NDA: An Effective Way to Protect Confidential Information

Sheppard Mullin Richter & Hampton LLP
Contact

Sheppard Mullin Richter & Hampton LLP

[author - Luke Bickel]

A recent California Court of Appeals decision found nominal damages could be awarded for an employee’s breach of a non-disclosure agreement (“NDA”), even if no actual harm was done to the employer.  An award of nominal damages for breach of an NDA may be important for companies seeking to protect confidential information and trade secrets for two reasons: (1) this may give rise to an award of litigation costs, and (2) may also support a permanent injunction ruling preventing the former employee from any further possession or use of the protected information.

Under California Civil Code section 3360, “[w]hen a breach of duty has caused no appreciable detriment to the party affected, he may yet recover nominal damages.”  In the partially published case, Elation Sys. v. Fenn Bridge LLC, the appellate court confirmed the application of Section 3360 to a breach of a non-disclosure agreement despite the jury’s finding of no actual damages.  (Nov. 22, 2021) A159749 (Cal. Ct. App.).

In, Elation, a software engineer, Tiebiao “Joe” Shi, signed an NDA with his employer, Elation, in which he agreed “to hold all Confidential Information in strict confidence and secrecy and not to disclose to others or to use” the information, and to make “no copies of Confidential Information” except upon his employer’s written authorization.  Shi then left Elation to start a business marketing “similar, if not identical software” using replicated source code.  A settlement agreement was reached where Elation could inspect the software developed by Shi and prevent the use of any trade secrets or confidential information.  Elation could then reinspect the software both before and after the first sale of the product by Shi.

After the first sale was made, Elation determined its trade secrets and confidential information were being used in Shi’s software and sued for breach of both the NDA and settlement agreement.  A jury found Shi breached the NDA and harmed Elation, awarding it $10,000 in damages.  The jury also found Shi breached the settlement agreement.  Shi then successfully moved for a judgment notwithstanding the verdict (JNOV) challenging the jury’s finding that Elation was harmed by the breach of the NDA and that Shi breached the settlement agreement.  Elation appealed the order granting the JNOV.

In the published portion of its decision, the Appellate Court affirmed the JNOV as to the breach of settlement agreement but reversed the order on the NDA claim.  Although Elation could not establish lost profits from the breach, and thus could not establish actual damages, the Court of Appeal held that nominal damages should have been awarded for the breach of the contractual duty under the NDA.  The appellate court explained that the breach of the NDA was in itself a legal wrong, regardless of whether damage was inflicted.  The Court of Appeal noted that, under Section 3360, California courts have held “‘[a] plaintiff is entitled to recover nominal damages for the breach of a contract, despite inability to show that actual damage was inflicted.’”  (Quoting Sweet v. Johnson (1959) 169 Cal.App.2d 630, 632.)  The appellate court further reasoned that reversal should be granted where, as here, an award of nominal damages would provide “‘absolute entitlement to costs’” or “‘determine some question of permanent right.’”  (Quoting Staples v. Hoefke (1987) 189 Cal.App.3d 1397, 1406.)  Here, reversal was necessary because the NDA provided either party could seek specific performance for a breach, and therefore an award of nominal damages would impact Elation’s rights to obtain further equitable relief, such as a permanent injunction preventing the former employee from further breaching the NDA.  Elation is an important decision for California companies suing to recover and prevent the use of confidential information in violation of confidentiality agreements or NDAs.  Even if no harm has yet occurred as a result of the violation, a company may still seek to enforce its agreements, obtain injunctive relief, and potentially recover fees and costs.

*Luke Bickel is a law clerk in Sheppard Mullin’s San Diego (Del Mar) office.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Sheppard Mullin Richter & Hampton LLP | Attorney Advertising

Written by:

Sheppard Mullin Richter & Hampton LLP
Contact
more
less

Sheppard Mullin Richter & Hampton LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.