On November 19, the University of Maryland announced that it is leaving the Atlantic Coast Conference, its home for 60 years, to join the Big Ten Conference. In weighing its decision, Maryland had to consider one big downside: the $50 million exit fee that ACC presidents voted to adopt in September 2012. Maryland hasn’t paid up, and the ACC sued it on November 27 in North Carolina state court, seeking to recover all $50 million.
The principal issue in the case will be whether the exit fee is a proper amount of “liquidated damages.”
“Liquidated damages” are damages that parties agree on in advance that an injured party can collect in the event of a breach of contract, often because measuring the actual damage from a particular breach may be difficult or speculative. Interestingly, this issue came up when Boston College left the Big East for the ACC, and a Massachusetts court noted that it was “not at all apparent” that the Big East’s $1 million exit payment was an acceptable liquidated damages figure.
Like the ACC, employers can adopt “exit fees” in employment agreements. And like the Terrapins, employees can challenge the enforceability of these liquidated damages. For example, in Mattern & Associates, LLC v. Seidel, John Seidel, a vice president for business development for a law firm consulting service, agreed to a restrictive covenant -- in other words, he agreed not to do something in the future -- in exchange for part ownership of the company. Specifically, Seidel promised not to disclose Mattern’s confidential information or compete with it for 24 months after changing jobs. If he breached, he was liable for $150,000.
Seidel later went to work for a competitor, Konica, and took with him an image of his hard drive, which Mattern alleged that he used to solicit customers. A jury found that he violated the restrictive covenant and awarded Mattern the full $150,000. Seidel then challenged that award as an unenforceable penalty, rather than appropriate liquidated damages. He argued that Mattern adopted the $150,000 amount as a penalty to either prevent him from breaching the covenant in the first place or to punish him for breaking it, rather than as compensation for harm it might suffer from a breach. The court disagreed. It noted that determining actual damages from a breach would have been very difficult, because it would have been hard, if not impossible, to measure the quantifiable loss resulting from Seidel’s “direct or indirect competition” or from his misuse of confidential information. Further, the record supported a finding that the provision was adopted without “nefarious intent,” because both parties had recognized the importance of having a compensatory measure in place to address the risk to the company if Seidel left and started siphoning off clients.
Whether a court upholds the “exit fee” sought by the ACC will likely depend on the same factors addressed in the Mattern case: how hard was it to calculate damages from the Terps’ departure? What kind of homework did the conference do in at least attempting to calculate the actual damages that would result from the breach? Was the exit fee really adopted as an attempt to measure damages resulting from an exit from the conference, or as a penalty to prevent teams from leaving in the first place or punish them if they did? When seeking to enforce or avoid liquidated damages, employers and employees should consider these kinds of factors.