Opinion ID: 1043281
Heading Depth: 2
Heading Rank: 2

Heading: Enforceability of Liquidated Damages Clause

Text: Apart from the validity of the entire contract, Ejaz also challenges the Settlement Agreement's liquidated damages clause in particular. He argues that it is unenforceable because it is not reasonably proportional to Bose's anticipated damages and difficulties of proving loss at the time the Settlement Agreement was executed.5 This is a closer question. 5 Ejaz also makes two other arguments, but both are easily rejected. First, he claims that there is a dispute over whether the parties intended the clause to serve as liquidated damages or as a penalty -- a genuine dispute of material fact that prevents a grant of summary judgment. That argument is simply wrong. Whether a clause imposes enforceable liquidated damages or an unenforceable penalty is a question of law. NPS, LLC v. Minihane, 886 N.E.2d 670, 673 (Mass. 2008). Even if the clause's effect were a question of fact, Ejaz points to no record evidence indicating that he believed at the time of contracting that the clause was intended to be a penalty. Second, Ejaz claims that the clause is unenforceable because it is disproportionate to the damages Bose actually suffered. But this argument cannot square with Kelly v. Marx, 705 N.E.2d 1114 (Mass. 1999), which explicitly stated that the damages actually suffered have no bearing on the enforceability of a liquidated damages clause. See id. at 1117. -13- Massachusetts law allows enforcement of a liquidated damages clause so long as it is not so disproportionate to anticipated damages as to constitute a penalty. TAL Fin. Corp. v. CSC Consulting, Inc., 844 N.E.2d 1085, 1093 (Mass. 2006). The inquiry depends significantly on the facts of the case, see Honey Dew Assocs., Inc. v. M&K Food Corp., 241 F.3d 23, 28 (1st Cir. 2001), but in general, a liquidated damages clause will usually be enforced, provided two criteria are satisfied: (1) the actual damages would have been difficult to ascertain at the time of drafting, and (2) the amount was a reasonable forecast of damages that would actually occur in a breach. NPS, LLC v. Minihane, 886 N.E.2d 670, 673 (Mass. 2008) (quoting Cummings Props., LLC v. Nat'l Commc'ns Corp., 869 N.E.2d 617, 620 (Mass. 2007)) (internal quotation mark omitted). Ejaz bears the burden of proving that the clause is unenforceable, and reasonable doubts are drawn in favor of Bose, as the provision's proponent. See id. at 673; Honey Dew, 241 F.3d at 27.
Ejaz has not produced any evidence, or even argued in his brief, that Bose's actual damages would be readily ascertainable. Further, Bose showed that it would be difficult to calculate its actual damages from a breach: it introduced evidence that Ejaz's actions threatened Bose's goodwill and brand integrity, which Bose calls its most important asset, and showed that damage to -14- goodwill and brand integrity is inherently difficult to quantify. The law supports Bose. See Societe Des Produits Nestle, S.A. v. Casa Helvetia, Inc., 982 F.2d 633, 640 (1st Cir. 1992) (By its very nature, trademark infringement results in irreparable harm because the attendant loss of profits, goodwill, and reputation cannot be satisfactorily quantified and, thus, the trademark owner cannot adequately be compensated.). The liquidated damages provision does not fail on this ground.
Ejaz has produced no record evidence suggesting that $50,000 per sale was grossly disproportionate to or an unreasonable forecast of the actual damages Bose would have expected. Instead, he claims that the structure of the clause itself, providing $50,000 in damages for every breach, without limit, shows that the forecast is unreasonable. But a hypothetical larger range, separated from the actual facts and the amount sought, does not make a clause unreasonable. Rather, courts examine for reasonableness the amount of liquidated damages actually sought. See Space Master Int'l, Inc. v. City of Worcester, 940 F.2d 16, 1617, 20 (1st Cir. 1991) (denying summary judgment motion of defendant seeking to avoid liquidated damages clause even though clause provided for per-day late fees without limit); Perfect Solutions, Inc. v. Jereod, Inc., 974 F. Supp. 77, 85 (D. Mass. 1997) (denying summary judgment motion of defendant seeking to -15- avoid liquidated damages clause even though clause provided for per-violation damages without limit).6 The Restatement also adopts this position, analyzing liquidated damages as they are actually imposed rather than in hypotheticals. See Restatement (2d) of Contracts § 356 cmt. b, illus. 3 (contemplating valid enforcement of liquidated damages clause providing for per-day late fees even though fees were unlimited, where ten days of fees are sought). Bose articulated a series of harms showing that the liquidated damages clause is reasonable in this case. 6 Courts in other jurisdictions have followed the same approach. See, e.g., ProTherapy Assocs., LLC v. AFS of Bastian, Inc., 782 F. Supp. 2d 206, 218-19 (W.D. Va. 2011) (allowing enforcement of liquidated damages provision granting uncapped damages of $10,000 per breach across fifty-seven breaches); Elexco Land Servs., Inc. v. Hennig, No. 11-CV-00214, 2011 WL 9368970, at  (W.D.N.Y. Dec. 28, 2011) (reserving decision of whether liquidated damages clause providing $25,000 per breach is enforceable until plaintiff actually sought damages under the clause); Mattingly Bridge Co. v. Holloway & Son Constr. Co., 694 S.W.2d 702, 704 (Ky. 1985) (allowing enforcement of liquidated damages provision granting $750 damages per day late without limit but reducing recovery from unreasonable 193-day penalty to reasonable 32 and 2/3-day damages); Bd. of Cnty. Comm'rs of Adams Cnty. v. City & Cnty. of Denver, 40 P.3d 25, 32 (Colo. App. 2001) (If a contract stipulates a single liquidated damage amount for several possible breaches, the damage provision is invalid as a penalty if it is unreasonably disproportionate to the expected loss on the very breach that did occur and was sued upon.); Anonymous v. Anonymous, 649 N.Y.S.2d 665, 666-67 (N.Y. App. Div. 1996) (liquidated damages provision allowing $500,000 per breach of confidentiality agreement not, in and of itself, unenforceable as against public policy); cf. Rex Trailer Co. v. United States, 350 U.S. 148, 151-152 (1956) (uncapped statutory penalty of $2000 per violation enforceable as liquidated damages rather than criminal sanction for case of five violations). -16- Specifically, Bose identified as its potential harms: loss of revenue from each sale (Bose's retail price for each unit was approximately $6500 (Australian)); harm to Bose's brand name; downstream effects of harm to the brand name, such as interrupting Bose's distribution chain and discouraging purchases by third parties; enforcement costs due to the possibility that Ejaz could, perhaps successfully, evade legal process, thereby increasing Bose's costs (Ejaz had explicitly told Bose's lawyers that he will run away from the country if they come after me for any money); and the possibility that Bose would not be able to prove all of Ejaz's sales in court (in this very case, Bose relies on proof of seven violations but asserts that there may have been many more). The absence of affirmative proof of unreasonableness is fatal to Ejaz's argument because he bears the burden of proof. See NPS, 886 N.E.2d at 673. Since Ejaz has not introduced any evidence to rebut Bose and show that $50,000 for each of seven violations was an unreasonable forecast, he remains bound by the liquidated damages clause. See Reed v. Zipcar, Inc., No. 12-2048, 2013 WL 3744090, at  (1st Cir. July 17, 2013) (Reed's complaint contains no allegations as to what a reasonable estimate of damages would be. This is sufficient to defeat [Reed's] claim . . . .).