We reported two years ago about Clemson University’s challenge to the $140 million exit fee that the Atlantic Coast Conference wanted to charge for Clemson to jump ship to a different conference. The parties settled that dispute, and so we do not know whether the exit fee was an enforceable liquidated damages provision or an unenforceable penalty clause.
Back in September, a Georgia appellate court provided an answer in a lower-profile case. Young Harris College challenged a $240,000 termination fee that the Peach Belt Athletic Conference (PBAC) wanted to charge it for leaving the PBAC, which Young Harris had joined in 2012. Between 2016 and 2020, four schools left the PBAC, paying between $47,000 and $52,000 to do so. On July 8, PBAC’s board conducted a meeting at which it unanimously adopted new termination fees (the 2020 Amendment) set at the new member initiation fee ($120,000) or a multiple thereof depending on how much notice the departing school provides.
Two years later, Young Harris provided written notice of its intent to exit the PBAC the following year. It offered to pay a $52,000 termination fee. The PBAC responded by demanding $240,000, consistent with the 2020 Amendment, as Young Harris had provided less than two years notice. The PBAC brought suit in January 2023, and Young Harris responded with counterclaims. On cross-motions for summary judgment, the trial court ruled for PBAC, finding the termination fee an enforceable liquidated damages clause.
Georgia has a three-part test for establishing that a provision is an enforceable liquidated damages clause and not a penalty: 1) the injury must be difficult to estimate in advance; 2) the parties must intend damages and not a penalty; and 3) the sum must be a reasonable estimate of probable loss. The breaching party bears the burden of proving that the factors are not met and that the provision is really a penalty.
Young Harris first argued that PBAC’s injury was not hard to estimate in advance because we know PBAC’s sources of revenue, so we can figure out its losses from a team’s decision to leave the conference. The Court notes that knowing sources is not the same as knowing amounts. There was record evidence of the conference board discussing the difficulty in knowing in advance the harm attendant to a school’s departure from the league. That was enough to establish that the trial court did not err on the first prong of the test.
As to the second prong, the Court’s reasoning here is messy, and I don’t really think the second prong is much use. Young Harris wanted to introduce parol evidence showing that before the 2020 Amendment, the termination fee was referred to as a penalty. Young Harris pointed to a prior case in which the court reasoned that it could look at parol evidence because the contract was silent on whether a provision was intended as a penalty. That’s cutting the salami pretty thin. The contract in question stated, “Failure to complete the required construction as specified will result in the assessment of Liquidated Damages at the rate of $1,000.00 per calendar day.” In my world, designating something “Liquidated Damages” is a way of saying, “This is not a penalty.” Also in my world, the test for whether a contractual provision is a penalty is substantive. I don’t care what the parties called it. Sophisticated parties are always going to label the provision liquidated damages, but the court still has to do the work to determine whether it is.
Here, there were non-trivial arguments that the parties had previously identified the clause as a penalty, which is quite the tell, and that the termination fee had quadrupled, perhaps in response to the recent defection of four teams from the PBAC. This seems like a situation in which an inquiry into the cause behind the increase in the termination fee is warranted. Yes, on the whole, I still think it likely that this termination fee is still a liquidated damages clause. The termination fee tripled along with the initiation fee. In the NIL era, there’s just much more money in college sports than there was before. Still, without seeing all the parol evidence, how can you really know?
That said, the parol evidence is relevant mostly to the third prong of the test. A court shouldn’t care much what the parties thought they were doing. Substantively, if you can’t know harms in advance but the damages provision is a reasonable estimate of anticipated harm, that is liquidated damages and not a penalty, regardless of what they called the provision.
Here, applying the third prong, the Court found that the PBAC made reasonable attempts to determine what actual harms might follow from a termination. Yes, it did connect the termination fee to the initiation fee, but the latter number did not come from nowhere. The same inputs were used to calculate both numbers, so it is not surprising that the initiation fee provided a handy approximation of the termination fee.
Finally, the Court rejected Young Harris’s contention that it should treat the termination fee as a penalty because this is a “case of doubt.” In such cases, the court is supposed to lean towards treating the fee as a penalty. However, the Court found that all three prongs of the test for an enforceable liquidated damages clause were met, and so this was not a case of doubt. I would have let in the parol evidence, because I generally think courts should have all the facts, but I doubt it would affect the outcome.
Although it is nice to see a court work through the test for whether termination fees are enforceable, the finding of enforceability in this case tells us little about what would happen in a case like Clemson’s against the ACC. The test will likely be similar, but the inputs are going to be very different.
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