Author/contributor
Burt Natkins
Associates & Special Counsel
Non-disclosure agreements (NDAs) are business contracts commonly used to protect confidential information. They specify what information is considered confidential and restrict how the recipient can use or disclose it.
The ubiquitous remedies provisions1 refers to a standard clause found in many NDAs. This clause outlines the legal options (remedies) available to the information owner if the recipient breaches the agreement and discloses confidential information.
The Negotiation of Non-Disclosure Agreements
Like most contracts, negotiating an NDA is largely a fluid “give and take” process, with each party seeking to achieve certain key objectives. Indeed, at the outset, both the receiving party and the disclosing party may stake out differing, if not extreme, positions to attain those aims. In the end, however, good faith negotiations will inevitably prompt compromise, allowing the parties to reach an agreement on mutually beneficial terms.
The “remedies” provision is customarily subject to those same negotiating dynamics. The disclosing party will typically propose language of a more mandatory (i.e., “would” or “will”) or entitlement (i.e., “entitled to”) nature, while the receiving party will predictably counter with a more permissive scheme (i.e., “may” or “entitled to seek”).
In other words, the disclosing party will typically be inclined to use more absolute or unconditional language, while the receiving party will be more apt to resist such wording. However, the parties’ willingness to compromise predictably fosters a reconciliation of those two seemingly diametrically opposed positions.
The Remedies Provision
In most agreements, the remedies provision is used to recognize what recourse one party (typically, the party disclosing confidential information) may have against the other party (again, typically, the party receiving such information) for breaching or threatening to breach its obligations under the agreement. A remedies provision may include the following declarations or acknowledgements:
- A breach of the agreement [may][would] cause irreparable injury to the disclosing party .
- Monetary damages [may][would] be inadequate to compensate the disclosing party for any breach of the agreement.2
- Due to the inadequacy of monetary damages, the disclosing party would be entitled to [seek] equitable relief, including an injunction and specific performance (“injunctive relief”).
- Injunctive relief should not be deemed the exclusive remedy for a breach of the agreement – i.e., other remedies available at law (that is, the recovery of damages) would be available to the disclosing party.
- The receiving party waives any requirement that the disclosing party post a bond or prove actual damages in connection with it seeking injunctive relief.
However, despite their ever presence in an agreement, do the remedies provisions truly serve a worthwhile purpose, or are they largely superfluous? Or, more pointedly, do they instead reflect a misunderstanding of the deference that the judiciary will afford such provisions and the standards that it will ordinarily apply to assess the appropriateness of a request for injunctive relief? Maybe, but maybe not as explained here.
Injunctive Relief Generally
Both federal and state laws and the courts ordinarily deem injunctive relief to be an extraordinary remedy. While most lawsuits seek monetary damages, injunctive relief is an equitable remedy, normally available to an aggrieved party when damages may not otherwise be recoverable by it.
The type of injunctive relief potentially available to a party harmed by the conduct of another party may vary, both in terms of length and outcome. From a durational standpoint, it may be temporary (ranging from just several days to something more enduring, but still not unending) or permanent, while from an effect perspective, it may be mandatory or prohibitory.
When judicially granted, a prohibitory injunction is preventative in nature, restraining or preventing a party from committing or continuing to commit a specific act that may be harmful to another party. Mandatory injunctive relief (commonly referenced as “specific performance”), on the other hand, is a more extreme remedy — it compels the performance of an affirmative act by the party enjoined. For this reason, most jurisdictions are often notably reluctant to issue mandatory injunctions until the final phase of litigation — the trial — unless extraordinary circumstances otherwise demand it.
Types of Injunctive Relief
There are three types of injunctions:
- Temporary restraining orders (“TROs”)
- Preliminary injunctions
- Permanent injunctions, which are granted after a full trial on the merits.
I discuss each one in detail below.
1. Temporary Restraining Order
As the name suggests, a TRO is a court-issued order that is in effect for a very short duration. In other words, it is largely intended to serve a single purpose – to afford a court the time required to consider more fully the appropriateness of granting a preliminary injunction.3
Because of the very limited nature of a TRO, many courts may, in their discretion, issue a TRO ex parte – i.e., grant a TRO application without notice, thereby resulting in neither the defendant nor the defendant’s counsel being present or otherwise heard on the TRO application.4 A party’s success or failure in obtaining this relief does not necessarily foretell its success or failure of a party obtaining a preliminary injunction.
2. Preliminary Injunction
A preliminary injunction is a provisional remedy designed to maintain the status quo between the parties while litigation is ongoing. In other words, it is intended to prevent one party from violating the rights of another party with respect to the subject of the underlying action.5
Unlike TROs, preliminary injunctions are ordinarily granted only after a court conducts a full evidentiary hearing. At such a hearing, the involved parties are represented by counsel and are afforded the opportunity to present relevant evidence. Once issued, a preliminary injunction does not generally have a pre-determined duration. Instead, it will typically remain in effect until a final judgment on the merits (i.e., after a full evidentiary trial) is entered or a court vacates the injunction.
3. Permanent Injunction
Permanent injunctions are awarded by a court only after a full trial on the merits. As the nature of relief implies, they do not have a specified duration.
Standard for Relief
In most jurisdictions, a prerequisite for granting an injunction — whether it be a TRO or a preliminary or permanent injunction — is a showing by the aggrieved party that it will be irreparably harmed absent the relief requested. However, in addition to that key element, a court may need to consider, based on the prevailing laws of its state, other factors for granting the type of injunctive relief being sought. Indeed, the very totality of the evidence required to demonstrate the appropriateness of the remedy sought may differ considerably from state to state.
In New York, for example, to obtain a preliminary injunction,6 a plaintiff must satisfactorily demonstrate by clear and convincing evidence:
(i) a probability of success on the merits of the underlying action;
(ii) a danger of irreparable injury if an injunction is not issued; and
(iii) a balancing of the equities in favor of the plaintiff.7
Yet, despite these clearly drawn requirements, a court is not required or expected to apply this three-prong test mechanically or rigidly. Instead, the ultimate granting of a preliminary injunction always lies within the court’s sound discretion, particularly regarding the irreparable harm and balancing the equities elements.
In evaluating each of the three prongs, a New York court may take into consideration the following principles:
(i) As to the “success” prong, a plaintiff need only demonstrate likely, rather than certain, success in the underlying action;
(ii) As to the “irreparable harm” prong, any injury is irreparable if it is” “real” and if the plaintiff lacks an adequate remedy at law. The lack of an adequate legal remedy may be if money damages are insufficient compensation. Money damages are insufficient when compensation is incalculable – that is, if there is, for example, an injury to good will or if the injury goes to the very heart of the plaintiff’s business. In the end, such injuries must be real, not illusory or speculative, and the threat of injury must be immediate.
(iii) As to the “equities” prong, the plaintiff must show that the irreparable injury is more burdensome on the plaintiff than the harm caused to the defendant by the injunction. Such a balancing is subjective, thereby allowing a court to be flexible in its crafting of a provisional remedy. A court may also consider the effect a preliminary injunction would have on the public interest.
Court’s Deference to the Parties’ Contract
Irreparable Harm
As already noted, a remedies provision will inevitably contain language stating that monetary damages would be inadequate to compensate the disclosing party for any breach of the agreement. However, does such a contractual stipulation by the parties sufficiently establish the irreparable harm prong for the purposes of granting injunctive relief? Will the courts, in other words, generally accept this acknowledgement by the parties as satisfying the required irreparable harm element? The answer is sometimes.
Under New York law, for example, while a contract may specify that a breach constitutes irreparable harm entitling an aggrieved party to injunctive relief to cure the alleged violation, they are not dispositive. Instead, such contractual stipulations may be viewed by a court as mere evidence of an admission that a breach may constitute irreparable harm. Contracting parties cannot, therefore, contract for irreparable harm. In other words, it must be demonstrated beyond conclusory assertions, contract or otherwise.
In somewhat stark contrast is Delaware law. It provides that such stipulations as to irreparable harm are generally sufficient to establish that element to support the issuance of preliminary injunctive relief.
Undertaking – Posting Bond
The requirement that a plaintiff is legally obligated to post a bond in connection with the grant of injunctive relief may vary from state to state. In New York, the obligation to post an undertaking depends on the nature of the relief granted:
- When a plaintiff is granted a TRO, the court has discretion to require an undertaking from the plaintiff.8
When a plaintiff is granted a preliminary injunction, an undertaking must be provided.9 This requirement cannot be waived. Absent a statutory exception, a court must require the plaintiff to post a bond.
Unlike New York, Delaware law requires a court to impose a bond when granting either a preliminary injunction or a TRO.10 However, again, unlike New York, the Delaware courts may disregard this requirement if the involved parties have so waived the posting of a bond by contract.
What Does It All Mean?
The procedures and prerequisites for granting injunctive relief will inevitably differ from state to state. A remedies clause will, therefore, not be applied or interpreted uniformly in every state. However, certain injunctive relief principles are likely common to many states, including:
- The granting of injunctive relief lies within the discretion of the presiding judge.
Consistent with the framework established by the controlling law of the state (either by statutory or court-created law), a court must determine whether injunctive relief should be granted based on the prevailing facts of the case.
While a non-disclosure agreement is obviously deemed a contract, it simply cannot bestow the right to injunctive relief on either or both parties. Again, this determination falls within the purview of the court and its sound discretion.
While the decision to issue injunctive relief remains with the court, the remedies clause may at least help a court weigh the existence of irreparable harm.
While the parties’ waiver of certain requirements may contravene existing state law, the courts may at times disregard those requirements and accede to the expressed wishes of the parties.
In the end, the remedies provision may serve some limited purpose. Nevertheless, this will depend on the law governing the agreement.
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1 Included in almost every agreement is a “governing law” provision, designating what body of law will control the interpretation and application of the agreement. Most of these provisions, in turn, typically designate either New York or Delaware as the governing law. In light of that fact, New York law will specifically be used and relied on in this article to illustrate or explain the concepts discussed. However, the reader should understand that while New York law may largely be like the laws of other states, each state does have its own body of law that may in some degree vary from New York law with respect to the procedures, operation, and standards applicable to injunctive relief.
2 Grammatically speaking, “would” can be, but is not always, the past tense of ”will.” When not used in the past tense, “would” is commonly used to refer to a future event that may occur under specific conditions. “May,” on the other hand, is used more generally to refer to future events—i.e., to express a high possibility of something happening. Given that understanding then, are not both “may” and “would” as used within a remedies provision seemingly conveying the same intent – possibility? Are they therefore not largely interchangeable in that clause? Probably yes.
3 See New York Civil Practice Law and Rules (“NY CPLR”) § 6301. Under that provision, a TRO may be granted pending a hearing for a preliminary injunction where it appears that immediate and irreparable injury, loss, or damage will result unless the defendant is restrained before the hearing for the preliminary injunction can be held.
4 See NY CPLR § 6313(a).
5 See NY CPLR § 6301.
6 Of the three types of injunctive relief, the preliminary injunction is perhaps the most important. If granted, it will very likely remain in effect until a final judgment is issued based on the results of a trial on the merits. However, such a trial may not be conducted for many months, if not years, after the preliminary junction is granted. And by that time, the very need for any further injunctive relief may be moot. The granting of a preliminary junction, therefore, may be the sole remedial relief that the plaintiff may require to ensure that its rights under the agreement are protected.
7 The same elements would equally apply in Delaware. However, as the Delaware courts have cautioned, preliminary injunctive relief should not be granted if the injury may be adequately compensated after a full trial on the merits, either by an award of damages or by some form of final equitable relief.
8 See NY CPLR § 6313(c).
9 See NY CPLR § 6312(b).
10 See Court of Chancery, Rule 65(c).
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