Is a Liquidated Damages Clause Enforceable in an Employment Agreement? By Dan Atkerson on March 13, 2017

Is a liquidated damages clause of $500,000, entered against a person terminated under an employment agreement, enforceable at law in Texas? This was the issue in the recent case Bunker v. Strandhagen, No. 03-14-00510-CV (Texas Court of Appeals, March 3, 2017). In this situation, the plaintiff, a doctor, was terminated for cause under her employment agreement with 60 other physicians. The employment contract had called for a liquidated damages clause whereby Strandhagen had to pay $500,000 if she was terminated for cause before the conclusion of the seven-year contract.

Do Texas Courts Uphold Liquidated Damages Causes in Employment Contracts?

Liquidated damage clauses are generally subject to scrutiny by courts, but that does not mean they are unenforceable. Texas courts will enforce liquidated damage clauses if the court finds (1) the harm caused by the breach is difficult to estimate when the contract was entered into, and (2) if the amount of damages in the clause is reasonable and not a penalty. Strandhagen conceded that (1) was true; she acknowledged that the damages for termination for cause would be hard to estimate. However, she disagreed that the amount was reasonable and argued it was an unenforceable penalty.

The trial court agreed with her and ruled in her favor in Summary Judgment. The physicians appealed, first arguing that Strandhagen failed to show actual damages that would prove the amount of liquidated damages was disproportional to the harm. The Texas Court of Appeals disagreed with this argument, noting that proof of actual damages is not required if the liquidated damage amount is facially unreasonable. However, it did not find the $500,000 to be facially unreasonable.

Next, the Court considered the physician’s second argument, that the liquidated damage clause is not facially unreasonable, as it is not a “one size fit all” provision. Instead, the clause is triggered by only one type of breach: being fired for cause. The contract listed several reasons why the liquidated damage clause was reasonable, including but not limited to the fact that the damages would include increased workloads for the other physicians, impairment of the physicians to earn bonuses, impairment of relationships with hospitals and third parties, and hiring and training of replacement physicians. The court rejected Strandhagen’s argument that the damages would be less if she was fired in her fifth year (the case here) than if she was fired in her first year, for example.

The Court ultimately sided with the physicians, reversing the summary judgment for Strandhagen and remanding the issue of the reasonableness of the liquidated damage clause back to the trial court.

Dan A. Atkerson handles employment law issues in the greater Dallas area, including but not limited to wrongful termination and severance packages.