Liquidated damages clauses are kind of like the Miami Heat.
They look powerful, but it's hard to tell whether they will ever come through. Courts frequently find such clauses unenforceable. In the non-compete context, they are quite common and can take a variety of different forms. A common type of clause is one that puts a flat-fee price on competition or solicitation of customers.
I am not crazy about flat-fee clauses, because they have been struck down on many occasions as arbitrary. But not always. The Supreme Court of Maine just upheld such a clause in three physicians' employment contracts, set at $100,000 for a non-competition violation. The evidence the court used to uphold the reasonableness of the clause was fairly compelling: over 1,300 patients requested a transfer of their medical records when the doctors left for another institution. At an annual gross revenue per patient level, the (arguable) actual damages far exceeded the liquidated sum.
Keep in mind there really is no downside to using a liquidated damages clause in a contract. Even if they are unenforceable, the fallback position is actual damages - which is where you'd be without including the clause in the first place. I still believe that some formula based on the number of clients lost, rather than a flat fee for breach itself, has a better chance of being validated by a court. But as the Maine case shows, the decisions on these types of provisions come out both ways with no real distinguishing factors.
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Court: Supreme Judicial Court of Maine
Opinion Date: May 26, 2011
Cite: Sisters of Charity Health System, Inc. v. Farrago, 2011 Me. LEXIS 62 (Maine May 26, 2011)
Favors: Employer
Law: Maine
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