The apparent certainty of a liquidated damages clause may seem to be an efficient remedy for a breach of contract. But, the enforceability of liquidated damages clauses typically is hotly disputed. Judge Jones’ opinion in L & L Wings, Inc. v. Marco Destin, Inc., No. 07 Civ. 4137 (S.D.N.Y.) contains a helpful analysis of when liquidated damages are appropriate, but also a caution on how efficient they really are.
Plaintiff sought summary judgment to enforce a liquidated damages clause in its licensing agreement with Defendants as a result of Defendants’ holdover use of Plaintiff’s trademark at its clothing stores. The clause provided for damages calculated at $200 a day per store, and the number of days and stores pushed the damages into seven figures. Defendant challenged the liquidated damages provision as an unenforceable penalty, as opposed to a reasonable projection of actual ‘damages in the event of a breach.
Judge Jones noted that the test of reasonableness is a legal question for the court, and found that liquidated damages were appropriate because “the potential harm to Plaintiff’s reputation and goodwill caused by post-termination use of the Mark [six years later] would be nearly impossible to quantify at the time the Agreement was signed in February, 2000.” Judge Jones specifically noted that the provision was the “product of an arm’s length negotiation rather than ‘a situation fraught with possible overreaching.’” This last point reflects a willingness to hold sophisticated parties to the terms of their agreement on contract damages, and may provide a useful counterpoise to the New York rule that “[w]here there is doubt as to whether a provision constitutes an unenforceable penalty or a proper liquidated damage clause, it should be resolved in favor of a construction which holds the provision to be a penalty.”
The finding that the parties’ liquidated damages provision was enforceable did not fully resolve the issue, however, as Judge still found a factual dispute as to how they should be calculated, i.e., how many days did the holdover use continue, and at how many stores. One lesson: At the time a contract is entered into liquidated damages may seem an efficient means of assessing damages, but don’t expect that they’ll do much to avoid litigation. Of course, the silver lining is that reading Judge Jones’ opinion would be a beneficial way to prepare for that litigation.