Eleventh Circuit Invalidates Liquidated Damages Provision As Impermissible Penalty

In Autauga Quality Cotton Association v. Crosby, 2018 WL 3097948 (June 25, 2018), the Eleventh Circuit invalidated a liquidated damages provision, holding it to be an impermissible penalty under Alabama law.

Appellant Autauga Quality Cotton Association is a not-for-profit cotton-marketing association based in Central Alabama whose mission is to provide price stability to both farmers and consumers by pooling the cotton grown by its more than 1,000 members and then marketing it for sale.  The appellees are individual members of the Crosby family who own a cotton farm in Alabama and who were members of Autauga for many years before deciding to market their cotton elsewhere in 2010.

Autauga and the Crosbys entered into a marketing agreement in 2009 with a “sign-out” requirement, requiring the Crosbys to give notice before a certain deadline if the Crosbys had decided not to market the 2010 cotton crop with Autauga.  The marketing agreement contained a liquidated damages provision, providing that, in the event of breach, the Crosbys would be liable for the difference between the value of the cotton according to the New York futures market during the period beginning with the date of the breach and ending with the final delivery by Autauga of cotton sold during that year, and the highest price per pound received by the Association for cotton of the same or similar quality.

The Crosbys never gave notice that they had decided not to market the 2010 crop with Autauga but nevertheless marketed the entire 2010 crop with a different cotton association.  Autauga sued the Crosbys for breach of the marketing agreement and asserted a claim for liquidated damages.

The district court granted summary judgment to the Crosbys on Autauga’s liquidated damages claim, holding the liquidated damages provision to be an impermissible penalty under Alabama law.  In an opinion by Judge Newsom, the Eleventh Circuit upheld the district court’s ruling, applying Alabama’s three-part test for considering the enforceability of liquidated damages provisions.

The court held that Autauga satisfied the first part of the liquidated damages test, which requires that the damages caused by the breach of the agreement be difficult or impossible to accurately estimate, but failed the second part of the liquidated damages test, requiring that the parties provide for damages rather than a penalty.  The court was persuaded by the provision’s use of the “highest price” received by the Association in its liquidated damages formula, which “certainly doesn’t evidence an intent to reasonably estimate Autauga’s loss.”

The court also held that Autauga failed the third part of the liquidated damages test, which requires that the sum stipulated be a reasonable pre-breach estimate of probable loss.  This prong “requires a hindsight comparison of actual harm to the damages prescribed by the contract.”  The liquidated damages provision would have entitled Autauga to recover $1,696,610, more than 80% of the total sales value of the Crosbys’ entire 2010 crop, and nearly 3 times the Crosbys’ 2010 net earnings.  The court concluded that “[t]he liquidated-damages figure vastly exceeds anything that Autauga could even possibly have lost as a result of the Crosbys’ alleged breach.”

Finally, the court dismissed Autauga’s argument that public policy entitles marketing cooperative agreements to liberal enforcement, saying that Autauga “retreats to the quintessential last hope of lost causes—‘public policy.’”

Margaret Flatt

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