Vanderbilt University v. DiNardo
974 F. Supp. 638, 1997 U.S. Dist. LEXIS 11519, 1997 WL 440940 (1997)
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Rule of Law:
A liquidated damages clause in an employment contract is enforceable if it represents a reasonable estimate of potential damages that are otherwise difficult to ascertain, and it is not considered an unlawful penalty. The reasonableness of the damages can encompass both quantifiable costs and unquantifiable harms like reputational damage and loss of goodwill, so long as such harms were contemplated by the parties at the time of contracting.
Facts:
- On December 3, 1990, Gerry DiNardo signed a five-year contract to be the head football coach for Vanderbilt University, expiring January 5, 1996.
- The contract contained a liquidated damages clause requiring DiNardo to pay Vanderbilt his remaining net salary if he terminated his employment early to work for another institution.
- During the initial contract negotiations, DiNardo, represented by his attorney, successfully negotiated to have the liquidated damages calculated based on his net salary rather than his gross salary.
- In August 1994, after receiving several salary increases, DiNardo signed an Addendum extending his contract for two additional years, until January 5, 1998.
- In November 1994, Vanderbilt's Athletic Director gave DiNardo permission to speak with Louisiana State University (LSU) about a potential coaching position.
- On December 12, 1994, DiNardo resigned from Vanderbilt University to accept the head football coach position at LSU, with over three years remaining on his extended contract.
Procedural Posture:
- Vanderbilt University (Plaintiff) filed a complaint against Gerry DiNardo (Defendant) in the U.S. District Court for the Middle District of Tennessee for breach of an employment contract.
- Defendant DiNardo filed a Motion for Summary Judgment, arguing the liquidated damages clause was an unenforceable penalty.
- Plaintiff Vanderbilt University filed a Cross-Motion for Summary Judgment, arguing the clause was enforceable as a matter of law.
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Issue:
Does a liquidated damages clause in a university head football coach's employment contract, which requires the coach to pay his net salary for the remainder of the contract term if he resigns, constitute an unenforceable penalty under Tennessee law?
Opinions:
Majority - Echols, District Judge.
No, the liquidated damages clause does not constitute an unenforceable penalty. A liquidated damages provision is enforceable if the amount is a reasonable estimate of the damages expected from a breach, especially when actual damages are difficult to quantify. Here, the damages Vanderbilt would suffer from DiNardo's early departure extend beyond the simple cost of hiring a replacement and include significant, unquantifiable harms such as damage to reputation, public relations, alumni support, and player recruiting. The contract explicitly stated that Vanderbilt was making a 'highly valuable investment' in DiNardo's continued employment and desired a 'stable intercollegiate football program,' demonstrating that the parties contemplated these broader damages. The formula, based on DiNardo's net salary for the remaining contract term, was a reasonable method to account for these uncertain losses and was not a penalty. Furthermore, the clause was the product of an arms-length negotiation where DiNardo was represented by counsel, reinforcing its reasonableness.
Analysis:
This decision solidifies the enforceability of liquidated damages clauses in high-profile employment contracts, particularly in collegiate athletics. It establishes that courts may consider a wide range of intangible and difficult-to-quantify damages, such as reputational harm and lost recruiting opportunities, when assessing the reasonableness of such a clause. The ruling provides significant protection for universities seeking to maintain stability in their athletic programs by creating a strong financial disincentive for coaches to breach their long-term contracts. Consequently, this case serves as a key precedent supporting the validity of 'buyout clauses' common in modern coaching contracts.
