The U.S. Court of Appeals for the Eleventh Circuit—one of the highest federal courts below the Supreme Court—recently affirmed a decision in Silverpop Systems, Inc. v. Leading Market Technologies, Inc. finding that all damages flowing from a vendor’s data breach were barred by a standard provision in IT service contracts, disclaiming all liability for consequential damages. If the vendor allows confidential information to be breached, this could harm the value of that data, cause competitive harm and lost profits, and expose the company to claims by third parties with interests in the exposed data, among other things. Appx. This requires both parties to reconsider the standard vendor-friendly term waiving all consequential damages,” the authors write. The type of consequential damages most often sought is lost operating profits of a business. Using that analysis, the court found that contract’s purpose was email marketing, and that the confidentiality obligations were only incidental to that purpose. Silverpop Sys., Inc. v. Leading Mkt. A defendant's breach of contract … Norton Rose Fulbright LLP © 2020. Recent Case Highlights The Dangers Of Consequential Damage Waivers in IT Contracts, U.S. Court of Appeals for the Eleventh Circuit. When Leading Market sued to recover the lost value of its e-mail list, Silverpop argued that this was … The court’s analysis could apply to almost any breach of data provided to a vendor under an IT service contract, and highlights the need to carefully scrutinize a proposed waiver of consequential damages when confidential or sensitive data is involved in the contract. Silverpop moved for dismissal of that claim with the argument that those damages were consequential, and were therefore barred by the consequential damages waiver in their agreement. January 5, 2016) enforced a contractual waiver of consequential damages provision, thereby reaffirming the validity of such provisions in Georgia. In November of 2010, Silverpop’s web-based system was hacked, potentially affecting the security of the nearly 500,000 e-mail addresses Leading Marketing had uploaded to the system. Circuit Court of Appeals that affirmed a decision in Silverpop Systems, Inc. v. Leading Market Technologies, Inc., finding that all damages flowing from a vendor’s data breach … Silverpop’s failure was a failure to uphold one specific term of the contract (the confidentiality provision), and, based on that, any damages from Silverpop’s lack of security were … The U.S. Court of Appeals for the Eleventh Circuit —one of the highest federal courts below the Supreme Court—recently affirmed a decision in Silverpop Systems, Inc. v. Leading Market Technologies, Inc. finding that all damages flowing from a vendor’s data breach were barred by a standard provision in IT service contracts, disclaiming all liability for consequential … The court dismissed LMTs breach of contract claim because LMT had agreed to include the waiver of all consequential damages in the contract it had entered into with Silverpop. The Eleventh Circuit Court of Appeals, in Silverpop Systems, Inc. v. Leading Market Technologies, Inc., 2016 U.S. App. The district court then assessed whether the contract prohibited the damages LMT sought … Ga. App. Recent Case Highlights The Dangers Of Consequential Damage Waivers in IT Contracts. Silverpop is a digital marketing software company focused on helping marketers transform the customer experience— increasing engagement and driving revenue. LMT sued Silverpop for breach of the confidentiality provisions in their agreement, alleging that the value of its confidential email list was diminished by the data breach. This analysis is significant, because it could apply in almost any IT services contract. In November of 2010, Silverpop’s web-based system was hacked, potentially affecting the security of the nearly 500,000 e-mail addresses Leading Marketing had uploaded to the system. Previously known as the Silverpop … You also learn how to connect a Silverpop connector endpoint to the Silverpop … In most cases, the primary purpose of such a contract is to provide IT services—the obligation to maintain the confidentiality of the data involved is only incident to that main purpose and performance. In a telling passage, the court reasoned: [T]he loss suffered by LMT is of a type resulting from the breach of a specific term of the agreement. It said that the parties’ agreement was not one for … Consequential (also known as special) damages, one capping the vendor’s total liability at some amount (often the total fees paid under the contract, or fees paid in the prior twelve months), and. The power of a contract’s consequential damages waiver was most recently illustrated in an Eleventh Circuit Court of Appeals decision, Silverpop Systems, Inc. v. Leading Market Technologies, Inc. 2 In that case, the appellate court summarily affirmed the federal district court’s “well-reasoned and thorough decision,” finding, among other things, that the parties’ consequential damages waiver barred all damages caused by a technology vendor’s data breach. In contracting for IT services, it is important for purchasers to thoughtfully consider the risks of harm presented by the services, and then negotiate terms that appropriately allocate those risks between the parties. Appx. Silverpop argued that it was engaged to provide access to its online system, not specifically to keep data secure. The result is that judges, attorneys, and scholars regularly note that the distinction between direct and consequential damages is difficult to apply, and one should never rest easy in believing that potential damages are one or the other. Consequential damage waivers are a frequent part of merger and acquisition agreements involving private company targets. Some writers have argued that any damages from the breach of a confidentiality obligation are necessarily consequential, because the specific harm caused by the breach would rarely be apparent on the fact of the contract. On July 19, 2012, Silverpop filed this action, seeking a judgment declaring that LMT was not damaged by the data breach or that the damages incurred were consequential damages and, as such, not … LEXIS 196, the US Court of Appeals for the Eleventh Circuit held that losses associated with a data breach “are best characterized as consequential” and recovery on a contract claim should be barred when the contract contains a prohibition the award of consequential damages. Silverpop Systems, Inc. v. Leading Market Technologies, Inc. in no event shall the regents or contributors be liable for any direct, indirect, incidental, special, exemplary, or consequential damages (including, but not limited to, procurement of substitute goods or services; … In the absence of a breach of the confidentiality provision, LMT would not have incurred the loss to the sale value of the LMT List. 849 (11th Cir. But this task confounds both lawyers and judges. (quote omitted). The company blends strategic services that include policy development, campaign … See id. Options for addressing these risks at the contracting stage include: Not all of these options are mutually exclusive, and together they provide a toolbox for allocating the parties’ liabilities in the event of a data breach. Silverpop argued that it was engaged to provide access to its online system, not specifically to keep data secure. Silverpop … In addressing this argument, the court acknowledged the black-letter “foreseeable to a stranger/foreseeable to the parties” test of direct versus consequential damages, but decided that the Second Circuit’s “value of performance/additional losses” analysis was a helpful gloss on that test. In granting Silverpop’s motion for summary judgment, the district court assumed that LMT had suffered damages. Every online business should have a Terms and Conditions agreement that lays out rules for customers and users, as well as any necessary legal terms. 2000),  the influential Second Circuit Court of Appeals (which handles appeals from New York’s federal courts, among others) adds the test of whether damages compensate for “the value of the very performance promised,” such that they are direct damages, or whether they compensate for “additional losses (other than the value of the promised performance),” such that they are consequential damages. … The Limitation of Liability clause clarifies a business's legal liability and responsibilities in the case of legal litigations in the future. Adding indemnification provisions for expenses incurred in addressing a breach of regulated personal information and protected health information (and adding a carve out for indemnification to the consequential damages disclaimer). Leading … Id. But hackers accessed the portion of Silverpop’s network where LMT’s email list was stored, and  the list may have been misappropriated (though this could not be confirmed). Matthew Spohn and David Navetta explain that the court’s analysis could apply to almost any breach of data provided to a vendor under an IT service contract, and highlights the need to carefully scrutinize a proposed waiver of consequential damages when confidential or sensitive data is involved in the contract. 3 The court then dismissed LMT’s claim for breach of contract because it had agreed to waive all consequential damages—even though claims for breach of confidentiality were exempted from the contract’s separate cap on total damages. The typical vendor-friendly IT service contract will contain a section titled “limitation of liability” with two key provisions: Purchasers will often focus on the first provision but fail to address the second provision, perhaps because it reads like boilerplate language that reasonably confirms that the vendor will not be liable for speculative damage claims. Leading Marketing counterclaimed, arguing that it was justified in withholding payment since Silverpop had failed to keep the addresses secure. LMT argues that it seeks to recover the lost market value of the LMT List and that lost market value is a direct injury rather than consequential … By Editoron October 6, 2016 in Computers & Technology, Contracts. Home > Vendor management and transactions > Recent Case Highlights The Dangers Of Consequential Damage Waivers in IT Contracts. But that is a misconception—the consequential damages waiver has important ramifications, especially in the context of confidentiality breaches. Therefore, direct damages would consist of the lost money paid for the promised marketing services, and other damages (such as the lost value of the confidential email list) were consequential. Although these waivers are heavily negotiated, the au-thors believe that few deal professionals understand the concept of consequential damages (Stand-alone non-disclosure agreements might be exceptions). In Silverpop v. Leading Market Technologies , 2016 U.S. App. Before addressing the Eleventh Circuit’s decision in Silverpop, some background on consequential damage waivers may be helpful –. To understand the effects of a consequential damages waiver, one must first understand what consequential damages are. And if a court uses the Silverpop analysis and finds that maintaining the confidentiality of data is not the primary purpose of the IT contract, then damages from the confidentiality breach will be consequential. 849 (11th Cir. It was therefore critical for the Court to decide whether the damages … Techs., Inc. UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT (5 Jan, 2016) 5 Jan, 2016 Thus there was no breach of its obligations under the agreement. “[T]o the extent that consequential damages are recoverable in breach of contract actions, a clause excluding such damages is valid and binding unless prohibited by statute or public … That position has some support from the recent decision of the Eleventh Circuit Court of Appeals in Silverpop Systems, Inc. v. Leading Market Technologies, Inc., 61 Fed. More than a news source, the Data Protection Report provides thought leadership on emerging privacy, data protection and cybersecurity issues, and helps its readers proactively address risks and anticipate next steps in this crucial emerging field. All consequential damages waiver has important ramifications, especially in the future to distinguish direct consequential... 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