Talk Is Cheap: Enforceability of Confidentiality Agreements Reached in Settlements in Civil Actions

A confidentiality agreement is an agreement between two parties promising to not divulge certain information. For many defense litigators, settlement in a civil action will resolve with a settlement package, including a confidentiality agreement. The terms of the agreements usually require the plaintiff to avoid discussing the underlying incident and amount of the settlement. Confidentiality agreements will usually also contain a non-disparage provision whereby the plaintiff agrees to not defame, disparage or in any way criticize the defendant. In this modern world, confidentiality agreements include discussions on the Internet as well.

The question raised is whether the settling defendant in a civil action could bring a subsequent successful breach of contract claim against the settling plaintiff for violating the confidentiality agreement. If so, how much could the settling defendant recover because of the plaintiff’s breach of the confidentiality agreement?

There are strong policy considerations favoring the enforcement of settlement agreements. See, Hallock v. State of New York, 64 N.Y.2d 224 (N.Y. 1984). A negotiated compromise of a dispute avoids potentially costly, time-consuming litigation and preserves scarce judicial resources. Courts could not function if every dispute devolved into a lawsuit. Denburg v. Parker Chapin Flattau & Klimpl, 82 N.Y.2d 375 (N.Y. 1993). To constitute sufficient consideration, for example, a party need only have a good-faith belief in the merit of its position.

Assuming that a movant is able to prove a breach of a confidentiality agreement, a movant must also prove actual damages caused by the breach. Gosden v. Elmira City School Dist., 934 N.Y.S. 2d 256 (App. Div. 3^rd Dept. 1989). Damages in an action for breach of contract are intended to restore the injured party to the position he would have had if the contract had been fully performed. Brushton-Moira Cent. School Dist. v. Fred H. Thomas Associates, P.C., 91 N.Y.2d 256 (N.Y. 1998).

Liquidated damages constitute the compensation which, if the parties have agreed, must be paid in satisfaction of the loss or injury that will follow from a breach of contract. Consolidated Rail Corp. v. MASP Equipment Corp., 67 N.Y.2d 35 (N.Y. 1986). They must bear reasonable proportion to the actual loss. Otherwise, an agreement to pay a fixed sum upon a breach of contract is an agreement to pay a penalty, although the parties have chosen to call it “liquidated damages,” and would be unenforceable. New York courts do permit loss of future profits as a damage for breach of contract. Kenford Co. v. County of Erie, 67 N.Y.2d 257 (N.Y. 1986). However, the damages must be capable of proof with a reasonable certainty and directly traceable to the breach. Alternatively, the damages cannot be merely speculative, possible or imaginary.

In Velasquez v. St. Barnabas Hosp., 25 Misc. 3d 1206(A) (NY. Sup. Ct. Bronx Co. 2007), St. Barnabas Hospital moved for an order pursuant to CPLR 2104 to compel the court to enforce an in-court settlement entered into with the plaintiff, Ana Velasquez. The defendant asserted that the settlement agreement included the requirement of an executed confidentiality agreement. The plaintiff argued that the confidentiality agreement was not part of the in-court agreement. The Supreme Court of New York, Bronx County Court found that the defendant demonstrated its entitlement to have the settlement agreement enforced along with the confidentiality agreement. The plaintiff appealed to the New York Supreme Court, First Department, which affirmed the Supreme Court’s order and found no reason to invalidate the agreement. Velazquez v. St. Barnabas Hosp., 867 N.Y.S.2d 681 (Appt. Div. 1st Dept. 2008). The plaintiff then appealed to the New York Court of Appeals, which found that there was no agreement requiring the plaintiff to execute the confidentiality agreement. Velazquez v. St. Barnabas Hosp., 13 N.Y.3d 894 (N.Y. 2009).

A court may enforce a breach of contract claim as it relates to a confidentiality agreement if the agreement is properly executed. See, Velazquez v. St. Barnabas Hosp., 13 N.Y.3d 894 (N.Y. 2009). However, a court will not automatically award damages based on the specified liquidated damages provision. See, Consolidated Rail Corp. v. MASP Equipment Corp., 67 N.Y.2d 35 (N.Y. 1986).

A settling defendant may pursue a breach of contract claim if the settling plaintiff breaches the confidentiality agreement. However, the settling defendant should be mindful that it will be required to prove actual damages. A settling defendant cannot simply demand the cost of the settlement as a result of the breach of the confidentiality agreement. Rather, the settling defendant must prove the actual damages sustained as a result of the breach.

Notwithstanding the difficulty of proving damages, defense counsel should still pursue executed written confidentiality agreements when settling civil cases. The confidentiality agreement will still prevent a settling plaintiff from disparaging the settling defendant. Additionally, the confidentiality agreement will still require a settling plaintiff to maintain confidentiality regarding the incident and the terms of the settlement.

*Dean is an associate in our New York City office. He can be reached at 212.376.6449 or dgaronin@mdwcg.com.

_{Defense Digest, Vol. 25, No. 3, September 2019. Defense Digest is prepared by Marshall Dennehey Warner Coleman & Goggin to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2019 Marshall Dennehey Warner Coleman & Goggin. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.}