Damages for breaching a settlement confidentiality clause can range from a fixed dollar amount written into the agreement to a court-ordered return of the entire settlement payment. What you actually pay, or recover, turns on three things: how the clause was drafted, what was disclosed, and whether the disclosure caused provable harm. Because measuring the financial fallout of a leaked settlement is notoriously hard, most well-drafted agreements sidestep the problem by baking in a preset penalty that triggers on any unauthorized disclosure.
What Counts as a Breach
A breach is any disclosure the agreement prohibits, and the boundaries depend entirely on the language the parties negotiated. Some clauses bar discussing only the dollar amount. Others prohibit acknowledging that the settlement exists, or even that a dispute occurred. Telling a friend over dinner, posting a vague reference on social media, or texting details to a family member can all qualify if the language is broad enough.
Most well-drafted clauses include carve-outs. A party can typically share information with a spouse, accountant, tax preparer, or attorney. Disclosures compelled by a court order or government investigation are usually permitted too. The critical question in any dispute is whether the specific disclosure falls inside or outside those exceptions.
Liquidated Damages
Liquidated damages are the most common remedy written into confidentiality clauses. The parties agree in advance on a specific dollar amount the breaching party must pay if confidential information gets out. That skips the expense and uncertainty of proving harm after the fact.
These clauses fit well when injury would be real but hard to measure, which describes most confidentiality breaches. The damage to a company’s negotiating position, or to an individual’s reputation, from a leaked settlement is genuine but nearly impossible to reduce to a precise figure.
Courts do scrutinize these provisions. A liquidated damages amount must bear a reasonable relationship to the anticipated harm from a breach. If a court concludes the amount is grossly disproportionate to any plausible injury, it may strike the clause as an unenforceable penalty rather than a legitimate estimate of damages. A $500,000 liquidated damages clause in a $50,000 settlement would likely face skepticism. A clause requiring forfeiture of the settlement amount itself stands on firmer ground because the penalty is tethered to the value at stake.
Losing the Settlement Payment Itself
Some agreements make the payment explicitly conditional on maintaining confidentiality, so the money can be clawed back if the clause is violated. This is not theoretical. In a well-known Florida case, a school administrator settled an employment dispute for $150,000. The agreement required confidentiality, with a forfeiture clause tied to the $80,000 portion payable directly to him. He told his college-age daughter the case had settled. She posted on Facebook: “Mama and Papa Snay won the case against Gulliver. Gulliver is now officially paying for my vacation to Europe this summer. SUCK IT.” The appellate court enforced the forfeiture, and the administrator lost the $80,000.
Two lessons follow. Courts will enforce these clauses even when the disclosure looks minor or secondhand. And the breach does not have to cause measurable harm to the other side. Forfeiture triggers because the agreement says it does. Many people assume a casual comment to a family member is harmless because no one was actually hurt. The agreement does not care about actual harm. It cares whether the information left the circle of authorized recipients.
Compensatory Damages When There’s No Fixed Amount
Without a liquidated damages clause, the non-breaching party has to pursue compensatory damages through a lawsuit and prove specific, measurable financial losses. A business might show that clients left after learning the settlement terms, or that a competitor gained a negotiating edge. The link between the disclosure and the financial hit has to be direct and documented, not speculative.
Recovery is limited to harm that was reasonably foreseeable when the parties signed the agreement. If a disclosure triggers some bizarre, unforeseeable chain of events, the resulting losses fall outside what a court will award.
The evidentiary burden is steep, which is precisely why liquidated damages clauses exist. Proving that a revenue decline came from a leaked settlement figure rather than market conditions, competitor moves, or unrelated business factors requires detailed financial records, expert testimony, and often depositions of the people who received the information. That difficulty is the strongest argument for insisting on a liquidated damages provision during negotiations.
Proving It
The non-breaching party carries the burden of proving that a breach occurred and, where required, that it caused a specific financial injury. The first element is often the easiest. Screenshots of social media posts, text messages, emails, and testimony from people who received the information can all establish that confidential details were disclosed.
Causation is where cases get complicated. A company claiming lost revenue needs financial records showing the timing and magnitude of the decline, along with evidence linking it to the disclosure. Testimony from clients who left because of the leaked information is powerful but not always available. Expert witnesses may be needed to isolate the impact of the breach from other variables. None of this applies when the agreement includes a liquidated damages or forfeiture clause. Those provisions trigger on the breach itself, regardless of actual harm.
Injunctions to Stop Further Disclosure
Money is not always the priority. Sometimes the non-breaching party needs to stop an ongoing or threatened disclosure before it spreads further. Injunctive relief is a court order requiring the breaching party to stop disclosing confidential information, and in some cases to take affirmative steps like deleting social media posts or notifying recipients that the information was shared in violation of a legal obligation.
Getting an injunction is not automatic. In federal court, a party seeking a preliminary injunction must show a likelihood of winning on the merits, a likelihood of irreparable harm without the court’s intervention, a balance of hardships tipping in their favor, and that the injunction serves the public interest.1Justia. Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7 (2008) State courts apply similar tests with some variation.
The irreparable harm requirement is the main hurdle, and confidentiality breaches often clear it because once information is public, no amount of money can make it private again. Many settlement agreements include language in which both parties acknowledge that a breach would cause irreparable harm and that monetary damages would be inadequate. Courts do not always defer to that language, but it helps.
Punitive Damages Are Rarely Available
Punitive damages punish egregious conduct rather than compensate for losses, and they are generally not available in a straightforward breach of contract case. Breaking a confidentiality clause is a contract breach, and that alone does not open the door to punitive damages no matter how angry the disclosure makes the other side.
The exception is when the breach is accompanied by conduct that independently qualifies as a tort, such as fraud, intentional infliction of emotional distress, or malicious interference with business relationships. Punitive damages then attach to the tortious conduct, not to the contract breach itself.
Attorney’s Fees
Under the general American rule, each side pays its own legal costs regardless of who wins. Even a party who proves a breach and recovers damages can still be out tens of thousands of dollars in fees.
The main exception is contractual. If the settlement agreement says the losing party in an enforcement action must pay the prevailing party’s legal costs, courts will typically enforce that. It’s a provision worth negotiating for. Without it, the cost of litigating a breach can easily exceed the damages recovered, especially with a modest settlement. A well-drafted agreement pairs the confidentiality clause with both a liquidated damages provision and an attorney’s fees clause so enforcement is economically viable.
When the Clause Won’t Produce Damages at All
A confidentiality clause that is unenforceable produces no damages. Courts may refuse to enforce a clause that is so vague the parties could not reasonably know what it prohibited, or so overbroad that it attempts to restrict speech far beyond what is necessary to protect a legitimate interest. A clause that tries to prevent a party from complying with a lawful subpoena or cooperating with a government investigation will generally fail on public policy grounds.
Federal law also carves out specific areas. The Speak Out Act, signed in December 2022, makes predispute nondisclosure and nondisparagement clauses unenforceable in cases involving sexual harassment or sexual assault.2Congress.gov. Text – S.4524 – 117th Congress (2021-2022): Speak Out Act It reaches clauses agreed to before the dispute arises; it does not ban confidentiality provisions negotiated after a dispute has surfaced as part of a settlement.
Federal tax law adds a separate disincentive. Under Section 162(q) of the Internal Revenue Code, a business cannot deduct settlement payments or related attorney’s fees if the settlement is subject to a nondisclosure agreement and involves sexual harassment or sexual abuse.3Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses The clause itself is not void, but confidentiality becomes much more expensive for the paying party.
Several states have also passed laws restricting confidentiality clauses in specific contexts, particularly employment discrimination and harassment settlements. The rules vary, and it’s worth confirming enforceability in your jurisdiction before relying on the clause as a source of future damages.
Liquidated damages clauses face their own enforceability challenge. If a court finds the specified amount is a penalty rather than a reasonable estimate of anticipated harm, the clause is void, and the party seeking to enforce it has to fall back on proving actual compensatory damages. An amount proportional to the settlement value and the realistic harm from a breach gives the clause the best chance of surviving.
Tax Treatment of Damages You Receive
Damages you receive for someone else’s breach of your confidentiality clause are generally taxable income. The IRS looks at the nature of the underlying claim rather than the label the parties used. Calling a payment “liquidated damages” in the agreement does not decide whether the IRS treats it as wages, ordinary income, or something else.
The main exception covers damages received on account of personal physical injuries or physical sickness, which are excluded from gross income.4Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness Most breach-of-confidentiality damages do not qualify. Emotional distress alone is not a physical injury for this purpose, though amounts paid for medical care attributable to emotional distress may be excluded. If you receive a significant damages payment, talk to a tax professional before filing, because withholding and reporting depend on the character of the payment.