A federal district judge in Delaware has upheld enforcement of a $150,000 liquidated damages clause ancillary to a non-compete clause. The restrictive covenant was contained in an operating agreement for Mattern & Associates, a consulting firm that provided technology services to law firms. The defendant, John Seidel, was a 3% member of the LLC and left in 2005 to seek a sales position with Konica Minolta Business Solutions.
At trial, a jury found in favor of M&A and against Seidel on all claims, the most significant of which was Seidel's breach of contract and application of the liquidated damages provision. The Operating Agreement, which was governed by Pennsylvania law, applied the $150,000 sum only to the non-compete covenant, not other types of restrictions. Under Pennsylvania law, this is vitally important. Though Pennsylvania is like many states when it comes to analyzing the enforceability of liquidated damages provisions, it takes a much closer look at them in the context of non-compete arrangements. In particular, an employer must demonstrate that the "sum fixed as security for the performance (of the non-compete) must not be overbroad in that it applies to a number of stipulations of widely different importance." M&A smartly limited the application of the liquidated damages provision to the most significant restriction.
The prophylactic rule articulated in Mattern & Associates requires employers to draft liquidated damages provisions carefully. Many employment contracts contain an array of restrictions, ranging from the onerous (a business non-compete) to the trivial (a non-disparagement clause). When a liquidated damages clause applies across the board to sweeping restraints and less exacting activity restrictions, it reeks of arbitrariness. An employer is vulnerable to a facial attack on the clause as a transparent penalty that bears no connection to a likely breach.
Court: United States District Court for the District of Delaware
Opinion Date: 1/14/10
Cite: Mattern & Associates, LLC v. Seidel, 2010 U.S. Dist. LEXIS 3199 (D. Del. Jan. 14, 2010)