Circuit Court Strikes Down Liquidated-Damages Agreement in Trade Secret Case

January 27, 2023

The 11th U.S. Circuit Court of Appeals recently made two rulings that may impact companies using liquidated-damages clauses in their confidentiality agreements to protect their trade secrets.

  • First, a liquidated-damages provision “based entirely on the breaching party’s profits, and not on the injury suffered by the non-breaching party,” was unenforceable because it did not reasonably estimate the non-breaching party’s losses.
  • Second, the district court’s award of $85,000 in nominal damages was upheld because there was no evidence that the jury arrived at the amount due to prejudice, bias or mistake.

Background: Contractor Bidding Wars

This case, SIS LLC v. Stoneridge Software Inc., et al., No. 21-13567, 2023 WL 164067 (11th Cir. Jan. 12, 2023), concerns SIS LLC’s bid for APi’s project, requiring certain software packages. To prepare its bid, SIS sought to hire Stoneridge Holdings Inc. as a subcontractor. SIS and Stoneridge executed a confidentiality agreement, prohibiting any party who receives confidential information from “accessing, reproducing, disclosing, or using that information for purposes unrelated to the business relationship between the parties.” The agreement included a liquidated-damages provision penalizing a breaching party by requiring “an accounting and payment [to the non-breaching party] of all forms of compensation or benefits [that the breaching party] directly or indirectly realizes as a result of the breach.”

SIS ultimately won the bid for APi’s project, but Stoneridge did not become a subcontractor. When APi encountered issues with SIS’ execution of the project, APi terminated its contract with SIS and sought to replace SIS with Stoneridge. As Stoneridge prepared its proposal for APi, it appeared to use SIS’ proposed prices and SIS’ organizational chart for project implementation. APi hired Stoneridge.

SIS sued Stoneridge for breach of contract and misappropriation of trade secrets, among other claims. The district court held that Stoneridge did not misappropriate SIS’ trade secrets, but it was liable for breach of the confidentiality agreement. Despite the breach, the district court refused to enforce the liquidated-damages provision and instead awarded $85,000 in nominal damages to SIS. SIS appealed, and Stoneridge cross-appealed the award of nominal damages.

11th Circuit Issues Key Rulings

Concerning the liquidated-damages provision, the 11th Circuit held that the provision was unenforceable because it was “not a reasonable pre‑estimate of the probable loss.” The court reasoned that the parties failed to employ a reasonable method of approximation because the formula they used was “based entirely on the breaching party’s profits, and not on the injury suffered by the non-breaching party.”

Relying on Crown Series, LLC v. Holiday Hospitality Franchising, LLC, 851 S.E.2d 150, 156 (Ga. Ct. App. 2020), and Ramada Franchise Systems, Inc. v. Motor Inn Investment Corp., 755 F. Supp. 1570, 1577–79 (S.D. Ga. 1991), SIS argued that a breaching party’s profit is an appropriate measure of probable loss. The 11th Circuit disagreed. It held that neither Crown Series nor Ramada Franchise supports the contention that a breaching party’s profit is an appropriate measure of probable loss.

Unlike the liquidated-damages clause in this case, the clauses in Crown Series and Ramada Franchise stated specific benchmarks to pre-estimate probable losses. Dissimilar to the instant clause’s broad language covering “all forms of compensation or benefits” that the breaching party realizes, the clauses in Crown Series and Ramada Franchise stated (1) a temporal benchmark, limiting the computable loss to a fixed period of time; (2) a revenue benchmark, computing the pre-estimate by identifying specific profits that the non-breaching party would not be able to realize if the contract is breached; and (3) a focus on what the non-breaching party would have been paid, instead of contemplating what the breaching party may earn.

Regarding nominal damages, the 11th Circuit held that, in Georgia, the award of nominal damages would not be set aside absent evidence of prejudice or bias at trial, or mistake by the jury. Since there was no such showing, the 11th Circuit affirmed the district court’s award.

Practice Pointers and Takeaways

This case emphasizes the role of confidentiality agreements to protect valuable information when companies prepare bids or engage with contractors. When litigation is inevitable, these agreements can supplement complex trade secret claims with breach-of-contract claims.

However, this case also flags the importance of basing a formula for liquidated damages on the injury suffered by the non-breaching party, rather than the amounts earned by the breaching party. Companies should review their confidentiality and nondisclosure agreements for liquidated-damages provisions to ensure they will survive judicial scrutiny.

Finally, this case reminds companies of the multiple claims and remedies involved in trade secret litigation. Even when all else fails, a court may still award nominal damages if the facts clearly establish a breach by a contracting party.