Dental and Medical Counsel Blog

What Are Liquidated Damages?

December 1, 2021
Liquidated Damages

The term “damages” refers to the physical, mental, or monetary injuries that you suffer when your legal rights are violated. The most well-known example of damages are medical expenses after a car accident. In many cases, it is very clear that a car accident caused a broken arm, for example. The damages you would suffer for that broken arm include medical expenses, lost time away from work while you were healing, and your physical pain and suffering.

While a broken arm is a pretty straightforward damage, not all damages are as easy to show. In the employment context, for example, you might know that having an employee share your business information (like patient lists or internal processes) can cost your practice money. However, it can be a real challenge to determine how much sharing that information hurts your business. In fact, in some cases, it can be difficult to tell whether it harmed your business at all.

In those situations, you might want to use a term called “liquidated damages” to help you decide what your monetary damages should be if certain legal rights are violated.

Defining Liquidated Damages

Liquidated damages are a pre-set amount of damages that will be imposed if certain legal rights are violated. These terms are generally found in written contracts of all shapes and sizes. They are used when it would be very difficult or impossible to measure the amount of damage that one party would suffer if the contract at issue is breached or violated in a specific way.

Liquidated damages clauses are very useful because both parties know at the outset what the damages will be if a breach occurs. These clauses, when enforceable, help avoid having to employ experts to prove how much harm someone suffered because of the breach. They also avoid having to present a wide variety of facts to prove that a party suffered harm.

Consider an Example…

Imagine that you employ a new dentist in your practice. This new employee will work for you for several years, and then she will be considered for a partnership stake in your practice. As part of this arrangement, you share a great deal of internal information about your practice, including a specialized process that you use to track patient files. This tracking system allows you to look up and serve your patients faster and much better.

This employee decides to leave your practice after two years. They go to the dental practice ten miles from your office. You hear that they have started using your tracking system, and you notice that you begin losing patients to your former employee’s new employer.

In that situation, you would need to show a few things to prove your damages, including:

  1. Which specific patients left
  2. The specific patients left because of the use of the tracking system at the other location
  3. The revenue that those patients would have generated if they had stayed
  4. Any other losses from potential new patients that you would have gotten that you can no longer obtain

It is easy to see why estimating the full value of these damages can be very difficult. You assume that the patients went to the other dentist because of the information your former employee has and is using, but you have to prove it to get damages.

In this type of situation, having the employee sign a non-compete and confidentiality agreement that includes a liquidated damages clause would be very helpful. If you have a liquidated damages clause, you can avoid having to prove this specific information as part of your legal case. Instead, you simply have to show that the information is being used in a way that breaches your agreement.

Enforcing Liquidated Damages Clauses

Although liquidated damages clauses can be very helpful, they have to be drafted carefully to ensure that they are enforceable. This is particularly true in certain states such as California. In many situations, if a California liquidated damages clause is phrased as a penalty, it will often not be enforceable. Instead, you have to ensure it meets a few criteria to withstand a court reviewing your contract terms.

1. The damages are difficult to estimate.

In our example above, the damages involved in the breach would have been very difficult to calculate and estimate. However, if it would be simple to calculate the damages, a liquidated damages clause would not make sense.

For instance, if you are buying a product that costs $100, it is clear that your damages for not receiving that product would be the $100 you paid for the product. In that situation, a liquidated damages clause would not add much value—and it would likely be unenforceable.

2. The amount of damages is reasonable.

It is more likely to be set aside if you include a huge dollar figure as your liquidated damages. In our example, if you include a $1 million damages clause, but your practice only nets $100,000 per year, that number likely will not make sense.

However, a $1 million liquidated damages clause might be feasible if your practice makes $1 million every year. In that case, losing $1 million over the life of several patients or clients (or the employee) could be possible.

If a party wants to increase the likelihood that their liquidated damages provision is enforced, they should take the time and effort to estimate what a breach of a specific term or condition of the contract would realistically cost. The closer your liquidated damages number is to reality, the better.

3. The amount of damages is not a penalty.

Keep in mind that just because a contract has a liquidated damages clause does not automatically mean that it will be enforced. Liquidated damages clauses that function like a fine or penalty are routinely set aside in California and several other states. To ensure that the clause is not really a penalty, a court will often look at the “actual harm” that the breach might have caused. If the harm is very minimal, but the liquidated damages number is large, it will sometimes be ignored.

Liquidated Damages in the Real Estate Context

Liquidated damages provisions are relatively common in employment and independent contractor agreements. You will also occasionally see them as part of real estate contracts and business/practice sales.

Practice Sales

When you purchase a practice, you often get patient lists and goodwill with the purchase. Those assets only really have value if the previous owner agrees not to use their knowledge and power regarding these assets. If a prior dental practice owner opens a new practice down the street, for example, the price you paid for the goodwill might as well have been thrown out the window.

In practice transitions, liquidated damages provisions are often used in the context of the sale of proprietary information, such as patient lists and business methods. Non-compete violations will also usually trigger liquidated damages provisions as well.

Commercial Real Estate

Liquidated damages are also used in the context of commercial real estate sales, specifically when a buyer fails to perform their part of the bargain. The other remedy available is “specific performance,” which essentially requires the buyer to turn over the real estate. In those cases, the liquidated damages clause takes the place of requiring specific performance.

Even if there is a liquidated damages provision in a real estate contract, there may be circumstances when asking for the actual damages might still be an option.  

Get Help Evaluating Your Options Regarding Liquidated Damages

Whether you think you might want to add liquidated damages provisions to your contract, or you need to interpret a liquidated damages clause, Dental and Medical Counsel can help. Call 925-999-8200 to get more information or submit a contact us form to schedule a complimentary consultation with medical and dental attorney Ali Oromchian.

Need Help with Your Contract? Contact Us Today for a Complimentary Consultation!


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