By Daniel B. Fitzgerald*
In NPS, LLC v. Minihane, 451 Mass. 417 (2008), the Massachusetts Supreme Judicial Court decided a case that could have serious ramifications for seat license holders around the National Football League (NFL) and in other professional sports. The Court, by enforcing a liquidated damages clause in a 10-year agreement for club level seats, required a seat license holder to pay the Patriots the full amount of his tickets over the course of the agreement, despite the ticket-holder’s breach after a single season. The issue of whether the Patriots could re-sell the seat licenses, and mitigate their losses, was deemed irrelevant by the Court.
In May 2002, a new found sense of excitement surrounded the New England Patriots. Three months earlier, the Patriots defeated the heavily favored St. Louis Rams for their first Super Bowl victory. Adding to this excitement was the construction of state-of-the-art Gillette Stadium, which was scheduled to open the following fall and take its place among the NFL’s premier venues. Against this backdrop, Paul Minihane entered into an agreement to purchase a 10-year license for two luxury seats located in Gillette Stadium’s Club Level with NPS, LLC (“NPS”), the stadium’s developer.
The terms of the agreement were as follows: Minihane would pay $3,750 per seat, per season from 2002 to 2011- a total commitment of $75,000. The agreement included a liquidated damages clause which provided that in the event of a default, Minihane’s payments would be accelerated so that he would be required to pay the entire balance remaining on the 10-year agreement. Minihane used all but 2 tickets during the 2002 season, and made payments totaling $9,500. Subsequently, he made no further payments.
NPS sought to enforce the contract and filed a complaint in Massachusetts Superior Court. Minihane argued that the liquidated damages clause was invalid as it did not represent a reasonable forecast of damages. Although Minihane’s seats had not been re-licensed, the Patriots used unsold club seats for VIPs, charities, players’ families and employees. Minihane argued that goodwill was generated, to the Patriots’ benefit. Therefore, he argued that the Patriots and NPS did not suffer the full extent of the damages set forth in the liquidated damages clause. Conversely, NPS defended the reasonableness of the clause in light of its financing of the construction of Gillette Stadium. At the time of its construction, the $300 million stadium was the most expensive privately financed stadium in the United States. To obtain financing, NPS needed to provide bond holders with assurances of guaranteed revenue streams. The 10-year seat licenses provided one such guaranteed revenue stream. In fact, the seat license agreements were pledged as collateral in connection with the financing of the stadium.
Following a bench trial, the trial court found in favor of NPS. However, the trial court ruled that the accelerated damages clause was unenforceable on the grounds that the amount due was “grossly disproportionate to a reasonable estimate of actual damages made at the time of contract formation.” NPS appealed the trial court’s decision and the case was transferred to the Massachusetts Supreme Judicial Court.
The central issues before the Supreme Judicial Court were the enforceability of the agreement’s liquidated damages and, as naturally follows, whether NPS was entitled to the entire amount of the 10-year contract. The Court utilized a two-pronged test to measure the legality of the disputed clause:
(1) at the time of contracting the actual damages flowing from a breach must have been difficult to ascertain; and
(2) the agreed upon sum reflected in the liquidated damages clause must represent a “reasonable forecast of the damages expected to occur in the event of a breach.”
The Court held that the liquidated damages clause did in fact meet the applicable test. First, NPS’s damages were found to be difficult to ascertain at the time of contract. Although the Patriots were coming off a Super Bowl victory, the demand for luxury seats was, and remains, variable. It would have been extremely difficult, if not impossible, to predict how long it would take NPS to resell Minihane’s seat licenses. Second, Minihane failed to meet his burden of proof as to the claim that the liquidated damages were unreasonable or unconscionably excessive. In fact, Minihane stood to receive a substantial benefit from the agreement in the form of guaranteed luxury seats for 10 years, without any possibility of price increases. Although the Court found that the “terms may be harsh, especially when, as here, the breach occurred early in the life of the agreement,” the Court did not find that the terms were unreasonable.
Although not expressly raised by the parties, the Court tackled the issue of whether mitigation should be considered in the context of a liquidated damages clause. This issue was one of first impression in Massachusetts. The Court held as follows:
[I]n the case of an enforceable liquidated damages provision, mitigation is irrelevant and should not be considered in assessing damages. When parties agree in advance to a sum certain that represents a reasonable estimate of potential damages, they exchange the opportunity to determine actual damages after a breach, including possible mitigation, for the “peace of mind and certainty of result” afforded by a liquidated damages clause.
The Court ultimately awarded NPS the total amount of unpaid fees due under the agreement – $65,500, plus interest. The practical effect of the Court’s ruling is that NPS can collect the entire amount of Minihane’s 10-year seat license contract and immediately resell the license, presumably at a higher price. Thus, NPS could be paid twice for the same seat licenses, which could certainly be considered a windfall.
NPS, LLC v. Minihane has the potential to effect seat license holders of NFL teams and other professional sports teams as well. The proliferation of expensive new stadiums in professional sports has triggered an emphasis on luxury suites and club seats, the sale of which can be directly tied to the financing of the stadium. Owners of seat licenses might find themselves hard pressed to extricate themselves from their license agreements considering courts may ignore the defense of mitigation and the question of whether the team can simply re-sell the licenses to another willing party.
Daniel B. Fitzgerald, publisher of the blog Connecticut Sports Law (http://ctsportslaw.com), is an attorney at Updike, Kelly & Spellacy, P.C. in Hartford, Connecticut, where he practices in the area of sports law. He can be reached at (860) 548-2613, or at dfitzgerald@uks.com.
