Friday, September 4, 2009

Capitalization of Income Not Appropriate for Liquidated Damages Clause (Perry v. H&R Block Eastern Ent.)


Liquidated damages are a common remedy for breach of a non-compete in the tax-preparation and accounting field. Most agreements I have drafted or reviewed usually forecast liquidated damages according to a capitalization of income or revenue derived from a misappropriated client. The Illinois courts, which decidedly favor actual over liquidated damages, have interpreted similar clauses as embodying reasonable money damage estimates.

However, even this type of formulation is not always failsafe. The case involving Donna Perry and H&R Block is illustrative of the point that liquidated damages provisions are always frowned upon and viewed with judicial skepticism.

In that case, the court reviewed H&R Block's evidence of liquidated damages, which nominally allowed it to recover: (a) two times the "average fee" charged by Perry during the course of her employment, times (b) the number of non-returning clients; times (c) the employee's client retention percentage. The problem for H&R Block, in the court's view, was that the formula did not account for commissions received by tax preparers. Because of this, H&R Block would always get more than its actual damages.

The court held the clause was not a reasonable approximation of actual damages and awarded H&R Block nominal damages of $1. While H&R Block was not precluded from recovering lost profits or traditional contract damages, it failed to put on any competent proof of the same.

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Court: United States District Court for the Eastern District of Pennsylvania
Opinion Date: 8/19/09
Cite: Perry v. H&R Block Eastern Enterprises, Inc., 2009 U.S. Dist. LEXIS 73759 (E.D. Pa. Aug. 19, 2009)
Favors: Employee
Law: Pennsylvania, Missouri

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