In a case that received national attention, on February 26, 2014, a Florida District Court of Appeal held that a plaintiff’s comments to his daughter regarding a settlement with his former employer and his daughter’s subsequent comment on Facebook about the settlement constituted a breach of the plaintiff’s confidentially obligations. In the underlying lawsuit the plaintiff, who had alleged age discrimination and retaliation claims under Florida state law against his former employer—a prep school—entered into a settlement agreement with the school. In the agreement, a confidentiality provision mandated that the plaintiff could not directly or indirectly disclose or communicate to any entity or person, except for his attorneys, professional advisors, or spouse, any information whatsoever regarding the existence or terms of the settlement agreement. A breach of this provision would result in the disgorgement of the plaintiff’s portion of settlement payments.
Four days after the settlement was completed, however, the plaintiff’s daughter posted the following status update on her Facebook profile, which was visible to over 1,200 of her “friends”:
Mama and Papa Snay won the case against Gulliver. Gulliver is now officially paying for my vacation to Europe this summer. SUCK IT.
Following this Facebook post, the defendant withheld approximately $80,000 in settlement payments due to the plaintiff’s breach of the confidentiality provision. After reviewing testimony regarding the alleged breach, the trial court held that the plaintiff’s comments to his daughter and his daughter’s comment on Facebook did not constitute a breach of the confidentiality provision.
The Florida Third District Court of Appeal disagreed and reversed the decision. The Court of Appeal ruled that the plain and unambiguous meaning of the confidentiality provision between the plaintiff and the defendant mandated that neither the plaintiff nor his wife would either directly or indirectly disclose any information regarding the existence or the terms of the parties’ agreement. Thus, the plaintiff’s representations to his daughter and his daughter’s comment on Facebook represented comments and communications that the confidentiality agreement was designed to prevent. The court approved the disgorgement of a portion of the plaintiff’s settlement payments.
Although this case came out of the Florida court system, it raises the same question for Texas employers: Would Texas law support a similar provision allowing the disgorgement of settlement payments? Texas employers should be cautioned that, unfortunately, a similar disgorgement of settlement payments pursuant to a breach of a confidentiality provision may not be enforced under Texas law.
First, to enforce a confidentiality agreement in Texas, a party must prove the fundamental elements of breach of contract: (1) the existence of a valid contract between the parties; (2) the plaintiff tenders performance under the terms of the contract; (3) the defendant breaches the contract; and (4) the plaintiff is damaged as a result of the breach. Even if the confidentiality agreement is valid and one of the parties is able to prove that the agreement was breached by the other party, a complete or partial forfeiture of the consideration paid for the settlement agreement will likely not be enforceable. Under Texas law, the forfeiture of consideration is generally frowned upon as a “penalty.” While “penalty” clauses are disfavored, Texas law does recognize the legality of liquidated damages clauses—a clause that presets the damage for a breach—in conjunction with a confidentiality provision. In employment-related settlement agreements, such clauses normally set a fixed sum—which is usually a much smaller amount than the consideration paid—as a damage if the confidentiality provision is breached. Setting an arbitrary number as a damage, however, is not enforceable. In fact, 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.
An employer seeking to enforce a liquidated damage clause must be ready to prove these factors through admissible evidence. Accordingly, in Texas, a party seeking to enforce a liquidated damage clause would arguably have to prove its damages and would likely not be able to rely on a disgorgement provision like the one used in the Florida case.