By Daniel A. Cohen and Jeff Daniel, of Nelson Mullins Riley & Scarborough LLP
On Nov. 18, 2019, the Board of Trustees for the University of Arkansas (“UA”) filed a lawsuit against former defensive line position coach John Scott, Jr., seeking to recover $187,862.32 in liquidated damages under his employment contract’s buyout clause, as well as attorneys’ fees and pre-judgment interest.
Scott entered into the employment contract on Jan. 18, 2018, earning an annual salary of $340,000 over the contract’s two-year term ending on Feb. 28, 2020. Under the buy-out clause, however, if he terminated the contract before that date, he became obligated to pay UA 50 percent of any remaining salary to which he would have been entitled under the remaining term, within 30 days thereafter. The only exceptions were if Scott left to become a college head coach or a full-time NFL coach, or if he had the written approval of certain UA officials.
The buyout clause states that, if Scott terminated the contract prematurely, UA would suffer damages in an amount difficult to determine, including expenses incurred in searching for and hiring a replacement coach, as well as other “tangible and intangible detriment” to the football program and its fans and donors. In exchange for this amount, UA agreed it would release any claims it might have against Scott’s new employer. Both parties also recite that the payment was “not a penalty.”
According to UA’s complaint, on Dec. 31, 2018, University of South Carolina Head Football Coach Will Muschamp called UA Head Football Coach Chad Morris to ask about hiring Scott as a defensive line position coach. During that phone call, Morris advised Muschamp of the buyout clause in Scott’s employment contract with UA. On Jan. 19, 2019, Scott told UA officials that he intended to take the USC job and asked “if anything could be done about” the buyout clause. UA declined to waive the clause. Nonetheless, on Jan. 23, 2019, Scott terminated his employment with UA and accepted the USC job, earning an increased annual salary of $435,000.
Scott has appeared in the lawsuit and removed it to federal district court on diversity grounds. He argues that the buyout clause is unenforceable because UA officials “specifically represented” to him that UA would “take care of” the buyout provision if he ever accepted a position that was better for his family or career. Scott contends he was induced to enter into the buyout clause through fraud, deceit, or misrepresentation.
Liquidated Damages and Buy-Out Clauses
In the lawsuit, UA contends that, by terminating the contract early, Scott now owes liquidated damages under the buyout clause. Over recent years, buyout clauses have become increasingly commonplace in the college football coaching carousel, essentially providing for liquidated damages in the event of the early termination of an employment contract.
Under Arkansas law, courts will generally enforce liquidated damages clauses, provided “the sum is a reasonable forecast of just compensation for the injury” and “the harm is difficult or incapable of accurate estimation.” Roberts Contracting Co. v. Valentine-Wooten Road Public Facility Bd., 2009 Ark. App. 437, 320 S.W.3d 1, 17 (2009). If the agreed-upon sum “bears no reasonable relationship” to the anticipated damages, it is considered a “penalty” and unenforceable. Muradian v. Haley, 12 Ark. App. 138, 140, 671 S.W.2d 210, 212 (1984). Whether a “liquidated damages” amount constitutes a “penalty” is a question of fact. Roberts, 320 S.W.3d at 17. Courts will consider contractual language about the parties’ intent, but there are no magical words that are dispositive of the issue. G & K Servs., Co. v. Bill’s Super Foods, Inc., No. 3:08cv0048 SWW, 2009 WL 2982971, *10 (E.D. Ark. Sept. 15, 2009).
Structuring An Enforceable Liquidated Damages Clause
UA is no stranger to buyout clauses, having included them in many of its football coaches’ contracts over the years. And in Scott’s case, the parties drafted the buyout clause to make it sound as much like an enforceable “liquidated damages” clause—and not like a penalty—as possible. General counsels representing colleges and universities would do well to take note of some of the drafting conventions used in it.
While not dispositive, the provision devotes an entire paragraph to memorializing the parties’ mutual understanding that (i) UA was “committing substantial financial resources” to the football program, (ii) if Scott terminated his contract early, UA would likely suffer damages, and (iii) it was presently difficult to calculate such future damages. Though the contract does not exhaustively list all types of financial injury UA might sustain in the event of early termination, it reasonably forecasts that UA would incur significant expenses in securing a replacement coach, as well as other “tangible and intangible detriment” to the football program and its fans and donors. Based on the Complaint, such “detriments” included (i) loss of current and prospective student-athletes, (ii) competitive disadvantage, (iii) “loss of program continuity”, (iv) “revision and implementation of signals, strategies, and schemes”, and (v) loss of revenue if Scott’s early departure negatively affects program performance or results.
Also, it is well-known that coaching searches can be expensive and time-consuming. Depending on the circumstances, a football program could reasonably anticipate that it would have to pay a replacement coach a higher salary than his predecessor. Beyond typical inflation, there has been a dramatic, increasing trend in college football coaching salaries in recent years. According to a recent USA Today study,[1] in the 2019-2020 season, the average total compensation for the 122 FBS coaches in the study was $2.67 million—representing a nine percent increase over the previous season. This was the largest percentage increase in four years.
The proliferation of buyout clauses is likely only accelerating that trend. If a football program must find a replacement coach, it should anticipate the likelihood that the replacement coach will have his own buy-out clause with which to contend. When a coach triggers a buyout clause by leaving a school early, that coach will likely look to the new school to cover all or some of the buyout payment via a higher stated salary. The new school is often willing to do so to minimize distraction and enable the coach to focus on developing a winning program.
Considerations When Structuring a Buy-Out
When negotiating and structuring a buyout clause, a school should take these considerations into account. The buyout amount should be reasonably sufficient to cover not only future salary escalation, but also any pain the school might have to absorb in paying a replacement coach’s buy-out from a previous employment contract.
Given the extreme difficulty of precisely quantifying these types of damages, UA’s contract with Scott does not attempt to specify an arbitrary estimate of future damages. Rather, it uses a formula (50 percent of salary owed during the remaining term) to provide a contingent amount. Under this framework, the buyout amount would necessarily decrease over time, as UA sees more return on its investment in Scott, along with a reduction in opportunity cost. Consequently, UA hopes the court will not deem Scott’s buyout a “penalty” and refuse to enforce it. Indeed, under the contract language, both UA and Scott agreed that this is a “fair and reasonable” amount and that it is “not a penalty.”
Practitioners should explore similarly creative ways to structure buyouts using formula-based metrics. They can further strengthen the enforceability of such provisions by describing the types of future damages they reasonably anticipate in the event of an early contract termination, and the difficulty of ascertaining those amounts.
Daniel Cohen
Jeff Daniel
Daniel Cohen, partner at Nelson Mullins, has more than 20 years of experience working in higher education athletics matters and his Title IX practice includes performing athletics audits and compliance reviews, developing strategic planning initiatives and representing schools in NCAA investigations and appeals. He represents universities in every Power Five conference as well as top public research institutions in 10 states in Title IX matters.
Jeff Daniel is an associate in the Atlanta office where he practices with the School and College Law Practice Group, focusing on litigation and regulatory compliance issues. His practice areas include Higher Education, K-12 Public and Private Schools, Litigation and Employment and Labor.
[1] Berkowitz, Steve, Tom Schad, and John Kelly. “6 surprising number from college football coaches salaries report.” USA Today 22 Oct. 2019
