties. The penalties may include the clause damages and attorney and legal fees incurred.

In the instance of a breach of a confidentiality agreement, specifically celebrities, the clause should include language that discourages third parties to encourage a violation of the contract. By stating liability and associated costs that will be placed on the third party, it will limit the possibility of a breach. In relation to a celebrity, this can occur when a newspaper or magazine attempts to have the celebrity's employee share confidential information.

Employees working for celebrities will often not have legal representation and, therefore, may not fully understand the clause. To avoid this being an issue in possible future legal proceedings, the celebrity should strongly encourage the employee to seek their own representation prior to signing. The celebrity can also offer to pay any attorney's fees that may be incurred.

What Happens If a Breach Occurs

Even the best-written clause may not prevent a breach of contract. To secure information that may be leaked, the drafter of the clause should include language that ensures privacy to prevent entering public records. Privacy may only be possible during the negotiation process.

Once the case reaches litigation, it will be difficult to prevent information from the public. In situations where arbitrators are used to finding a resolution between parties, there is a higher likelihood of the details of the case being kept private. Arbitration is a recommended course of action in order to limit how much information reaches the public and the ability to choose what evidence will be considered.

Enforcing Liquidated Damages

If the liquidated damages clause acts as a penalty, the clause cannot be enforced. Instead, as determined in Phillips v. Phillips, 820 S.W.2d 785, 788 (Tex. 1992), criteria must be met including:

  • "harm caused by the breach is incapable or difficult of estimation"
  • "the amount of liquidated damages is a reasonable forecast of just compensation"

In relation to non-compete agreements, a set amount will be listed because determining the effect of the breach is difficult. It should be noted that in noncompete agreements, the liquidated damages clause cannot be based on the employee's salary.

If the reputation of a person has been harmed, the damages will be harder to calculate. In a celebrity case, if the confidential information has not been leaked to the public but may be, the celebrity can ask for higher damages as the information will negatively impact their reputation.

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