Friday, August 20, 2010
Gross Billings for Accounting Clients Proper Measure of Liquidated Damages (Mayer Hoffman v. Barton)
Most shareholder agreements between partners in accounting firms contain strict client non-solicitation clauses, and agreements of this kind normally are looked at under the more lenient standard of reasonableness analysis common to sale-of-business contracts. In fact, accountants more than any other profession seem to use liquidated damages calculations to put an express, pre-determined price on competition.
There is a definite cost-benefit to this. On the upside, a liquidated damages clause provides certainty - particularly among partners who pool in equity and trust as consideration for agreeing not to compete directly for firm clients when they leave. As a potential risk, liquidated damages clauses tend to be difficult to enforce, if for no other reason than lawyers seem to have a tough time drafting them in compliance with governing legal standards. Also, if not properly thought through, the damages clause can actually underestimate potential damages arising out of a breach.
Accounting firms have been ahead of the game on non-solicitation clauses, and there are a number of firms that even allow competition as long as the departing employee or partner purchases the book of business. (Some agreements even allow just the right to buy specific clients, as opposed to the entire book). This "forced purchase" mechanism is still a restriction, but one that courts tend to examine more favorably than outright prohibitions on client work.
As the recent appellate opinion in Mayer Hoffman McCann v. Barton shows, the most commonly upheld liquidated damages formula is tied to a historical look-back of client billings over a set period of time. So for instance, if an accounting firm bills a tax or audit client $40,000 over the past two years, that amount may be pre-determined as the price for taking that client. Courts have even upheld multiples of billings over a period of time, though presumably the look-back period would have to be relatively short if a multiple were used.
Other industries in which these types of revenue-based liquidated damages clauses are common include executive recruiting and retail insurance brokerage.
Court: United States Court of Appeals for the Eighth Circuit
Opinion Date: 8/11/10
Cite: Mayer Hoffman McCann, P.C. v. Barton, 614 F.3d 893 (8th Cir. 2010)