By Daniel B. Fitzgerald
Litigation involving a university and one of its former coaches is not a novel concept in the realm of Division I collegiate athletics. As demonstrated in the often discussed case involving West Virginia University and its former football coach, Rich Rodriguez, and more recently repeated in cases involving Marist University and Kent State University, litigation may arise when a coach’s departs one school for a more lucrative position at another school.
A new piece of litigation involving the University of Hawaii and former men’s basketball coach Gibson Arnold, however, presents a different scenario. The University of Hawaii (the “University”) terminated the employment of its basketball coach, Gibson Arnold (“Arnold”), without cause in October 2014, with one-year remaining on his employment agreement. The employment agreement between the University and Arnold (the “Agreement”) provided that Arnold would receive liquidated damages if his employment was terminated by the University without cause. Such liquidated damages amount to approximately $1.4 million. Reportedly faced with the demand for payment from Arnold, the University took the offensive, suing Arnold in Hawaii’s Circuit Court of the First Circuit. The University seeks, among other things, a declaration from the court that the University is not responsible to pay the liquidated damages set forth in the coaching contract. The University further claims that Arnold violated NCAA rules including Level I and Level II NCAA violations, which involve the alleged obstruction of the investigation concerning such alleged violations and a disagreement over a hotel bill in the amount of $2,123.52.
Liquidated damages clauses, often referred to as buyout clauses, are commonplace in collegiate coaching contracts. It is a basic tenant of contact law that liquidated damages must be reasonably related to a party’s anticipated damages in the case of a breach and may not be a mere penalty. The seminal sports case dealing with a liquidated damages clause in the termination of a coach is Vanderbilt University v. DiNardo. In DiNardo, Vanderbilt University (“Vanderbilt”) sued its former head football coach, Gerry DiNardo, following his resignation and acceptance of the head coaching position at Louisiana State University (LSU). Vanderbilt sought payment of the coach’s buyout clause, triggered when he accepted the position at LSU. The amount owed under the buyout clause in question was calculated by multiplying DiNardo’s base salary by the number of remaining years on his contract. DiNardo argued that the clause was a penalty and therefore unenforceable. TheSixth Circuit Court of Appeals upheld the trial court’s enforcement of the liquidated damages clause. The District Court’s analysis of whether the liquidated damages clause was reasonable, and not a mere penalty, included a discussion concerning the difficulty in determining damages:
The potential damage to [Vanderbilt] extends far beyond the cost of merely hiring a new head football coach. It is this uncertain potentiality that the parties sought to address by providing for a sum certain to apply towards anticipated expenses and losses. It is impossible to estimate how the loss of a head football coach will affect alumni relations, public support, football ticket sales, contributions, etc…
Vanderbilt University v. DiNardo, 174 F.3d 751, 756 (6th Cir. 1999) quoting 974 F.Supp. at 642.
In Hawaii v. Arnold, the tables are turned. Upon termination of his employment, the University paid Arnold his outstanding wages for the year but refused to pay him liquidated damages to which the parties had agreed under the following clause in the Agreement:
This Agreement may be terminated by the University at any time without cause upon ninety (90) days written notice to Coach. In such event, University will pay Coach as liquidated damages, a lump sum equal to the total amount of compensation earned under the terms of this Agreement as of the date of the termination (incentives and extensions are not included in the liquidated damages).
The question for the court is whether the liquidated damages clause constitutes a reasonable forecast of Arnold’s damages or a mere penalty. Similar to DiNardo, the amount of liquidated damages is determined by a formula using Arnold’s salary (although the formula looks to salary earned during the period of employment rather than the period remaining on the employment agreement). Arguably a coach’s damages from losing his job are even more difficult to quantify than a university’s damages when losing a coach. It is unlikely that Arnold will be a candidate for a comparable job following his termination by the University. How will his career be affected if he accepts employment as an assistant or as a head coach at a lower level of basketball? What reputational damage will result? How long, if ever, will it take him to achieve a comparable position? These unknown factors demonstrate the difficulty in demonstrating actual damages and support the enforcement of the liquidated damages provision.
A review of the University’s Complaint also begs the question of why the University did not attempt to terminate Arnold’s employment with cause rather than fight the liquidated damages battle. Coaching contracts typically contain for cause termination provisions, which can be triggered by NCAA violations. The University clearly sets forth various alleged violations of NCAA rules in its Complaint. So why didn’t the University terminate Arnold’s employment with cause? Without the benefit of reviewing the Agreement and accompanying facts, this question is left unanswered. (Although, according to Sam Spangler of khon2.com, Arnold’s attorney, James Bickerton, argues that the University’s strategy is related to the ongoing grievance process and NCAA issues in connection with this matter). Regardless, it is an interesting legal twist.
Hawaii v. Arnold is only in the preliminary stages of litigation. Nevertheless, this case bears watching by universities and coaches alike due to its unique set of facts within the landscape of collegiate coaching contracts.
Daniel B. Fitzgerald is an associate at Brody Wilkinson PC in Southport, Connecticut and publisher of the blog Connecticut Sports Law (www.ctsportslaw.com). He can be reached at 203-319-7154 or dfitzgerald@brodywilk.com.
