February 1, 2023

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Protecting trade secrets is typically the #1 rule for many organizations — especially technology companies. Therefore, when a company needs to share its closely guarded trade secrets with a subcontractor in order to complete a project together, most companies understandably require that the subcontractor enter into a confidentiality agreement that includes a non-disclosure clause. Many of these confidentiality agreements also include a contractual penalty clause that is triggered by the subcontractor’s breach.

The advantages of a contractual penalty regulation are obvious. It is often extremely difficult – if not impossible – to calculate the exact actual damage resulting from an injury. In these situations, a liquidated damages clause may be used to seek damages, so long as the clause is not determined as an unenforceable penalty clause. The exact requirements vary from state to state, but in general the liability for damages must represent a reasonable estimate of the damage caused by the not hurtful Group.

Earlier this month, the 11thth Circuit focused precisely on this issue in its unpublished statement SIS LLC v Stoneridge Software Inc. et al.Case number 21-13567, a trade secret case involving two technology companies who once attempted to work together.

A few years ago, SIS entered into a confidentiality agreement with Stoneridge Holdings. Ultimately, SIS claimed that Stoneridge breached the parties’ confidentiality agreement, causing SIS to lose a “multi-million dollar contract.” SIS filed a lawsuit seeking damages from Stoneridge solely on the basis of the liquidated damages provision contained in the confidentiality agreement.

In 2021, a Georgia jury found that Stoneridge had breached the confidentiality agreement but could not be awarded a penalty because the court concluded that the penalty clause in the parties’ contract allowed for recovery of damages and therefore not enforceable. Instead, SIS only recovered $85,000 in “nominal damages.”

SIS appealed against the judgment of the court of first instance on the contractual penalty. the 11th Circuit upheld the finding of the trial court, noting that “

Understandably so the 11th Circuit held that the liquidated damages provision violated Georgian law because the provision of the agreement “mismatched” the damages awarded to SIS and the actual damage suffered. Instead of estimating the actual damage to SIS, the provision has more of a deterrent function that is not enforceable.

To make matters worse for SIS, SIS never presented evidence of alleged lost profits in court. Therefore, after the court found the liquidated damages provision unenforceable, the jury had no basis to award SIS damages other than its finding of $85,000 in “notional damages” (which was also upheld on appeal).

Bring away

In most cases, including a contractual penalty in a non-disclosure agreement is a smart move. However, it is crucial – especially in states like Georgia – that the compensation calculation is based on the damage suffered Not– infringing party and not confiscation of any profits made by the infringing party.

The content of this article is intended to provide a general guide to the topic. In relation to your specific circumstances, you should seek advice from a specialist.

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