Written by Jessica Relyea, Esq.
Edited by Brian Cafritz, Esq.
With the ubiquitous nature of social media, more and more retail and restaurant establishments are requiring confidentiality clauses in settlement agreements to contain strong penalties that deter a breach. In an effort to streamline litigation should a breach occur, those provisions often contain liquidated damages clauses, which state the parties agree a breach of confidentiality would result in a return of all settlement proceeds. This begs the question, is this provision enforceable? If a plaintiff breaches confidentiality, can you get the settlement funds back?
The Supreme Court of Virginia has held, and the Eastern District of Virginia has recently reaffirmed, that parties “may agree in advance about the remedy resulting from a breach, including damages, but only when (i) the actual damages contemplated at the time of the agreement are uncertain and difficult to determine with exactness and (ii) the amount fixed is not disproportionate to the probable loss.” Job v. Simply Wireless, Inc., 2015 U.S. Dist. LEXIS 171535, *11 (E.D. Va. Dec. 22, 2015). A breach in confidentiality would be a good example of when actual damages are unknown, as the facts surrounding the breach are also unknown at the time the release is negotiated and executed. The bigger question for a restaurant or retail establishment to consider is whether or not the amount of damages is proportional to the probable loss.
To help answer that question, Virginia courts will allow discovery into a liquidated damages clause to determine if the “stipulated damages are grossly in excess of the actual damages suffered by the non-breaching party.” O’Brian v. Langley Sch., 256 Va. 547, 551 (Va. 1998). In these scenarios, the restaurant or retail establishment would want to present evidence in support that (1) the amount stated in the release was based on probable loss and (2) the actual damages are similar to the estimated damages. Factors to be considered are the type of case and the injury suffered by the plaintiff. How many people became or likely will become privy to confidential information? What specific information was, or likely will be, dispersed with a breach? One should consider how the facts surrounding the breach will affect the defendant’s brand name. Any prior damage awards could also provide additional guidance.
KPM LAW recommends against using a blanket “all settlement proceeds” amount in the liquidated damages clause of the release for two reasons. First, if potential damages have been contemplated, this will bolster support for the figure stated in the release as proportionate to the probable loss. Second, if a clause is successfully challenged and found to be unenforceable, the non-breaching party can still present evidences of damages, the amount of which to be decided by the trier of fact. As a result, if the release states a figure less than the total settlement amount, the breaching party may pause to consider if they actually want to challenge the clause, since being successful in the challenge may not result in paying less in actual damages.
If you have a specific release provision you want to discuss, or a case involving a breach of confidentiality, the premises liability attorneys at KPM LAW are happy to discuss these matters with you further.