On Nondisclosure Agreements and Societal Harm
posted by Dave Hoffman
Shh! Don't tell anyone we're about to blow!
Below, Larry Cunningham posts:
For centuries, contract law has readily permitted contracting parties to agree to hold information confidential and law has recognized essentially unbridled party capacity to so commit, subject only to the usual rules on contract formation, interpretation and performance.
I want to focus on that qualifier, “subject only to the usual rules on contract formation,” and expand a bit on some of the assumptions in my post on contracts and privacy. When thinking about enforceability, I start with the premise that society provides private law protection for a small subset of carefully chosen promises: a legal remedy for breach of trust is the exception, not the rule, in social exchange. Fuller and Perdue showed that we provide such damages for “juristic” reasons: a “policy consciously pursued by courts and other lawmakers.” So, in evaluating the enforceability of an agreement to hold a certain piece of information secret, we ask first what policies does such an exchange advance? Put aside, if you will for a minute, the potential application of first amendment law to the problem of nondisclosure agreements, which Solove and Richards helpfully clarified. What remains is a complex welter of issues. But this policy analysis may lead us to a different conclusion about courts’ general approach than Larry’s “pockets of relationships” post suggests.
The strongest case for damages after breach of an NDA arises in the trade secret context, where we assume that the property right is necessary to spur investment. That’s why explicit contractual protection is only sometimes necessary. (I say that we assume an investment effect because there is mixed evidence on whether NDAs have such a behavioral consequence.) A different, but strong, argument can be made for employment-related NDAs, where the information to be protected relates to employers’ strategies and business plans. Here, enforcing the promise reduces social costs by promoting relational agreements, firm-specific investment, and stability. (For more on this, check out Promises of Silence: Contract Law and Freedom of Speech.)
Is there such a strong case to be made for a contract between strangers? A common stranger-secrecy contract is generated during litigation: e.g., confidentiality during discovery and after settlement. These clauses are often enforced because not enforcing them would make a hash of the orderly disposition of cases. We know that “protecting judicial interests” is the policy being validated because if the disclosure impedes a later judicial proceeding, or conceals crimes or statutory violations, the clause won’t be enforced.
Outside of litigation, we might think of a commercial private information clause as a form of NDA. Here, interests conflict. On one hand, it looks a little bit like the employer-employee context: we want to encourage long-term relationships that require the sharing of information, so we protect the information shared with a damages rule. But there are limits to such protection, quite apart from the usual time, place and manner restrictions. Yesterday, I discussed an important limitation: information about family life. But we might imagine others, especially as the risks to third parties of secrecy become exigent.
Thus, what if A and B enter into an agreement whereby A agrees to keep private any information it learns about B during the course of an hour long conversation they are about to have. B discloses to A that B is considering whether or not to shoot C to prevent C from making up new legal hypotheticals of dubious practical relevance. Can A disclose without fear of civil liability under contract? Of course A can! A might actually be compelled to do so. You might object that the hypothetical is overdetermined because B is disclosing a plan to commit a crime. So now suppose that B has instead merely confessed that B is unsure whether the blowout preventer on B’s oil drilling platform is working well, suggesting that the entire project was a “nightmare.” B further tells A, however, that B is convinced that the current well design and operation is not unlawful or in violation of an applicable regulation, because “we’ve captured the agency.” A, an ardent environmentalist, decides that the social and environmental risks of a spill are likely to be catastrophic and discloses. This disclosure results in a huge scandal and B is fired. B sues A for breach. Who thinks that B has a strong claim to recover damages ?
June 22, 2010 at 2:19 pm
Posted in: Contract Law & Beyond, Economic Analysis of Law, First Amendment, Privacy
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Responses (2)
Lawrence Cunningham - June 22, 2010 at 6:51 pm
B has a lousy case to claim contract damages, though I’d put this on the grounds that it is highly unlikely to meet the requirement of proving expectancy or reliance losses with reasonable certainty. Of what bargain has B lost a benefit and what is the value of that disappointed interest? Reliance losses may be the hour spent talking. I’d award nominal damages, about six cents. See Freund v. Washington Square Press.
A.J. Sutter - June 24, 2010 at 11:39 am
This is off your main point, but I’d like to question your statement, “The strongest case for damages after breach of an NDA arises in the trade secret context, where we assume that the property right is necessary to spur investment. That’s why explicit contractual protection is only sometimes necessary.”
First, I’m confused by the second sentence in this quote. To what contractual protection are you referring? By hypothesis, there is an NDA. What exactly is not being made explicit in that agreement? If you mean that trade secrets can be protected in the absence of an NDA, then, yes — but that’s a non sequitur with your reference to breach of an NDA. Please clarify.
Second, why is the assumption about property and investment necessary? When the measure of damages is lost profits, the theory can be compensation, not a policy to incentivize to invest. When the measure of damages is a royalty, the theory can be unjust enrichment. This incentive-to-invest rationalization seems like an L&E “just-so story,” and ignores that courts have awarded damages for misappropriation of trade secrets since long before economic theories percolated into the judiciary.
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