Wednesday, April 11, 2007

Warning: Legal Analysis Ahead - Beilein's Buyout

A week or so ago, when it was finally official that Beilein was heading off to "greener" pastures in Michigan, the silver lining to that ominous rain cloud was his $2.5 million dollar "buyout" provision in his contract. Most fans felt we could use that money to improve various aspects of the athletic program or at least get some hookers for Hardesty's going away party. Well, not so much.

Apparently, no one is going to pay it unless court ordered. From, ugh, ESPN:

Beilein won't go on the record about his intentions in seeking legal counsel, but multiple sources have told ESPN.com that Beilein is trying to get the buyout reduced -- if not wiped out entirely. Pastilong said he wouldn't discuss anything more about the buyout, except that, "We expect the contract to be honored. A contract is a contract. [The buyout is for $2.5 million] and that's what the contract is for."

Well, not exactly.
The short story: This clause is potentially uneforceable (more on this below). If the judge finds that it IS enforceable, WVU gets $500,000/year ($2.5M). If the judge finds it unenforceable, then the liquidated damage clause is out, but Beilein is still on the hook for "damages", which, unfortunately here, seem to be minimal.
The long story: Beilein's buyout clause was not written particularly well. Beilein's buyout clause is technically what is called a liquidated damage clause. Liquidated damage clauses allow parties to specify in advance an estimated value of how badly a party would be damaged if the other party breached the contract. However, they're typically only enforceable if the contract provides that "the parties hereto hereby agree that in the event of a breach by either party that the nature of this Agreement would prevent an accurate measurement or estimation of the actual damages incurred by the nonbreaching party" and "that the parties hereto hereby agree that $xxx,xxx.xx is a fair and reasonable estimation of damages resulting for a breach and that the nonbreaching party shall be entitled to this amount in liquidated damages in the event of a breach." So, lets take a look, does Beilein's contact have this stuff:


Crap. Who drafted this thing? What? Some second year law student? Where's Cardi!? Regardless, the liquidated damage clause, i.e. buyout, is probably still enforceable. However, it faces two potential "uphill battles". First, a liquidated damage clause is only enforceable if actual damages are difficult to measure and the amount is found to be reasonable, i.e. $500,000 is a reasonable estimate of damages. That's why drafters typically include the "the parties agree that it will be hard to esitmate and that this is a reasonable amount" language. Unfortunately, that language is missing from Beilein's contract and so more open to review by a judge than if it had that language.

Second, there are other limitations on employment contracts. For instance, clauses that make it unreasonable or overly difficult for a former employee to pursue new employment can be striken from a contract if its found to be against the public policy encouraging the freedom of employment.

So, if this is actually litigated, WVU has to be concerned whether the "iffiness" of the liquidated damage clause and the prohibition against restricting future employment weighs so strongly against it that a judge rules it as unenforceable. While I find it unlikely, the potential exists for such a ruling. Consequently, WVU may have to decide whether to roll the dice and have the full amount enforced or settle for a smaller amount. And this, I imagine, is why Beilein is fighting it.

*This is not legal advice. This is only general legal information. Do not rely upon the information provided herein. This is also not a legal advertisement.

*More analysis in the comments. Please read on. Questions? Feel free to ask.

96 comments:

letsplaytummysticks said...

Funny that there is no time table for payment either. That will also be litigated. Whether it is all due now or spread out over the remainder and if now does inflation get the amount reduced somewhat.

Option Spread said...

Eh, implied into any contract, unless specifically provided otherewise, is a reasonable time frame for performance. What's reasonable? Who freakin' knows?

Furthermore, the "reasonableness" of the amount is pretty suspect considering the yearly penalty is approximately 5/8 of his yearly salary.

letsplaytummysticks said...

But the fact he was willing to risk it without getting it waived, reduced, or someone else to pay it shows how bad he wanted out. For those who will defend Beilein to the death, he hated it here and would have taken a job at Chucky Cheese if it meant he could leave.

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letsplaytummysticks said...

I thought you said 15%.

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I pulled the ladder out from under him and yelled 'How's it hanging.'

letsplaytummysticks said...

The Charleston Gazette also attemted to break down the contract. And much like Michael Scott they went to Wikapedia:

In the third, signed March 30, 2005, the contract is extended until April of 2012. And deep into the amendment is the following language: “If Coach terminates the agreement for any reason without breach of the Agreement by University, in addition to all other forfeitures and penalties provided herein, Coach will pay University a sum equal to Five Hundred Thousand Dollars ($500,000) per year for the remainder of the Agreement’s term, subject to proration for any partial year.’’

Sounds pretty cut-and-dried from this one-class-of-Poly-Sci observer. Unless Beilein’s lawyers can prove breach of contract, the new Michigan coach owes WVU serious cash. Breach, by the way, is a “legal concept in which a binding agreement or bargained-for exchange is not honored by one or more of the parties by non-performance or interference with the other party’s performance,’’ according to Wikipedia.

Now that is some serious analysis. Unless they can prove breach by WVU they are screwed according to non-lawyer, never taken a law class guy. No other arguments apparently.

CTMountaineer said...

Beilein wanted a pay raise. He also wanted the security of a longer term contract. He received both in the agreement.

In consideraton for these valuable benefits, he agreed to pay a penalty if he breached the contract by failing to perform until its completion. He had proper legal counsel when he agreed to this provision. In fact, the penalty was his idea and freely agreed to in writing.

Suddenly he decided he wanted to move elsewhere. He bolted, renigued in his written word, and now owes the penalty for doing so.
It's his moral and legal obligation to pay what he owes.

Option Spread said...

Ah, the "moral obligation" argument I hear from so many of my clients. Unfortunately, what should happen and what does happen are occasionally two completely different things.

The law regarding liquidated damage clauses evolved to its current status because judges decided it was against the public policy for parties to penalize a breaching party (following the premise that a breach isn't necessarily a bad thing, but instead, occasionally, an economically beneficial event).

Referring to an old case book (since I don't have access to WV case law): "It is plain that a provision which requires, in the event of contractual breach, the payment of a sum of money grossly disproportionate to teh amount of actual damages provides for a penalty and is unenforceable.... The rule is now well established. A contractual provision fixing damages in the event of a breach will be sustained if the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or diffult of precise estimation.... If, however, the amount fixed is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced." Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 361 N.E.2d 1015 (NY, 1977).

Our concern remains the fact that the penalty against Beilein is such a large percentage of his income, it begins to look like a penalty instead of a reasonable estimation of damages. Further, the contract does not contain any of the usual language which limits court analysis (as previously discussed).

Your own argument asserts the $500k/year is a "penalty" and if so, it is presumptively unenforceable.

It is true that Beilein had his own lawyers who negotiated this contract on his behalf and I'm quite sure they were aware of the poor wording and questionable enforcement of that provisions at the time of execution, which is probably why he went ahead and signed it fully expecting to challenge it in the future if necessary.

chutta said...

I like that CTMountaineer seems to have gone out of his/her way to conjure up a misspelling of "renege". Well done.

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Interestingly, some venues offer special bingo games for kids although some halls don't allow players to have companions while playing. Suppose you bring kids with you, don't let them run around the venue and bother other gamers. They should behave well whilst you play and the game proceeds. Play quietly and don't recite the numbers you desperately want to come off because you'll be much of a disturbance if you do. Decorous playing is expectant of all players, even those who play roulette at casinos. Also, having a valid identification is important because you don't know you might win and need to present credentials.

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