The Dallas Court of Appeals has ruled that an employment contract between a hospital and a nurse that stipulated the term of employment and contained a liquidated damages provision if the employee left before the end of the term constitutes an unenforceable penalty.
Diana Garcia v. Dallas County Hospital District d/b/a Parkland Hospital (No. 05-23-01295; December 31, 2024) arose from an alleged breach of an employment contract. This case has to do with Diana Garcia, a nurse and former employee of Parkland. Garcia and Parkland entered into a a resident/graduate nurse program employment agreement that required Garcia to remain in the program from November 21, 2015 to February 2, 2019. Garcia, however, terminated her employment on March 31, 2018, about eleven months short of the contract term. The termination triggered the agreement’s liquidated damages provison, which called upon Garcia to pay Parkland $20,000 if she left employment too early. When Garcia refused to pay, Parkland filed suit for breach of contract and sought recovery of the $20,000 plus attorney’s fees. Garcia moved for summary judgment, arguing that the agreement constituted an unlawful restraint of trade, the claim for attorney’s fees under Chapter 38, CPRC, was preempted by Chapter 15 of the Texas Business and Commerce Code, and the specified-damages clause was an unenforceable penalty. Parkland likewise moved for summary judgment. The trial court denied Garcia’smotion, granted Parkland’s, and awarded Parkland $20,000 and attorney’s fees. Garcia appealed.
In an opinion by Justice Garcia, the court of appeals reversed and remanded to the trial court. The court agreed with Garcia that the liquidated damages clause was not enforceable because it imposed a penalty rather than representing Parkland’s actual damages from the breach. Observing that “a liquidated-damages clause is facially unreasonable if it prescribes the same measure of damages for breaches of varying magnitudes,” the court reasoned that had Garcia terminated her employment two weeks, two years, or two months prior to end of the contract term, the penalty would have been the same. In other words, a “one-size-fits-all” approach won’t work. The court, however, agreed with Parkland that despite the unenforceability of the liquidated-damages provision, it was still entitled to pursue actual damages, which the court determined were sufficiently pleaded in Parkland’s live petition.
Moreover, because Garcia did not make a no-evidence summary judgment motion on that issue at the trial court, she could not raise it for the first time on appeal. Garcia argued further that Parkland was not entitled to actual damages because the unenforceable damages provision rendered the contract “illegal.” The court rejected this argument, noting that “authorities confirm that a claimant can still recover actual damages after a liquidated-damages cllause has been held to be a penalty because of its one-size-fits-all character” (citation omitted). Finally, the court ruled that Garcia failed to establish as a matter of law that the contract imposed an unlawful restraint of trade in violation of § 15.05(a), Business & Commerce Code (the Texas Free Enterprise and Antitrust Act). In order to have done so, she would have had to meet the “rule-of-reason” requirement for restraint of trade cases as directed by DeSantis v. Wackenhut, 703 S.W.2d 670 (Tex. 1990) or at least adduce some evidence of the relevant market and the anti-competitive effect of the agreement. The court thus sent the case back to the trial court on the issue of Parkland’s actual damages.
If nothing else, this decisions stands for the proposition that a liquidated-damages clause in an employment agreement must bear a reasonable relationship to the magnitude of the breach, and that a one-size-fits-all approach won’t do it.
TCJL Research Intern Geneva Cline researched and contributed to the composition of this article.