Company Entitled to Nominal Damages for Former Employee's NDA Breach

A software developer breached a nondisclosure agreement (NDA) with his former employer by using confidential information to develop a product he sold to a third party. However, the employer did not show that it was harmed by the employee's misuse of the information, so it was not entitled to a $10,000 jury award, a California appeals court ruled. Instead, the former employer was entitled only to nominal damages.

The employee worked for his former employer from 2005 to 2011. His duties included building labor compliance program (LCP) software and adding new features as its client base expanded. LCP software helps to automate reporting, monitoring and compliance with federal and state-specific prevailing wage laws for public works projects.

He signed an NDA, under which he agreed to hold all confidential information in strict secrecy and not to disclose or use the information without written authorization.

In April 2011, the employee left his job and formed his own company. His former employer subsequently sued him for breach of the NDA, among other claims. It alleged that the employee had copied the company's software and was marketing software products that were substantially similar, if not identical, to those that it had developed.

An expert witness testified at trial that he compared the software products and concluded that several of the employer's trade secrets had been misappropriated. The NDA, therefore, had been violated.

The employer argued that it was entitled to monetary damages for the breach because the employee had disclosed and used the company's confidential information, which had resulted in the company losing business and profits.

The jury found that the employee had breached the NDA but initially awarded zero damages. After receiving additional instructions on damages, including an instruction on nominal damages, the jury awarded the employer $10,000.

The judge then set aside the jury's verdict, finding that there was no evidence that the employer had been harmed by the employee's use of the software. The employer appealed.

Proof of Lost Profits in Contract Cases

An NDA is a contract. In cases alleging a breach of a contract, a business may recover lost profits if the loss can be ascertained with reasonable certainty, the appeals court first explained. Once the existence of a loss has been established, the court said, recovery should not be denied even if the amount cannot be shown with mathematical precision.

The plaintiff must demonstrate a reasonable probability that profits would have been earned except for the defendant's conduct, the court continued.

To establish its claim for lost profits, the employer noted that in 2013, a third company won a bid to provide the city of Richmond with software and services. The employer had also bid on the project. The winning company did not use the former employee's software in the initial bid but subsequently entered into contracts with the employee's new company to use its software for the project starting in 2015. By 2018, the third company that had won the contract had paid the employee's company $82,000 for work done on the project.

However, the employer failed to show that it would have received profits from the city of Richmond project if not for the employee's breach of the NDA, the court said.

Significantly, the company that won the initial bid for the project did so without the employee's software. While that company eventually used the software for the project, there was no evidence showing that it would have been unable to continue servicing the project without the employer's confidential information purportedly contained in the software.

Thus, the employer's evidence was insufficient to support the jury's finding on harm, the appeals court said.

The employer contended, however, that even if the jury's findings on harm and damages were not supported by substantial evidence, the jury's finding on breach of the NDA entitled it to nominal damages.

The appellate court agreed that the trial court should have awarded nominal damages. Section 3360 of the California Civil Code, which applies to breach of contract actions, provides that when a breach of a contractual duty has caused no appreciable harm to the party affected, the party may still recover nominal damages.

California courts have applied section 3360 to conclude that a plaintiff is entitled to recover nominal damages for the breach of a contract, despite his or her inability to show that actual damage was inflicted. Nominal damages may be properly awarded for the violation of a contractual right because failure to perform a contractual duty is, in itself, a legal wrong that is distinct from the actual damages, the appeals court said.  

The nominal damages award, along with the jury's finding on breach of the NDA, could affect the employer's rights under the NDA to bring an action, not for monetary relief, but to stop the employee from using the confidential information taken from the employer, the court stressed.

The court sent the case back to the lower court both to award the nominal damages and to determine whether, under the terms of the NDA, the employer was entitled to an order prohibiting the employee from using the confidential information.

Elation Systems Inc. v. Fenn Bridge LLC, Calif. Ct. App. Nos. A159749, A160823 (Nov. 22, 2021).

Professional Pointer: Nominal damages are usually awarded in the amount of $1 or a few dollars. Such an award is intended to show that the defendant's conduct was wrongful even though no actual harm was done.

Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md.