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The Use of Liquidated Damages Clauses in Coaching Contracts - The University Perspective

By Steve Stephens and Brandee R. Hancock

#14311985 | © Hugh O'Neill | fotolia.com

No doubt about it, collegiate athletics has become big business. With huge revenues generated from ticket sales, television contracts and post-season play, college sports are a booming industry. Many college coaches are extraordinarily highly compensated and command guaranteed multiyear contracts. Most of those contracts contain “buyout clauses,” lay terminology for “liquidated damages” clauses that set forth the negotiated, prebreach presumption of the amount of damages the nonbreaching party will incur, or agree to receive, if the contract is terminated.1 Although most modern coaching contracts contain reciprocal clauses – one establishing damages should the university terminate the contract and one establishing damages should the coach terminate the contract – this article will only focus on the latter situation.

Every year at the end of the competition season, numerous highly successful coaches – despite having long-term contracts – consider offers from other universities. When the price is right, or a perceived better opportunity arises, successful established coaches or coaches perceived to be rising stars often break their current contract and jump ship, continuing what is often referred to as the “college coaching carousel.”2 In such situations, damages to a university caused by the breaching coach are extremely difficult to calculate. A good coach establishes valuable recruiting relationships (at the university’s expense) that are lost when the coach leaves. The departure of a coach can adversely impact the development of players he or she previously recruited. A departed coach also takes with him or her a vast knowledge of the team’s offensive and defensive schemes and tendencies – information that can now be used against his or her former team. Further, the university now must incur expenses to recruit and hire a new coach and must deal with possible public relations issues stemming from the loss of a successful coach. The coach’s ability to market the program or assist in fundraising is lost. How do you appropriately place a price tag on such losses? Even more problematic is how to financially gauge the impact of the loss of a coach in terms of wins and losses.

For example, in the Football Bowl Subdivision of NCAA football, the loss of a single additional game can cause a university to lose bowl eligibility or to play in a less prestigious and less financially lucrative bowl game. That single additional loss alone could easily translate into millions of dollars. Accordingly, it has become the norm for coaching contracts to include liquidated damages clauses to compensate universities for such anticipated losses.3 The damages owed when a coach breaches contract are also often paid by the acquiring institution, which is increasingly viewed as a cost of doing business.4

Oklahoma appellate courts have not yet examined the validity of a liquidated damages clause in a collegiate coaching contract. However, the District Court of Payne County, based upon the analysis set forth in this article, recently found that such a clause was enforceable.5 In that case, the trial court found that:

  1. The contract between the parties contains language providing for liquidated damages to be paid by a breaching party to a nonbreaching party, which is appropriate pursuant to 15 O.S. §215;
  2. The language in the contract meets the legal test to be a liquidated damages clause and is not a penalty;
  3. The liquidated damages clause is not an unlawful restraint of trade and does not violate public policy; and
  4. The method for calculating liquidated damages, as set forth in the contract, was a reasonable prebreach estimate of the damages OSU would suffer if defendant breached the contract.

That case was subsequently settled, so the issues have still not been decided at the appellate level in Oklahoma. To date, only appellate courts in Tennessee and Ohio have done so, and both concluded that liquidated damages clauses were valid and enforceable.6

In Vanderbilt, Gerry DiNardo entered into an employment contract with Vanderbilt University. DiNardo’s contract was for football coaching duties, recognized the importance of stability and longevity in the university’s football program and contained a liquidated damages clause.7 The liquidated damages clause provided that Vanderbilt would pay DiNardo his remaining salary if he was terminated and DiNardo would pay Vanderbilt his remaining salary if he left before the contract expired.8 DiNardo breached the contract.9 The district court granted summary judgment in favor of Vanderbilt, awarding Vanderbilt liquidated damages as provided by the contract.10 On appeal to the 6th Circuit, DiNardo argued, among other contentions, that the liquidated damages clause was an overly broad covenant not to compete and was an unlawful penalty.11

Like Oklahoma, Tennessee law prohibits contractual penalties but will enforce liquidated damages when the amount is reasonable, prospectively measured when the contract is entered and not “grossly disproportionate” to damages actually suffered.12 The court analyzed the clause under the liquidated damages rubric and found the stipulated damages to be reasonable because “Vanderbilt hired DiNardo for a unique and specialized position, and the parties understood that the amount of damages could not be easily ascertained should a breach occur.”13 It further noted that the clause was reciprocal and the result of contract negotiations between the parties.14 Accordingly, the 6th Circuit affirmed the grant of summary judgment as to the enforcement of the liquidated damages clause.15

Similarly, Gene “Geno” Ford entered into an employment contract containing a liquidated damages clause with Kent State University (Kent State).16 When Ford breached the contract and left for Bradley University (Bradley), he owed Kent State $1.2 million under the liquidated damages clause.17 Kent State sued Ford for breach of contract and Bradley for tortious interference with a contractual relationship.18 The Ohio Court of Common Pleas granted summary judgment in favor of Kent State on the issue of liquidated damages.19 In reaching its decision, the court analyzed the difficulty of proof of actual damages suffered by Kent State, whether the contract was unconscionable or unreasonable and the intention of the parties.20

The 11th Appellate District of Ohio Court of Appeals reviewed the trial court’s findings under a three-part test previously established by the Supreme Court of Ohio in the case of Samson Sales, Inc. v. Honeywell, Inc.:

Where the parties have agreed on the amount of damages, ascertained by estimation and adjustment, and have expressed this agreement in clear and unambiguous terms, the amount so fixed should be treated as liquidated damages and not as a penalty, if the damages would be (1) uncertain as toamount and difficult 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 damage in the amount stated should follow the breach thereof.21

Applying that test, the appellate court affirmed the trial court ruling and determined the liquidated damage clause was enforceable.22

LIQUIDATED DAMAGES PROVISIONS ARE VALID UNDER OKLAHOMA LAW
Oklahoma law, like Tennessee, Ohio and most other jurisdictions, prohibits penalty clauses in contracts. Specifically, 12 O.S. §213 provides, Except as expressly provided in Section 215 at this title, penalties imposed by contract for any performances therefore are void… (emphasis added). However, the Oklahoma Legislature specifically recognized and approved the use of liquidated damages clauses when it enacted Section 215. Subsection (A) of Section 215 specifically addresses the validity of liquidated damages clauses for situations where actual damages would be extremely difficult or impractical to determine.

To square the concepts behind Sections 213 and 215, the Oklahoma Supreme Court established a three-part test to determine whether a liquidated damages clause is valid or is an unlawful penalty.23 A liquidated damages clause is valid if: 1) the resulting injuries from a breach are difficult or impossible to estimate; 2) the parties intend to provide for damages and not for a penalty; and 3) the amount of stipulated damages is a reasonable prebreach estimate of the probable loss.24 A properly drafted contract can easily meet all three of these requirements.

First, the parties should expressly acknowledge in the contract that damages would be difficult, if not impossible, to calculate in the event of a breach. A sample provision might state:

The parties have bargained for and agreed to the foregoing liquidated damages provision, giving consideration to the fact that university will incur administrative, recruiting, resettlement, competitive losses and other costs in obtaining a replacement for coach, in addition to the loss of coach for fundraising and marketing purposes and potentially increased compensation costs if coach terminates this agreement prior to its expiration, which damages are extremely difficult or impracticable to determine with certainty.

Second, a properly drafted contract should state that the liquidated damages clause “shall not be, nor be construed to be, a penalty.” Such a clause shows the intent of the parties to specifically provide for damages, not a penalty. Third, the contract should recite that the amount of damages is acknowledged by the parties as a reasonable prebreach estimate of the possible loss.

Moreover, the terms of the liquidated damages clause will be more easily supportable and therefore not found unreasonable if there are reciprocal liquidated damages clauses in the contract (one in favor of the coach for termination without cause and one in favor of the university upon the coach’s breach of the contract), which as stated earlier appear to be standard in the industry.

An argument was made by the defendant in the Wickline case that a liquidated damages clause in favor of a university is not truly reciprocal if the coach has a duty to mitigate damages by seeking other employment. The university took the position that argument was unavailing because the university could not itself mitigate its damages. When a coach breaches his or her contract, the university has to suffer the difficult to calculate damages that accompany the loss of a successful coach to a potential competitor. There is simply no way to gauge a university’s ability to mitigate its losses. However, the departing coach has the opportunity to lessen the damages he or she agreed to pay as liquidated damages. That is because it has become customary in the industry for departing coaches to bargain with their new employer for that employer to pay, or indemnify their newly acquired coach against, that coach’s liquidated damages obligation to his or her former employer. Accordingly, reciprocity should be limited to the concept that the parties have agreed prebreach to a methodology to calculate liquidated damages to a coach who is terminated or to a university where the coach leaves for a better deal.

LIQUIDATED DAMAGES PROVISIONS ARE NOT UNLAWFUL RESTRAINTS OF TRADE
Oklahoma, like most jurisdictions, disfavors contractual provisions restraining trade. A covenant not to compete is a form of a restraint of trade, but a liquidated damages provision is not a covenant not to compete. It does not prevent a coach from leaving. Liquidated damages clauses in employment contracts are enforceable and are not unreasonable restraints on trade. 15 O.S. §217 “prohibits only unreasonable restraints on the exercise of a lawful profession, trade or business.”25 A provision restraining trade is reasonable if it is no more extensive than necessary to protect the employer from unfair competition, does not impose undue hardship on the employee and does not injure the public.26 The court in Loewen opined that employment contracts can impose reasonable limitations on post-employment competition by an employee “which is made possible by the expertise, contacts, good will and opportunity…gained directly from the employment with employer.”27

A properly drafted contract can satisfy all three of these elements. First, a liquidated damages provision is no greater than is required for the university’s protection because, in lieu of restricting the coach from competitive employment, it allows for damages to be paid to the university when the coach leaves earlier than allowed by the contract. Second, no undue hardship is imposed on the coach. He or she was highly compensated during his or her tenure at the previous university and will likely be highly compensated at his or her new job. Accordingly, the damages sought are not excessive and do not create a hardship. Further, as discussed before, it is common for damages under these types of clauses to be paid by the acquiring institution. A departing coach can negotiate with his or her new employer to include payment of the damages to his or her prior employer as part of a new contract. Any burden upon the coach is the result of his or her own actions, not those of the university he or she departed.

Third, the clause is not injurious to the public. In fact, with respect to public universities, a liquidated damages clause actually protects the public interest by allowing a state university to recoup damages from a breaching employee rather than from the public. As to private universities, the analysis is similar as there is no cogent or logical harm caused to the public at large by the enforcement of such clause. Additionally, a liquidated damages clause meets the standard set forth in Loewen – it seeks reasonable damages for post-employment competition that was made possible by the expertise, contacts, good will, marketing ability, fundraising skill and opportunity gained directly from the coach’s prior employment.

Because Oklahoma allows reasonable limitations on post-employment competition, it necessarily follows that liquidated damages clauses that accomplish that purpose are not impermissible. This is in accord with the analysis by other courts that have directly addressed such an attack. The Wisconsin Court of Appeals distinguished liquidated damages provisions from restraint of trade provisions.28 A restraint of trade occurs when a party is restricted from “the exercise of a gainful occupation,” while a liquidated damages clause is not an occupational restriction but addresses the consequences of engaging in prohibited competition.29 North Carolina has similarly determined that a provision providing for the loss of rights and privileges if an employee participates in competitive activity, rather than prohibiting competitive activity altogether, is not a restraint of trade.30

CONCLUSION
A university can suffer a huge financial loss when it loses a successful coach. However, it is virtually impossible to gauge the precise amount of those damages. The only way to protect against such a loss is by inclusion of a liquidated damages clause in the coach’s contract, setting forth prebreach the amount of damages the parties agree will compensate the university if the coach terminates a long-term contract without cause. Such clauses are now standard in collegiate athletics, and although litigation over those clauses is rare, such clauses if properly drafted should be upheld under Oklahoma law.

ABOUT THE AUTHORS
Steve Stephens is the general counsel for the OSU/A&M Board of Regents. Prior to that he practiced as a trial attorney with Fellers Snider for 30 years. He is a 1980 graduate of OSU and a 1983 graduate of the OU College of Law.

Brandee R. Hancock graduated with honors from the OU College of Law in 2012. She is associate general counsel for the OSU/A&M Board of Regents. Ms. Hancock received the Impact Award from the Oklahoma College Student Personnel Association in May 2017.

1. Reid v. Auxier, 1984 OK CIV APP 33, 690 P.2d 1057.
2. See Richard Karcher, “The Coaching Carousel in Big-Time Intercollegiate Athletics: Economic Implications and Legal Considerations,” 20 Fordham Intell. Prop. Media & Ent. L.J. 1, 2 (2009).
3. See, generallyRichard Karcher, “Redress for a No-Win Situation: Using Liquidated Damages in Comparable Coaches’ Contracts to Assess a School’s Economic Damage from the Loss of a Successful Coach,” 64 S.C. L. Rev. 429 (2012).
4. Richard Karcher, supra note 2 at 48.
5. See, Order on Summary Judgment, Sept. 17, 2015, Board of Regents for the Oklahoma Agricultural and Mechanical Colleges, v. Gregory Joe Wickline, District Court Payne County, State of Oklahoma, Case No. CJ-2014-430.
6. Vanderbilt Univ. v. DiNardo174 F.3d 751 (6th Cir. 1999); Kent State Univ. v. Ford2015-Ohio-41, 26 N.E.3d 868. See also, O’Brien v. Ohio State Univ., 139 Ohio Misc.2d 36 (Ct. Cl. 2006) (holding liquidated damages clause in favor of coach enforceable against Ohio State University).
7. Vanderbilt Univ. at 753-54.
8. Id.
9. Id.
10. Id.
11. Id. at 753-55.
12. Id. at 755.
13. Id. at 757.
14. Id.
15. Id. at 760. The 6th Circuit affirmed in part and reversed in part. The reversal related merely to the validity and enforcement of an addendum to the contract and is not applicable here.
16. Kent State Univ. v. Ford, 2015-Ohio-41, 26 N.E.3d 868, at ¶¶5, 6.
17. Id. at 20.
18. Once Kent State obtained summary judgment against Ford, it dismissed its claim for tortious interference against Bradley. Regardless, the trial court had overruled Bradley’s motion for summary judgment in which it sought dismissal of the tortious interference claim that had been asserted by Kent State. Research found no other case involving a tortious interference claim in the context of “poaching” another university’s coach. Time will tell whether that was a novel claim or whether it is a precursor of things to come.
19. Id. at ¶¶19, 20.
20. Id. at ¶¶28, 36-37, 40.
21. 12 Ohio St. 3d 27, 29, 465 N.E.2d 392, 294 (Ohio 1984).
22. However, one judge dissented on the basis that viewing the facts in the light most favorable to the nonmoving party, as is required when ruling on a motion for summary judgment, triable issues of fact remained as to reasonableness of the amount of liquated damages. Id. at ¶¶48-57.
2
3. Sun Ridge Investors, Ltd. v. Parker, 1998 OK 22, 8, 956 P.2d 876, 878.
24. Id.
25. Bayly, Martin & Fay, Inc. v. Pickard, 1989 OK 122, 11, 780 P.2d 1168, 1171 (emphasis added).
26. Loewen Grp. Acquisition Corp. v. Matthews, 2000 OK CIV APP 109, 15, 12 P.3d 977, 980, citing Tatum v. Colonial Life and Accident Ins. Co. of Am., 1970 OK 27, 563 P.2d 448.
27. Id. at 21, 982 (emphasis in original).
28. Fields Found, Ltd. v. Christensen, 103 Wis.2d 465 (Wis. Ct. App. 1981).
29. Id. at 477.
30. E. Carolina Internal Med., P.A. v. Faidas564 S.E.2d 53 (N.C. Ct. App. 2002) (aff’d per curiam), citing Newman v. Raleigh Internal Med. Assocs., 362 S.E.2d 523 (N.C. Ct. App. 1987).

Originally published in the Oklahoma Bar Journal -- OBJ 89 pg. 7 (October 2018)