LIQUIDATED DAMAGE CLAUSES IN EMPLOYMENT CONTRACTS FOR COLLEGE COACHES
Because of the difficulty in accessing damages upon a breach, universities and college coaches typically agree to liquidated damage clauses in their employment agreements. Such clauses set forth a fixed amount of damages in the event a contractual breach occurs. Reciprocal liquidated damage clauses are common but in some contracts, the fixed damage amount is higher for one party or the other.
Difficulty In Proving Damages
As the case of Marist University v. Matthew Brady et al. demonstrates, liquidated damage clauses are necessary to help ensure that the non-breaching party is compensated if a breach occurs. The Marist University case involved a lawsuit by Marist University against its former basketball coach Matt Brady. The employment contract provided that Brady could not discuss and accept another coaching position without Marist University’s consent and that he must cease all contact with Marist basketball program recruits upon the termination of his contract. Brady discussed and accepted a position with James Madison, without obtaining consent, and continued to contact players he was recruiting while at Marist University. Ultimately, a New York jury found that Brady breached the contract. The contract, however, contained no liquidated damage or buyout clause, and thus it was left for Marist University to prove actual damages. Because of the speculative nature of the damages, the jury did not award Marist University any damages.
Liquidated damage clauses set a fixed amount of damages in advance, avoiding the problem seen in the Marist University case, but such clauses must be carefully drawn.
Upon a contractual breach, some universities and coaches have challenged the previously negotiated liquidated damage clause in an attempt to avoid or reduce damages. These cases demonstrate the unique issues present when negotiating a liquidated damage clause in an employment contract for a college coach.
Challenges To Liquidated Damage Clauses By Universities
A university typically strives to limit its responsibility for fixed damages, upon terminating the coach without cause, to the base salary remaining under the contract. This provides the university with certainty. Otherwise, if the contract contained provisions for bonuses, perks, and outside sources of income, and if there was not a liquidated damage clause, the coach could try to seek damages far above and beyond the remaining base salary. Without a liquidated damage clause, a coach could still obtain, as actual damages, the base salary remaining under the contract because such damages are certain. Without a liquidated damage clause, however, the coach has a duty to mitigate damages and if the coach has accepted a position elsewhere, compensation earned from the new job would reduce the amount of actual damages awarded. With a liquidated damage clause, however, courts have generally found that mitigation efforts are irrelevant. See e.g., Radisson Hotels Intern, Inc. v. Majestic Towers, Inc. (C.D. Cal. 2007) 488 F.Supp.2d 953, 963 (requiring a party to a liquidated damage clause “to prove its mitigation efforts would wholly undermine the rationale for employing liquidated damages provisions in the first place” which is to allow “the parties to avoid the cost, difficulty, and delay of proving damages.”)
In Fleming v. Kent State University, 17 N.E. 3d 620 (2014), James M. Fleming, who had been the defensive coordinator for the Kent State football team, filed a complaint against Kent State University for breach of his employment contract after he was terminated. The employment contract contained a liquidated damage provision providing that if Kent State was the initiator of the termination, it shall pay the balance of Fleming’s then in effect base salary due for the remaining term. Id. at 622. Kent State argued that the liquidated damage clause was unenforceable.
A liquidated damage clause is generally enforceable if it is not a penalty. The Fleming court explained that in Ohio a liquidated damage clause will be treated as damages, and not a penalty, “if the damages would be (1) uncertain as to amount and difficult(y) [sic] of proof, and if (2) the contract as a whole is not so manifestly unconscionable, unreasonable, and disproportionate in amount as to justify the conclusion that it does not express the true intention of the parties, and if (3) the contract is consistent with the conclusion that it was the intention of the parties that damages in the amount stated should follow the breach thereof.” Id. at 627.
Fleming contended that the damages were uncertain as to amount because the contract provided for bonuses dependent on the team’s academic and athletic performance and contemplated the possibility of income from other sources, such as television and consultation contracts with apparel companies. Id. Kent State argued that Fleming was not receiving any bonuses or income from other sources. The court, however, held that “the proper focus is on whether the damages the parties could anticipate Fleming would incur if KSU breached the contract were uncertain in amount and difficult to proof at the time the parties entered the contract.” Id. The court explained that “at the time of contracting, the parties could not predict whether the football team would achieve any of the goals that would entitle Fleming to bonuses under the contract.” Id. As such, the appellate court overruled the lower court’s decision that the liquidated damage clause constituted an unenforceable penalty.
Kent State also claimed that because the liquidated damage clause only entitled Fleming to recover his base salary, he cannot argue that the clause was intended to compensate him for other sources of income. The court held that “it is unclear how this argument relates to the issue of whether damages were uncertain as to amount or difficult [sic] of proof at the time of contracting.” Id. at 628. This argument was interesting because the fixed amount of damages must bear a reasonable relationship to the amount of damages contemplated by the parties if a breach occurred, and Kent State was essentially arguing that the parties were contemplating damages for other sources of income and because the fixed amount did not take the other sources of income into account, the clause was unenforceable. If the court held that the liquidated damage clause was unenforceable and Fleming was left to prove damages, he could have turned this argument against Kent State and contended that since Kent State acknowledged the parties were contemplating damages for other sources of income if a breach occurred, it follows that they breached the contract or even committed fraud by not helping him secure other sources of income.
Challenges To Liquidated Damage Clauses By Coaches
While a university hiring a coach, who has triggered a liquidated damage clause by resigning at his or her old school before the end of the contract, may pay the liquidated damages, coaches may still challenge the liquidated damage clause. The new school and coach could agree on more compensation for the coach if the clause is declared unenforceable.
In DiNardo v. Vanderbilt University, 174 F.3d 751, 753 (1999), Gerry DiNardo resigned as Vanderbilt’s head football coach to become LSU’s head football coach and Vanderbilt University sought liquidated damages. DiNardo’s contract contained reciprocal liquidated damage provisions. Vanderbilt agreed to pay DiNardo his remaining salary should Vanderbilt replace him as football coach, and DiNardo agreed to reimburse Vanderbilt should he leave before his contract expired. Id. DiNardo argued that no damages beyond the cost of hiring a replacement coach were contemplated when the contract was entered, and that the amount of his salary bears no relationship to the cost of hiring a replacement coach. Id. at 756. DiNardo further suggested that Vanderbilt may actually benefit from a coaching change. Id.
The Sixth Circuit explained that courts will enforce a liquidated damage provision if the amount agreed to by the parties is not a penalty. Id. at 755. “[A] provision will be considered one for liquidated damages, rather than a penalty, if it is reasonable in relation to the anticipated damages for breach, measured prospectively at the time the contract was entered into, and not grossly proportionate to the actual damages.” Id.
The Sixth Circuit held that the parties understood and agreed that Vanderbilt’s damages, if DiNardo breached the contract, extended beyond the cost of hiring a replacement coach. Id. First, it noted that the contract provided that “’a long-term commitment’ by DiNardo was ‘important to the University’s desire for a stable intercollegiate football program,’ and that this commitment was of ‘essence’ to the contract.” Id. Second, it noted that Vanderbilt offered a two-year extension to DiNardo well over a year before his current contract expired because it wanted to “provide stability to the program, which helped in recruiting players and retaining assistant coaches.” Id.
The Sixth Circuit also noted that Dinardo’s argument as to his resignation potentially benefitting Vanderbilt was irrelevant because “we measure the reasonableness of the liquidated damage provision at the time the parties entered the contract, not when the breach occurred, and we hardly think the parties entered the contract anticipating that DiNardo’s resignation would benefit Vanderbilt.” Id. at 756.
Further, the Sixth Circuit explained that “the parties understood that the amount of damages could not be easily ascertained should a breach occur. Contrary to DiNardo’s suggestion, Vanderbilt did not need to undertake an analysis to determine actual damages, and using the number of years left on the contract multiplied by the salary per year was a reasonable way to calculate damages considering the difficulty of ascertaining damages with certainty. The fact that liquidated damages declined each year DiNardo remained under contract, is directly tied to the parties’ express understanding of the importance of a long-term commitment from DiNardo.” Id. at 757. This was consistent with the District Court’s finding that it was reasonable for the parties to use a formula based on DiNardo’s salary to calculate liquidated damages because “[i]t is impossible to estimate how the loss of a head football coach will affect alumni relations, public support, football ticket sales, contributions, etc…. As such, to require a precise formula for calculating damages resulting from the breach of contract by a college head coach would be tantamount to barring the parties from stipulating to liquidated damages evidence in advance.” Id. at 756.
The Sixth Circuit further noted that “the liquidated damages provision was reciprocal and the result of negotiations between two parties, each of whom was represented by counsel.” Id. at 757.
Lastly, the Sixth Circuit noted that “[t]he liquidated damages are in line with Vanderbilt’s estimate of its actual damages.” Id.
These cases demonstrate that universities and coaches must carefully negotiate and draft liquidated damage clauses. There are a multitude of issues to consider to ensure that the clauses are held enforceable.