Provided by: Jennifer Kirschenbaum, Esq.
June 7, 2022
My contract has a liquidated damages provision. Will my employer be able to enforce?
So, I've asked my Partner, Caroline Wallitt, Esq. to take this one.
By: Caroline Wallitt, Esq. -
Parties to an agreement, particularly in the health care field, often breathe a sigh of relief after locking up its terms. They’ve invested serious time and money in negotiating and drafting the contract, and expect that it will dictate the solution to any and all future issues.
We do not, however, advise our clients to have this much faith in the liquidated damages clause of an employment agreement—as Jennifer stated in her May 17, 2022 newsletter. When it comes to enforcing a liquidated damages provision, courts are inconsistent and unpredictable.
To illustrate, one recent court decision that enforced a liquidated damages clause deviated from well-established case precedent in multiple ways. In Mathew v. Slocum-Dickson Med. Group, PLLC, two cardiologists were bound by a non-compete covenant in their respective employment agreements. 160 A.D.3d 1500 (4th Dep’t 2018). After years of working for the defendant practice, they terminated their agreements and began practicing within the contractually restricted geographic zone. The breaches triggered their liquidated damages clauses, which required them to forfeit the greater of: (i) $50,000; or (ii) 50% of the prior year’s individual productivity or salary. The cardiologists therefore commenced a lawsuit seeking a judicial declaration that their liquidated damages clauses were unenforceable penalties.
The Mathew Court enforced the liquidated damages provisions, relying upon the following legal standard: (i) the actual damages that flowed from the breaches were not easily ascertainable when the parties executed their employment agreements; and (ii) the liquidated damages are a reasonable measure of the anticipated probable harm. It was undisputed that the first prong was met. The Court also concluded that the second prong was met by accounting for various unquantifiable damages to the defendant practice: the “loss of intra-organizational referrals, the loss of good will caused by the departure of critical members of its professional staff, investment made by defendant in the development of plaintiffs’ practices, and the cost associated with the recruitment of replacement physicians and the development of those new practices.” The Court was not swayed by the defendant practice’s failure to submit any evidence of specific revenue loss.
Mathew contradicts case precedent in myriad ways. For example, the Mathew Court changed the legal standard’s second prong. It set forth the second prong as “the liquidated damages are a reasonable measure of the anticipated probable harm,” though courts previously used this language: “the liquidated damages are not plainly disproportionate to the probable loss resulting from the breach.” Compare Mathews, 160 A.D.3d at 1502 with Ford v. Cardiovascular Specialists, P.C., 103 A.D.3d 1222, 1223 (4th Dep’t 2013); Fingerlakes Chiropractic, P.C. v. Maggio, 269 A.D.2d 790, 791 (4th Dep’t 2000); Novendstern v. Mount Kisco Med. Group, 177 A.D.2d 623, 625 (2d Dep’t 1991); Sentosa Care, LLC v. Anilao, 2010 N.Y. Slip Op. 31326 (Sup. Ct. Nassau County May 20, 2010); Gismondi, Paglia, Sherling, M.D., P.C. v. Franco, 104 F. Supp. 2d 223, 236 (S.D.N.Y. 2000). The difference between the two is not insignificant—the more forgiving Mathew language does not require the party trying to enforce liquidated damages to submit proof of specific damages, while the prior language did. It is no wonder that the result is different—Mathew enforced liquidated damages despite the lack of this proof, while the courts in the other cases struck them.
The Mathew Court also omitted policy concerns from its legal standard deviating from such prior cases as Sentosa Care, LLC. 2010 N.Y. Slip Op. 31326. In Sentosa Care, LLC, the Supreme Court strongly considered, in addition to the classic legal standard: (i) the unequal bargaining power between the parties (nurses vs. nursing facilities); and (ii) the fact that the employment agreements were offered on a take-it-or-leave-it basis. Ignoring Mathew, another court later returned to Sentosa Care, LLC by incorporating those two policy factors into its analysis in Paguirigan v. Prompt Nursing Empl. Agency LLC, 17-cv-1302 (E.D.N.Y. Sept. 23, 2019), another case involving nurses and nursing facilities. Again, the result depends on whether courts considered the policy factors–Mathew omitted policy discussion and enforced the liquidated damages clause, while the other cases struck liquidated damages, in part due to the policy factors.
The true legal standard for evaluating liquidated damages is therefore unclear because it changes from decision to decision. Courts have clearly taken the liberty to tweak the legal standard to achieve the “fair” result. For this reason, we caution employers to take this clause with a grain of salt, and encourage employees to push back on onerous liquidated damages.