NDA: An Effective Way To Protect Confidential Information

• Published date: 06 December 2021
• Subject Matter: Corporate/Commercial Law, Intellectual Property, Corporate and Company Law, Trade Secrets
• Law Firm: Sheppard Mullin Richter & Hampton
• Author: Mr 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...