There is a clause in many confidentiality agreements that sticks out like a sore thumb. The clause worries clients, because they don’t understand it. It looks so different from most of the clauses in the agreement. Some lawyers gloss over it, recognising it as a standard piece of legal verbiage. Other lawyers, particularly in the UK, are uneasy about it, and sometimes seek to water it down. Yet the clause persists in thousands, if not millions, of confidentiality agreements across the globe.
Some typical manifestations of the clause follow. The first is from a UK template found on the internet that appears to be based on a PLC document…
The Recipient acknowledges that damages alone would not be an adequate remedy for the breach of any of the provisions of this agreement. Accordingly, without prejudice to any other rights and remedies it may have, the Disclosing Party shall be entitled to the granting of equitable relief (including without limitation injunctive relief) concerning any threatened or actual breach of any of the provisions of this agreement.
…while this one is from a confidentiality agreement that was the subject of a reported case (discussed below) in the Delaware courts in 2012:
Money damages would not be [a] sufficient remedy for any breach …by either party. The non-breaching party shall be entitled to equitable relief, including injunction and specific performance, as a remedy for any such breach.
In other words, if a party breaches the confidentiality obligations, the other party is entitled to an injunction.
When deciding whether to grant an injunction, the court considers various factors, including whether an injunction is necessary. If the breach can be adequately compensated with a financial award, the court might decide that an injunction is not necessary. Clauses such as those above record the parties’ agreement that an injunction is an appropriate remedy.
IP Draughts doubts whether clauses of this kind have much value under English law. The award of injunctions forms part of what is known as the law of equity. Equitable remedies are generally at the discretion of the court. Clauses of this kind smack of telling the court what it must do. IP Draughts tends to dilute wording of this kind in negotiations, eg by saying “shall be entitled to seek equitable relief”. This change takes some of the impertinent sting out of the clause and is usually accepted by the other party.
It seems, however, that some US courts take a different approach. The 2012 case of Martin Marietta Materials Inc v. Vulcan Materials Company concerned the interpretation and enforcement of a confidentiality agreement that included the words quoted above. In that case, the Supreme Court of the State of Delaware upheld a decision by Chancellor Strine. In the words of Chancellor Strine at first instance in this case:
In Delaware, parties can agree contractually on the existence of requisite elements of a compulsory remedy, such as the existence of irreparable harm in the event of a party’s breach, and, in keeping with the contractarian nature of Delaware corporate law this court has held that such a stipulation is typically sufficient to demonstrate irreparable harm.
Various case law is cited both by Chancellor Strine, and by Jacobs J in the Delaware Supreme Court, in support of this contention.
According to this law firm article, the approach of Delaware state law differs from that of US federal law on this point. The authors discuss the federal case of Riverside Publishing Co. v. Mercer Publishing LLC, No. 11-1249 (W.D. Wash. Aug. 4, 2011):
Riverside pointed to the settlement agreement’s irreparable harm clause to argue that, absent injunctive relief, Mercer’s purported breach would cause irreparable harm. The court disagreed. It first recognized that circuit and district courts have declined to presume irreparable harm based on a contract clause. Pointing to the Supreme Court’s emphasis in Winter v. Natural Resources Defense Council that movants demonstrate actual harm, the court “querie[d] whether it can give any weight to such a clause.” “At best,” the court concluded, “the clause is evidence that at the time of the Settlement Agreement, the parties predicted that breaches of [certain terms of the Agreement] would be the sort that would cause irreparable harm.”Although “[t]hat prediction is perhaps entitled to some weight,” the court held that the clause did “not relieve Riverside of its obligation to demonstrate irreparable harm.”
IP Draughts suspects that the approach of the English courts would be similar to that of the US federal courts, but he is not aware of any case law on the point.
So, it seems there is some point to these clauses after all, in some US courts. Often, the financial losss that results from breach of a confidentiality obligation is difficult to assess or prove, and the party that “owns” the confidential information may well view an injunction as the most useful remedy for breach. There is, therefore, a good reason for including such a clause if it increases the likelihood of an injunction being granted.
Footnote: IP Draughts is not sure what legal principle is being referred to by Chancellor Strine in his use of the phrase the “contractarian nature of Delaware corporate law”. IP Draughts is not familar with the word contractarian. Some US lawyers with whom IP Draughts has discussed similar issues (eg see the recent debate on Adams on Contract Drafting here) seem to consider that agreeing to a remedy in a contract sets up some kind of estoppel. From IP Draughts’ reading of the English laws of estoppel and waiver, it is not immediately obvious that any of these laws is directly applicable to this type of situation. However, the law in this area is not clear or simple (and some of the leading English cases were decided the late Lord Denning who liked to stretch the law, and was not always followed by more conservative judges).