Willard Packaging Company, Inc. v. Javier

SHARER, J. Appellant, Willard Packaging Company (“Willard”), and appellee, Demetrio Javier, formerly enjoyed an amicable employer-employee relationship. After Javier left Willard’s employment, Willard filed a breach of contract action in the Circuit Court for Montgomery County seeking to recover liquidated damages based upon the terms of an employment contract. After a bench trial, the circuit court awarded appellant nominal damages of one dollar, rejecting appellant’s argument that it was entitled to liquidated damages of $50,000 pursuant ¹¹⁴ to the terms of an employment contract. Disaffected with its Pyrrhic victory, appellant has noted this appeal, raising a single issue: 1 Whether the circuit court erred in faffing to uphold the entire contract, duty of confidentiality and covenant not to compete, where the court found that the contract was valid, that the Appellee had breached the noncompetition clause of the agreement, but rejected the agreed upon liquidated damage clause and awarded a nominal sum of one ($1.00) dollar.

For the reasons discussed, we shall affirm the circuit court’s judgment. FACTUAL BACKGROUND Willard is a Maryland corporation that manufactures and distributes packaging materials, including corrugated boxes, bubble wrap, tape, and foam packaging throughout Virginia, Maryland, the District of Columbia, and Delaware. In March 1998, Dana Salkeld, one of the owners of Willard, and also its president, hired Javier to be an outside salesman for the company. This position entailed pursuing established leads, as well as cold calling, to generate sales to businesses needing corrugated boxes or packaging materials.

Javier began as a salaried employee and remained as such for approximately two and one half years. Ultimately, Javier began to be compensated by commission, resulting in a decrease in his earnings, precipitating his departure from Willard and subsequent employment with a Willard competitor. Duty of Confidentiality and Covenant Not to Compete On June 19, 1998, shortly after being hired by Willard, Javier was called to a sales meeting held by its owners. At this meeting, which was also attended by senior staff, and other personnel, the sales staff, including Javier, was present ¹¹⁵ ed with a document entitled “Duty of Confidentiality and Covenant Not to Compete” (“contract”).

As its title implies, the contract included a restrictive covenant prohibiting Javier from working for a competing business within a 75-mile radius of Willard’s principal place of business for one year after leaving Willard’s employ, subject to a liquidated damages provision of $50,000 in the event of a breach. 2 ¹¹⁶ Before those present at the meeting signed the contract, Salkeld read it out loud and informed the employees that if they did not sign their futures at Willard “would not be very bright.” Without much objection, Javier and the others then signed the contract and, as consideration, each signator received $50 in cash. At trial, Javier testified that he did not read the contract before signing it, and that he had never subsequently read the restrictive covenant giving rise to this litigation. Termination On April 11, 2003, Javier voluntarily terminated his employment with Willard. Before Javier left, Salkeld conducted an exit interview with him during which Salkeld discussed the provisions of the restrictive covenant.

Approximately six months after leaving Willard, after working for other employers and for a time receiving unemployment insurance, Javier took a position with Atlas Alexandria Packaging, LLC (“Atlas”), located in Northern Virginia. Atlas also manufactures and distributes packaging materials, and was a major competitor of Willard in the District of Columbia area market. In mid-October 2003, Salkeld became aware of Javier’s employment after placing a call to him at Atlas’s offices. We shall set forth additional facts necessary for resolution of the issues below.

Procedural History On October 23, 2003, Willard filed a complaint in the circuit court, seeking injunctive relief and damages due to Javier’s alleged breach of the restrictive covenant. The circuit court denied appellant’s request for injunctive relief on October 24, 2004, and the remaining claims for breach of contract and damages came on for a bench trial on November 9, 2004. ¹¹⁷ At the conclusion of appellant’s case, Javier moved for judgment, pursuant to Md. Rule 2-519, claiming that appellant had failed to prove that the $50,000 liquidated damages amount in the restrictive covenant was supported by a reasonable expectation of damages. 3 Thus, the issue before the circuit court was refined to the propriety of the liquidated damages provision of the contract. The court, in a ruling from the bench, granted appellee’s motion for judgment, considering all inferences in the light most favorable to appellant. The court ruled that Javier, by taking employment with Atlas within one year and within the 75-mile restriction, was in breach of the restrictive covenant.

As to damages, the court ruled that the liquidated damage clause in the contract was not based upon a reasonable expectation of damages, hence it was a penalty, and that Willard had failed to prove any other actual damages. The court awarded nominal damages of one dollar. In its ruling, the court noted: The law, generally is, as it applies to this case with respect to liquidated damages, that a contract can contain a provision fixing the amount to be paid in the event of a breach, if the amount so fixed is, in fact, compensation for damages and such an agreement is usually up-held [sic] when entered into in good faith by the parties, where the damages are ¹¹⁸ uncertain in nature or amount or are difficult to ascertain and the amount agreed upon is not extravagant and is not unreasonably disproportionate to the damages that would actually result from a breach of contract. Generally, an order for a provision for liquidated damages of a stated amount on breach of the contract to be considered as a valid liquidated damage clause, it is required that the damages to be anticipated are uncertain in amount or difficult to be proved, as I just said, and that the parties intended to liquidate them in advance and the amount stated is a reasonable one and is not disproportionate to the presumed loss or injuries.

In other words, it has to be in reasonable expectation of the damages that were expected to be suffered in the event of a breach of contract. This case, at this point, the Court, of course, is required to review the evidence produced by the plaintiff in light of the most favorable to the plaintiff. [4] In this case, a contract has been proven. A contract entitled “A Duty of Confidentiality and Covenant Not to Compete.” This contract, the language of the contract, essentially, was borrowed, if you will, from a friendly competitor of the plaintiffs, and it was, essentially, word for word, the contract used by Cantwell Cleary, again, a friendly competitor and it is identical enough so that the liquidated damages clause amount of $50,000 was the same as was used by Cantwell Cleary. It was, this Court determines, reasonable and [sic] certain aspects, certainly with respect to the covenant not to compete.

It was reasonable as to time and space, with respect to the non-compete provision. It is plaintiffs burden, as I have quoted the law, to prove that the liquidated damage clause bears a reasonable relationship to the damages likely or expected to be incurred. ¹¹⁹ This Court determines, based on plaintiffs case, alone, unrebutted at this point, that the plaintiff has proven no damages in this case. The business about the Wilhelm case, [5] that is a completely separate case, it was not the same agreement, it would only involve speculation for this Court to be able to relate that case to this case. I have no idea what happened in that case and what the damages were, what the expenses were.

Certainly, litigation expenses to enforce that agreement could not be considered by this Court as damages. The contract was breached in that the defendant did go to work for a competitor within one year after he left, and that was Atlas Alexandria. The plaintiff also posits that damages have been incurred because when an employee in a salaried position, as defendant was, for the first couple of years, he is not earning money for the company. And then, when he is switched to a commission employee, he even earns less, I believe, the amount goes roughly from $35,000, plus car expenses, to about twenty-two or so thousand, plus six thousand for car expenses.

But that comes with the territory, that has no relationship to the breach. While he is working for the plaintiff, whether or not he is earning money for the company has no bearing on damages incurred by the plaintiff when and if the defendant, as he did in this case, leaves within the one year. So those losses, if you will, that the plaintiff experiences are so irrespective of this agreement and this breach of contract and those facts arose prior to and irrespective of this agreement. So both theories that the plaintiff posits with respect to any damages suffered whatsoever are not supported by the evidence.

Therefore, there is no evidence before this Court whatsoever that this liquidated damage clause bears a reasonable expectation to the damages that the plaintiff expected to lose. It is an arbitrary figure. It was taken from the ¹²⁰ Cantwell Cleary contract in the opinion of this Court. Based on the plaintiff’s evidence and the Court’s taking the evidence in a light most favorable to the plaintiff, the $50,000 is not a valid liquidated damages clause, but rather constitutes a penalty and I will grant the motion [for judgment].

Thus, although appellee’s motion for judgment was granted, and the court found that the liquidated damages provision constituted a penalty, the court did, in fact, award damages due to a breach of contract. 6 Thereafter the parties’ noted their timely appeals. Standard of Review Maryland Rule 8-181(c) provides that, when an action has been tried without a jury, the appellate court will review the case on both the law and the evidence. It will not set aside the judgment of the trial court on the evidence unless clearly erroneous, and will give due regard to the opportunity of the trial court to judge the credibility of the witnesses. Further, “[w]hen reviewing a trial court’s construction or interpretation of a written contract, we do so as a matter of law.” Nationwide Ins.

Cos. v. Rhodes, 127 Md.App. 231, 235 , 732 A.2d 388 (1999). “[T]he determination of whether a particular clause in a contract is to be construed as providing for liquidated damages, or as a penalty, depends on the facts and circumstances in each case and is ordinarily a ¹²¹ question of law for the court.” Traylor v. Grafton, 273 Md. 649, 667 , 332 A.2d 651 (1975) (citing H.J. McGrath Co. v. Wisner, 189 Md. 260, 264 , 55 A.2d 793 (1947)). We noted in James v. General Motors Corp., 74 Md.App. 479, 484-85 , 538 A.2d 782 (1988): [W]hen ruling on a motion for a judgment the trial judge must consider the evidence, including the inferences reasonably and logically drawn therefrom, in the light most favorable to the party against whom the motion is made. If there is any evidence, no matter how slight, legally sufficient to generate a jury question, the motion must be denied. On the other hand, where the evidence is not such as to generate a jury question, ie., permits but one conclusion, the question is one of law and the motion must be granted.

An appellate court reviewing the propriety of the grant or denial of a motion for judgment by a trial judge must conduct the same analysis. (Internal citations omitted); see also Wilbur v. Suter, 126 Md.App. 518, 528 , 730 A.2d 693 (1999). DISCUSSION Whether the circuit court erred in failing to uphold the entire contract, duty of confidentiality and covenant not to compete, where the court found that the contract was valid, that the Appellee had breached the noncompetition clause of the agreement, but rejected the agreed upon liquidated damage clause and awarded a nominal sum of one ($1.00) dollar. Appellant has argued that the language of the restrictive covenant was clear and unambiguous, and that the trial court erred in not assessing damages based on the liquidated damage clause of the contract. 7 We agree with the trial court’s finding that the liquidated damage clause was not based on a ¹²² reasonable expectation of damage and was a penalty, thus leading to its award of nominal damages. 8 Under the principles of freedom of contract, parties have a broad right to construct the terms of contracts they enter into as they wish, providing the contract is neither illegal nor contrary to public policy.

In most cases, courts -will not inquire into any inherent disparity in the utility of a given exchange between parties, but solely into its voluntariness. See 24 Williston on Contracts, § 65:1, p. 213 (4th ed. 2002)(‘Williston”); see also Goetz and Scott, Liquidated Damages, Penalties and the Just Compensation Principle: Some Notes on an Enforcement Model and a Theory of Efficient Breach, 77 Colum. L.Rev. 554, n. 12 (1977). In most contract cases, the law of compensatory damages applies, providing a standard measure of compensation limited to the amount of injury incurred under a breach of the contract.

See Note, Liquidated Damages as Prima Facie Evidence, 51 Ind. L.J. 189 (1975); see also Restatement § 346 cmt. c (“The central objective behind the system of contract remedies is compensatory, not punitive.”); Ray v. Eurice, 201 Md. 115 , 93 A.2d 272 (1952); Holmes, The Path of the Law, 10 Harv. L.Rev. 457, 462 (1896)(“The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it—and nothing else.”) Liquidated damages provisions, however, allow private parties to reform that fixed concept of injury providing relief in excess, or in lieu, of compensatory damages. “[T]he fundamental purpose of a valid liquidated damages provision is to provide a reasonable measure of compensation in the event of a breach where, at the time the provision is agreed to the damages are indeterminable or will be otherwise difficult to prove.” Williston, supra, § 65:3, p. 250; see also Note, supra, 51 Ind. Law at 192-193 (collecting ¹²³ arguments for treating liquidated damages as an exception to compensation).

In determining the validity of liquidated damages provisions, courts conduct a more searching inquiry into the propriety and reasonableness of the agreement itself, under the auspices of the so-called penalty doctrine, than would be conducted in any more typical contract case. 9 See Goetz and Scott, supra, at 555; see also Clarkson et al., supra, 1978 Wis. L.Rev. at 357. Under the penalty doctrine, a liquidated damages provision fixing an unreasonably large liquidated damages amount is void as a penalty. See Restatement § 356 (“Damages for breach by either party may be liquidated ... but only at an amount that is reasonable in the light of the anticipated or actual loss[.]”) This reasonableness test ¹²⁴ “strikes a balance between ... two competing sets of principles [upholding and disallowing stipulated damages provisions] by ensuring that the court respects the parties’ bargain but prevents abuse.” Wassenaar v. Panos, 111 Wis.2d 518, 529 , 331 N.W.2d 357 (Wis.1983).

Two recognized bases for unreasonableness characterize liquidated damages provisions as unreasonable, or penalties, when the sum for damages is so disproportionate with provable damages “as to require the inference that the agreement must have been effected by fraud, oppression or mistake” or, when an “objectionable in terrorem agreement [is used] to secure performance” in place of the usual conception of just compensation. 10 See Goetz & ¹²⁵ Scott, supra, at 560-61; see also Wassenaar, supra, 111 Wis.2d at 529 , 331 N.W.2d 357 . In Traylor, supra, 273 Md. at 661-62 , 332 A.2d 651 , the Court of Appeals outlined Maryland law pertaining to liquidated damages clauses as follows: We have defined “liquidated damage” as a “ ‘specific sum of money ... expressly stipulated by the parties to a ... contract as the amount of damages to be recovered by either party for a breach of the agreement by the other.’ ” [0]ur decisions ... have held that a liquidated damage clause is within the substantive law of contracts, and—if not a “penalty”—is an enforceable provision as a sum agreed upon by the parties to be paid in the event of a breach, enforceable as any other provision or valid promise in the contract. The nomenclature used by the parties, although a circumstance, is not determinative in passing upon whether or not the payment of the designated sum is in fact a penalty. The ¹²⁶ decisive element is the intention of the parties—whether they intended that the sum be a penalty or an agreed-upon amount as damages in case of a breach and this is to be gleaned from the subject matter, the language of the contract and the circumstances surrounding its execution.

If the sum agreed upon is a reasonable forecast of the just and fair compensation for the harm that would result by a breach of the contract and the resultant injury is difficult to estimate accurately or actual damages could not be easily ascertained, such a clause has been held enforceable as liquidated damages____ Where, however, the amount agreed upon and inserted in the agreement is shown to be grossly excessive and out of all proportion to the damages that might reasonably have been expected to result from such breach of the contract, the amount specified removes it from the ambit of “liquidated damages.” (Internal citations omitted); see also Williston § 65:9, p. 266-27; 8 Maryland Law Encyclopedia, Damages § 51, p. 104-05 (2001)(“In determining the scope of a provision in a contract for liquidated damages, it will be interpreted according to the rules applicable to contacts generally.”) (citing John Cowan, Inc. v. Meyer, 125 Md. 450 , 94 A. 18 (1915)). As noted, the validity of a stipulated damages provision is a question of law for the court. 11 A legal conclusion regarding the validity of a stipulated damages provision, however, is dependent on factual determinations of the trial judge “including such matters as the existence and extent of the anticipated and actual injury to the nonbreaching party.” Wassenaar v. Panos, 111 Wis.2d 518, 525 , 381 N.W.2d 357 (Wis.1983). 12 ¹²⁷ Burden of Proof An initial inquiry is determining which party shouldered the burden of proof. 13 We find no definitive Maryland law on this subject. Expressing skepticism concerning the traditional common law treatment of liquidated damage clauses, this Court very recently stated in dicta that, in light of the principles of freedom of contract, “[t]he burden of proving that a particular damage stipulation is not enforceable is ‘on the party seeking to invalidate’ it.” Smelkinson Sysco v. Harrell, 162 Md.App. 437, 447 , 875 A.2d 188 (2005)(citing Mattvidi Assocs. Ltd. P’ship v. NationsBank of Va., 100 Md.App. 71, 92 , 639 A.2d 228 , cert. denied, 336 Md. 277 , 647 A.2d 1216 ).

We also note that our citation to Mattvidi is not conclusive of Maryland law, for that case was decided under Virginia law. See Mattvidi Assocs. Ltd. P’ ship, supra, 100 Md.App. at 91-92 , 639 A.2d 228 . As we will develop further below, Mattvidi involved a dispute between two commercially sophisticated parties about construction of their agreement fixing the amount of a late charge.

See id. at 93 , 639 A.2d 228 (“When two commercially sophisticated parties freely enter into an agreement containing a late charge clause ... it seems entirely appropriate that the burden of proof should be on the party who later claims that the clause is invalid.”) It is significant, as the Smelkinson Sysco Court noted early on in its opinion, that it was not dealing with a liquidated ¹²⁸ damages provision. Nonetheless, the Court discussed the effect of a reasonableness inquiry. 14 See Smelkinson Sysco, supra, 162 Md.App. at 451 , 875 A.2d 188 . Not discussed in either Mattvidi or Smelkinson Sysco is Mount Airy Milling & Grain Co., supra, 118 Md. 371 , 84 A. 533 , wherein the Court of Appeals indicated that the burden was on the party seeking to sustain a liquidated damages penalty to show it was incorporated intelligently to fix a measure of damages. The Court noted that “speaking of a sum of money in gross for the nonperformance of an agreement ‘[I]t will not, as of course, be considered as liquidated damages, and it will be incumbent on the party who claims it as such that they were so considered by the considered by the contracting parties.’ ” Mount Airy Milling & Grain Co., supra, 118 Md. at 377 , 84 A. 533 (quoting Tayloe v. Sandiford, 7 Wheaton 13 , 5 L.Ed. 384 (1822)). 15 , 16 ¹²⁹ The circumstances of the case sub judice militate against a strict application of the assignment of the burden of proof outlined in Mattvidi and subsequently in Smelkinson Sysco , because we believe those cases to be inapposite.

Courts of other jurisdictions are sufficiently divided on the issue of burden of proof in stipulated damage cases as to not prove instructive. See, e.g. Mattvidi Assocs. Ltd. P’ ship, supra, 100 Md.App. at 92 , 639 A.2d 228 (collecting various instances of divergent case law).

The majority places the burden of proof on the party challenging a stipulated damages provision, while others place the burden on the party seeking its ratification. See, e.g., Williston, supra, § 65:30, 355-58 (outlining various reasons courts put forth placing the burden of proof on the non-breaching party); Note, supra, 51 Ind. L.J. at 205 (arguing that liquidated damages clauses should serve as prima facie evidence subject to rebuttal by the defendant, who must prove that the clause is inconsistent with actual damages). Those courts that place the burden on the party challenging the provision argue that doing so comports with the protections afforded the non-breaching party by designating stipulated damage provisions in the first place.

See, e.g., S. Brooke Purll, Inc. v. Vailes, 850 A.2d 1135, 1138 (D.C.2004)(recently clarifying District of Columbia law on the subject of the allocation of the burden of proof); Wassenaar, supra, 111 Wis.2d at 526 , 331 N.W.2d 357 (“Placing the burden of proof on the challenger is consistent with giving the nonbreaching party the advantage inherent in stipulated damages clauses of eliminating the need to prove damages, and with the general principle that the law assumed that bargains are enforceable and that the party asking the court to intervene to invalidate the bargain should demonstrate the justice of his or her position.”) Those courts that place the burden on the party seeking enforcement of a liquidated damages clause do so, inter alia, because the party seeking enforcement has the “most immediate access to the evidence on the issue of both (a) the difficulty of advance estimation of damages and (b) the reasonableness of the forecast.” Pacheco v. Scoblionko, 532 A.2d 1036 , 1039 ¹³⁰ (Me.1987). A gray area also exists in which even courts that place the burden of proof on the breaching party do so only when it appears that the stipulated damages clause at issue is not patently out of proportion with expected loss. See Little v. Rohauer, 707 P.2d 1015, 1017 (Colo.Ct.App.1985)(noting that “the burden of proving that a liquidated damages clause constitutes a penalty is on the party so asserting, unless it patently appears from contract itself that the liquidated damages agreed upon are out of proportion to any possible loss.”) From our review of those cases, we can conclude that the bargaining position of the parties contributes to the prima facie determination of the validity of a particular stipulated damages provision. One basis for deeming a stipulated damages provision unreasonable is if damages are so excessive as to demonstrate an inference of unfairness in bargaining.

Drawing upon the cases, articles, and treatises, we conclude that a non-breaching party cannot simply survive the legal test of reasonableness, regardless of the assignment of the burden of proof, where, as in the case sub judice, the court is not dealing "with a freely negotiated damages provision made between two parties of equal sophistication. Thus, the ultimate question of the assignment of the burden of proof, in cases where gross inequality of bargaining power exists, ought to be resolved in favor of the non-proponent of the provision, because the stipulated damage may prove unreasonable a. priori. 17 See District Cablevision Limited P’ship v. Bassin, ¹³¹ 828 A.2d 714, 723-24 (D.C.2003)(“[W]here there is a disparity of bargaining power and one party unilaterally imposes a liquidated damages provision in an adhesive contract, the skepticism (bordering, it has been suggested, on outright hostility) shown by the common law to liquidated damages is at its height.”) Reasonableness “The reasonableness of the amount fixed as liquidated damages is to be determined from the standpoint of the parties at the time the contract was made.” Traylor, supra, 273 Md. at 663 , 332 A.2d 651 (citing Hammaker v. Schleigh, 157 Md. 652, 667 , 147 A. 790 (1929)). “Further, one of the elements of a valid liquidated damages provision is that the anticipated damages be ‘in their nature uncertain and incapable of exact ascertainment’ ” United Cable Television of Balt. Ltd. P’ship v. Burch, 354 Md. 658, 674 , 732 A.2d 887 (1999)(quoting Anne Arundel County v. Norair Eng’g Corp., 275 Md. 480, 492 , 341 A.2d 287 (1975)). In Holloway v. Faw, Casson & Co., 78 Md.App. 205, 240 , 552 A.2d 1311 (1989)(quoting Massachusetts Indemnity and Life Ins.

Co. v. Dresser, 269 Md. 364, 368-69 , 306 A.2d 213 (1973)), we set forth the following three-part test outlining the essential features of a valid liquidated damages clause: (1) The clause “must provide ‘in clear and unambiguous terms’ for ‘a certain sum ’ ” (2) “[T]he liquidated damages must reasonably be compensation for the damages anticipated by the breach” (3)