Friday, January 23, 2009
California Appellate Court Rules Liquidated Damages Clause Unreasonable (Nissanoff v. Balikian)
Any California case involving a covenant not to compete has a fairly predictable outcome. The recent unpublished decision in Nissanoff v. Balikian is no different.
The case involved an attempt by Philip Balikian to become affiliated with an orthopedic practice in California after a relocation from Kentucky. Unfortunately for Balikian, he seemed to run into Jonathan Nissanoff wherever he looked. At first, Balikian went through a headhunter and discussions ensued with respect to Balikian joining that practice. The deal fell apart when Nissanoff balked to working with the headhunter, presumably because of the fees involved.
Then, in an unrelated transaction, Balikian found a listing for a medical practice - which turned out to be Nissanoff's. Eventually, Balikian signed a non-disclosure clause to conduct some due diligence about Nissanoff's practice. The NDA contained an end-around non-compete and a liquidated damages clause. As a fairly transparent way to circumvent California's statute against non-compete agreements, Nissanoff's contract with Balikian provided that it would be a breach of the confidentiality clause if, after reviewing Nissanoff's so-called proprietary information, Balikian opened up a medical practice for orthopedic surgery within 25 miles of Nissanoff's office within one year from signing the NDA.
The agreement contained a liquidated damages clause of $300,000 and a $1,000 per day violation every day thereafter for breach. (It is entirely unclear how a $1,000 per day penalty could be applied for breach of confidentiality, but that academic issue was not addressed).
Eventually, Balikian continued his search and ran into another physician who asked if he had looked at other options. Balikian remarked that he "had interviewed with Nissanoff." The same physician then asked Nissanoff if he was planning to leave San Diego. Apparently, Nissanoff concluded Balikian breached the confidentiality provision and demanded $300,000 and $1,000 per day. Balikian declined to pay.
Balikian then accepted a job with another orthopedic surgery center and found himself sued by the disgrunted Nissanoff.
Not surprisingly, the court had little trouble disposing of the case in favor of Balikian. In terms of the liquidated damages clause, the court of appeals affirmed the ruling that it constituted an unenforceable and unreasonable penalty under California's statute governing liquidated damages.
Key to the court's ruling were a couple of factors: (1) that there was no discussion whatsoever between the two surgeons about potential damages which might arise from a breach; (2) that there was no effort by either party to ascertain what damages might arise from a breach of the covenants; (3) that the agreement referred to the $1,000 per day amount as a "penalty."
Generally, liquidated damages clauses that are fixed fee or flat sum amounts are unreasonable and unenforceable. They are inherently arbitrary, and courts will not uphold damages clauses which are not a reasonable estimate of the damage likely to occur.
Though Balikian may have regretted his decision to relocate, he had the last laugh. He obtained over $76,000 in attorneys' fees from his opponent.
Court: Court of Appeal of California, Fourth Appellate District
Opinion Date: 1/20/09
Cite: Nissanoff v. Balikian, 2009 Cal. App. Unpub. LEXIS 425 (Cal. App. Ct. 4th Dist. Jan. 20, 2009)