In the summer of 2016 Stormy Sultry aka Peggy Peterson and Dennis Duck aka David Dennison engaged in some alleged hanky-panky. Wanting to nip in the bud any later stories about what happened, Duck’s agent gets Sultry to sign a non-disclosure agreement (NDA) in exchange for which Duck happily pays Sultry $130,000 for her silence and her agreement that any dispute over the NDA could only be pursued in a private arbitration. Agreeing that damages for any breach are not readily determinable in dollars, the NDA has a liquidated damages provision that damages are $1 million per breach. Is the NDA enforceable?

Most likely. It’s a contract that appears to have been breached which satisfies: (1) existence of a valid contract; (2) performance (delivery of the money); (iii) material breach by the defendant (failure to comply with silence); and (4) damages sustained by the plaintiff as a result of the breach.

Difference Between a Nondisclosure Agreement or Confidentiality Agreement?

None. A nondisclosure agreement (“NDA”), also known as a confidentiality agreement, is a contract permitting Duck to identify confidential information and contracting with Sultry not to disclose it to third parties.

NDAs with Employees or Third Parties?

Yes, there is a difference. So-called confidentiality or nondisclosure agreements with employees are more likely to be evaluated – with their own nuances and interpretations – as non-competition agreements protecting trade secrets, customer lists, and the like. Whether it’s an NDA, confidentiality, non-competition or non-solicitation agreement, it’s a contract.

Liquidated Damages

Although not expressed as liquidated damages yet argued to be a penalty, a Florida school principal settling with his private school employer was required to disgorge the $80,000 settlement when – ignoring the confidentiality provision of the settlement agreement – the principal’s daughter posted on her Facebook page:  “Mama and Papa Snay won the case against Gulliver.  Gulliver is now officially paying for my vacation to Europe this summer. SUCK IT.”

NDAs are enforced like any other breached contract. In this case, Dennis Duck’s arbitration clause requires enforcement in a private arbitration. But, how did he put a dollar amount on damages for breach when Sultry revealed something she promised not to tell? Typically, the parties negotiate on the amount of the damages reasonably expected to be incurred by the non-disclosing party. Yet, a liquidated damages clause is only enforceable if the following conditions are met: (1) the harm caused by the breach is incapable of being estimated or is difficult to estimate at the time of the agreement; and (2) the amount of liquidated damages is a reasonable forecast of just compensation. This is called the “penalty” analysis; if either element is not shown the clause is unenforceable.

Properly done, perhaps with negotiations between counsel, damages that are otherwise difficult to assess are more likely to be enforced.

Weinstein Tax on Confidential Sexual Settlements

And then there is Section 162(q) of the 2017 tax law, which eliminates a tax deduction for sexual harassment-related settlements and any related attorney’s fees if payment is subject to a nondisclosure agreement. If an employer requires the alleged victim of sexual harassment or abuse to keep the settlement (and presumably the underlying claim) confidential, then the amount of the payment and any attendant attorney’s fees are not tax-deductible. Sexual harassment/abuse settlements and related attorney’s fees remain tax-deductible if they are not subject to a nondisclosure agreement.

If you have – or are asked to sign – an NDA read it carefully, and make sure:

  • What information is confidential and for how long it will be kept confidential is clearly stated;
  • When and how disputes related to the NDA will be determined – arbitration is frequently specified;
  • Keep an electronic copy in addition to the hard copy in your files;
  • If written records, clearly stamp or otherwise mark each page as “Confidential;” and
  • If no written records, the NDA should clearly state the scope of the information being designated as “Confidential.”