Category Archives: Confidentiality

Non-disparagement clauses in NDAs

Unequal bargaining power

Non-disclosure agreements (NDAs) have been in the news recently. First, there were the revelations about the US film producer, Harvey Weinstein, and the suggestion that some of the women who made allegations about his conduct have broken the terms of NDAs that they have signed.

More recently, there has been political controversy in the UK about the BBC requiring NDAs when settling disputes with female staff about whether they are paid less than men for the same work.

One of the issues that has emerged is the use of so-called non-disparagement clauses in NDAs. In effect, these require a party not to bad-mouth the other party. Here is an example found quickly on the internet:

Executive will not disparage the Employer or any of its directors, officers, agents or Executives or otherwise take any action which could reasonably be expected to adversely affect the personal or professional reputation of the Employer or any of its directors, officers, agents or employees.

Whether such a clause is enforceable will, no doubt, vary between jurisdictions. There are likely to be situations where the clause is not enforceable on public policy grounds, eg if the employee is reporting illegal activity (whistle-blowing) or giving evidence in court. See, for example, this commentary (on a related point) from a leading employment law chambers in London.

IP Draughts notes in passing that the model settlement agreement recommended by ACAS in the UK doesn’t include any non-disparagement clause, but commentary on various employment law firm websites seems to be in favour of such a clause.

IP Draughts doesn’t see these clauses very often, though he is occasionally asked to review (UK) employment settlement agreements. He recalls seeing one in an agreement to settle a dispute between UK academics (not an employment dispute). You might think that there is something about academic disputes that make such a provision useful; I couldn’t possibly comment.

Clauses of this kind seem to be more popular in the USA. He has his doubts over whether, in a UK setting, they are typically anything more than something for the ex-employer to point to, when seeking to dissuade the ex-employee from making negative comments.

Postscript: Since writing this article, IP Draughts has seen a news report about an ex-employee of Redwood, a San Francisco start-up company, who complained of harassment and “declined to sign the nondisparagement agreement offered to her as a condition of severance”.

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CDAs and liquidated damages

panicConsider the following clause, which is taken from a template confidentiality agreement that can be found quickly on the internet.

Liquidated Damages. In case of unauthorized use or disclosure of the Confidential Information, the Disclosing Party shall be entitled to liquidated damages in the amount of €10 000 (ten thousand Euro) for each such use or disclosure.

Notwithstanding the right to liquidated damages, the Disclosing Party has the right to take any measures available and to claim and receive a higher amount of compensation if the Disclosing Party can prove that the actual damage sustained will exceed the amount of liquidated damages.

IP Draughts has seen variants of this wording in a significant minority of CDAs over the last decade. Typically, the CDA has been drafted by a lawyer in a civil law jurisdiction, rather than a common law jurisdiction. The above example appears in an agreement used by a Dutch company.

To a common lawyer’s eyes (well, certainly to this English common lawyer’s eyes), the clause appears strange and inappropriate for several reasons, and would often be resisted. In IP Draughts’ experience, when the clause is resisted, the party that proposed it is, in a fair number of cases, willing to remove it from the CDA. It doesn’t seem to be a “must have” clause.

Why does the clause seem inappropriate to an English common lawyer?

First, because the traditional view of liquidated damages clauses was that they were supposed to be a “genuine pre-estimate” of the loss that the non-breaching would suffer as a result of the breach. They were specifically not supposed to be a penalty, or disincentive for breach, as this would render the clause unenforceable.

illiquidPutting the figure of €10 000 in a template agreement does not suggest that the drafter has related the amount to a pre-estimate of loss in an individual case. Rather, it appears that the figure has been included as a disincentive to breach. IP Draughts’ view was (and still is, subject to comments at the end of this article) that, if you are going to include a liquidated damages clause, some thought is required as to why the figure is appropriate in the individual case, and that it would be prudent to record the reasons for coming up with the figure in a file note. If the clause is later challenged in court, one could produce the file note to demonstrate that it was intended to be a pre-estimate of the loss and that the amount was thought to be reasonable rather than a penalty or “stick” to beat up the other party.

Secondly, because it is inherently difficult to pre-estimate loss in the case of many CDAs, particularly those which concern early-stage technology. The confidential information might be used to develop a product, and the product might be highly successful. Or it might not. The range of possible values for the information will sometimes range from zero to millions. Even if the information stands a reasonable chance of being developed into a blockbuster product, a court would typically be likely, when assessing damages, to heavily discount the amount to take account of the uncertainties, risks and time involved in taking information through to a successful product.

In the case of many CDAs, the most useful remedy for breach or anticipated breach may be to obtain an urgent injunction to stop any disclosure or further disclosure.  The likely cost of obtaining such an injunction may be several times €10 000, at least in the English legal system.

Thus, the figure of €10 000 seems to be plucked out of the air, unrelated to any measurable loss, and unrelated to the costs of enforcement of contractual rights under the CDA.

Thirdly, because the whole idea of a liquidated damages clause in the English system (and, IP Draughts suspects, in other common law jurisdictions) is to avoid the need to calculate losses at trial. The parties are agreeing in advance what the damages will be. This is what the term “liquidated damages” is supposed to mean. It is therefore misconceived to say, as the above clause does, that you can claim more than the agreed amount. It turns the clause into a “minimum damages” clause rather than a “liquidated damages” clause.

IP Draughts suspects that wording such as that quoted above reflects a misguided mish-mash of common law and civil law concepts. IP Draughts has commented before on the pervasive use of US templates in agreements that are made under non-US laws, and where the template uses US legal concepts that may not be appropriate in the jurisdiction in which the agreement is made.

penaltyIP Draughts doesn’t know what the correct Dutch law term (ie in the Dutch language) is for a damages provision such as that quoted above, nor what its English language equivalent would be. He suspects that the term might be “penalty” or its Dutch language equivalent, but that the drafter of the English language version was concerned about including this word in view of its negative connotations under common laws, and preferred the more benign, but inaccurate term, “liquidated damages”.

For most of IP Draughts’ career, English lawyers have focussed on trying to ensure that a clause providing in advance for a financial payment of this kind was a liquidated damages clause rather than an unlawful penalty. Many lawyers have even thought it desirable to include in such a clause a statement such as “The parties acknowledge that this amount is a genuine pre-estimate of the anticipated loss that will result from a breach of clause X.” This statement was designed to echo the words used by one of the judges in the leading English case on liquidated damages clauses, the 1915 House of Lords case of Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd. IP Draughts has always found this wording rather self-serving, and likely to be ignored by the court in the event of dispute.

English lawyers’ certainties about liquidated damages clauses were shaken last year, with the decision of the UK Supreme Court in a pair of cases that, in the interests of brevity, IP Draughts will call the ParkingEye case [2015] UKSC 67.

The Supreme Court decided that the Dunlop case had been misunderstood. The justices in the Supreme Court each gave slightly different reasons for their decision, but a common thread was that a penalty could be enforced if:

  1. it protects a legitimate business interest; and
  2. the amount is not extravagent, exorbitant or unconscionable.

parkingeyeMoreover, in commercial contracts between parties  of comparable bargaining power, there was a presumption that the parties were the best judges of what is legitimate, and the court should not strive to find an unlawful penalty.

In light of this important decision, IP Draughts is less concerned about the enforceability of a pre-determined damages clause of €10 000, as this is not a huge amount in the context of commercial litigation or for most business clients. However:

  • He will probably continue to use the term liquidated damages rather than penalty, if that is what the clause is.
  • He will be less concerned about demonstrating that the amount is a genuine pre-estimate of loss, and more concerned with whether there is a good reason for the clause, whether the parties are of comparably bargaining power, and whether the amount seems proportionate.
  • He will continue to recommend that clauses of the kind quoted above are resisted, as being unnecessary and inappropriate in many cases.

 

 

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Agreeing injunctions is for teuchters

rangersIP Draughts won’t claim this as a full blog posting. The subject – clauses in which parties agree that an injunction may be obtained for breach of a confidentiality obligation – has been discussed in detail already in an earlier blog article. That earlier article is the most popular there has been on this blog, with over 26,000 viewings.

One of IP Draughts’ hobby horses (hmm… says Mr Pettifog, with unusual restraint) is that these clauses are largely pointless in the English courts, as the judge will not be interested in being told how to apply his discretion on the granting of an injunction.

What music it was, then, to IP Draughts’ eyes, to see the following statement by Mr Justice Peter Smith in a case reported last week. The case was partly about confidentiality undertakings given by the owner of Glasgow Rangers Football Club in favour of the owner of Newcastle United Football Club. A lot of balls, then. Although the judge was not being asked to interpret the undertakings, he couldn’t resist commenting as described them, pointing out that they were unilateral and that no consideration seemed to have been given for them. This stream-of-consciousness approach seems typical of Peter Smith J. What particularly caught IP Draughts’ eye was the following observation:

  • Paragraph 2 has an express statement that the Undertakers agree “that monetary damages may not be adequate compensation…. and accordingly any member of the SD Group shall be entitled to seek equitable relief including interdict, injunction and specific performance in the event of any actual or threatened breach to the provisions of this letter.”
  • I pause to observe that that self serving clause cannot in my view be used to override the principles which the courts apply when asked to grant such relief.

It is tempting to say, I told you so. But Mr Justice Peter Smith has a long record of shooting from the hip. It would have been better if a more mainstream judge had said this. But as the bard of Dartford said, you can’t always get what you want, but you get what you need.

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A book you can keep under your hat

Untitled-1Nestling in IP Draughts’ inbox this morning was an email from Law Society Publishing, inviting him to purchase the recently published, third edition, of a book, Drafting Confidentiality Agreements. Written by some lawyers called Anderson and Warner, apparently.

It is a small book, so it may fit under your hat, or in your loved one’s Christmas stocking.

Details here.

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