Travelodge Hotels, Inc. v. Govan

NOT RECOMMENDED FOR PUBLICATION
File Name: 05a0986n.06
Filed: December 15, 2005
No. 05-3037
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
TRAVELODGE HOTELS, INC., )
)
Plaintiff-Appellee, )
)
v. ) ON APPEAL FROM THE UNITED
) STATES DISTRICT COURT FOR
) THE SOUTHERN DISTRICT OF
GOPAL GOVAN, ) OHIO
)
Defendant-Appellant. )
Before: SILER and GRIFFIN, Circuit Judges; TARNOW, District Judge.*
SILER, Circuit Judge. Defendant Gopal Govan appeals the district court’s grant of
summary judgment to Plaintiff Travelodge Hotels, Inc. (“THI”) for liquidated damages pursuant to
an agreement between the parties. For the following reasons, we AFFIRM.
BACKGROUND
In 2000, Govan purchased a Travelodge motel and subsequently entered into a 15-year
franchise Lease Agreement (“Agreement”) with THI. Among other things, the Agreement
contained, in relevant part, the following stipulated damages provision in the event of breach:
. . . If the Facility has been open for fewer than 24 months, then the amount shall be the
average monthly Royalties and System Assessment Fees since the Opening Date multiplied
by 24. You will also pay any applicable Taxes assessed on such payment. Before the
*
The Honorable Arthur J. Tarnow, United States District Judge for the Eastern District of
Michigan, sitting by designation.
No. 05-3037
Travelodge Hotels, Inc. v. Govan
Ending Period, Liquidated Damages will not be less than the product of $2,000.00 multiplied
by the number of guest rooms in the Facility. . . .
About 16 months after the effective date, THI terminated the Agreement, and instituted the present
suit. Both parties agree that the contract was governed by New Jersey law. Ultimately, the district
court granted summary judgment to THI on all issues and awarded $142,000 in liquidated damages.
On appeal, Govan contests only the award of liquidated damages.
DISCUSSION
A preliminary issue is whether Govan’s current arguments were presented to the district
court and thus properly preserved for appeal. Assuming, without deciding, that these arguments are
properly before us, we must decide whether the district court properly found the stipulated damages
clause enforceable.
Under New Jersey law, “[i]n commercial contracts, stipulated damages clauses are
presumptively valid.” Ramada Franchise Sys., Inc. v. Hanna Hotel Enters., Inc., 147 F. Supp. 2d
840, 848 (N.D. Ohio 2001) (citing MetLife Capital Fin. Corp. v. Washington Ave. Assocs. L.P., 732
A.2d 493, 496 (N.J. 1999)). Thus, “the party challenging such a clause should bear the burden of
proving its unreasonableness.” Wasserman’s Inc. v. Twp. of Middletown, 645 A.2d 100, 108 (N.J.
1994). In deciding these cases, “[t]he New Jersey courts apply a reasonableness test to determine:
1) whether the set amount is a reasonable forecast of compensation for the harm caused by the
breach; and 2) whether the harm is incapable or difficult to estimate.” Ramada Franchise Sys., Inc.,
147 F. Supp. 2d at 848 (citation omitted). Ultimately, whether a stipulated damages clause is
enforceable “is a question of law for the court to decide.” Naporano Assocs., L.P. v. B & P Builders,
706 A.2d 1123 (N.J. Super. A.D. 1998) (citation omitted). Both parties agreed at oral argument that
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Travelodge Hotels, Inc. v. Govan
the question of reasonableness of the liquidated damages is an issue of law for the court to
determine.
1. Estimation of Actual Harm
Govan first argues that the actual harm to THI is not incapable or difficult to estimate. The
only evidence that Govan presents in support of this argument is a statement of recurring fees that
had accrued during Govan’s operation of the motel and, based solely upon this, he asserts that “[i]t
would be fairly easy to extrapolate those figures out to determine THI’s actual damages.” However,
stipulated damages clauses need only be proved reasonable at either the time of contract or the time
of breach in order to encourage “more frequent enforcement of stipulated damages clauses.”
Wasserman’s Inc., 645 A.2d at 107; see MetLife Capital Fin. Corp., 732 A.2d at 502. The evidence
presented by Govan, that THI’s actual damages looking back are easily estimable, says nothing
about THI’s ability to estimate damages at the time of contract. Since New Jersey law places the
burden on Govan to prove unreasonableness and a stipulated damages clause will be enforced if it
was reasonable at either the time of contract or breach, see Wasserman’s Inc., 645 A.2d at 106-07,
Govan has failed to present any evidence on an issue that it was his burden to prove and therefore
summary judgment was proper on this issue.
2. Reasonable Forecast of Actual Harm
Govan next alleges that the stipulated damages clause is unenforceable because it was not
a reasonable forecast of just compensation for the actual harm caused by the breach. Specifically,
he claims that there is no evidence indicating that the stipulated damages reasonably relate to the
actual damages. Despite this assertion, though, Govan presents no evidence as to why the stipulated
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Travelodge Hotels, Inc. v. Govan
damages and the actual damages do not reasonably relate. His arguments are only filled with
conclusory statements that THI used an “arbitrary calculation.” In justifying this lack of evidentiary
production, he highlights the fact that THI has put forth no evidence that the stipulated damages
were in fact reasonable. However, it is Govan’s burden to prove that the damages provided for in
the clause are unreasonable, not THI’s burden to prove the clause’s reasonableness. See
Wasserman’s Inc., 645 A.2d at 108. Since he presented no evidence on this point, Govan has failed
to meet his burden of proving that the calculation used by THI was not a reasonable forecast.
3. Stipulated Damages Based on Gross Revenue
The liquidated damages clause provided that damages were the greater of (1) the average
monthly Royalties and System Assessment Fees multiplied by 24, plus taxes, or (2) $2,000
multiplied by the number of rooms. The Agreement defines “Royalty” as 4.5% of Gross Room
Revenues. Therefore, one alternative in the stipulated damages calculation includes gross revenues
as a factor.
Govan made two arguments in his briefs for why the inclusion of gross revenues in the
calculation renders the clause invalid. However, at oral argument, he insisted that the first
alternative, using gross revenues as a factor, was the correct measurement. Therefore, he has
abandoned the argument that the whole clause is invalid due to the mention of gross revenues.
4. Alternative Stipulated Damages Clauses
Lastly, Govan contends that the presence of an alternative stipulated damages clause that
requires a court to award the “greater of” two stipulated damages calculations is inherently punitive
and unreasonable. New Jersey courts have repeatedly said that the test for determining the validity
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Travelodge Hotels, Inc. v. Govan
of a stipulated damages clause is reasonableness. See Wasserman’s Inc., 645 A.2d at 106-07;
MetLife Capital Fin. Corp., 732 A.2d at 498-99; Naporano Assocs., L.P., 706 A.2d at 1128. As
such, it is plausible that there may exist some situations where a “greater of” calculation would be
reasonable. Accordingly, since the burden to prove unreasonableness is on the party challenging
the stipulated damages clause, Govan must show why this “greater of” clause is unreasonable in this
instance. See Wasserman’s Inc. 645 A.2d at 106-07. Again, he fails to make an argument on this
point. His briefs are simply filled with conclusory allegations of unreasonableness and frequent cites
to the discrepancy in calculation between the two formulas. Therefore, Govan has failed to present
sufficient evidence on this issue to withstand THI’s motion for summary judgment.
AFFIRMED.
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