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Executive Summary

 
You are required to prepare a business memo addressing legal issues arising in connection with the Background Facts set forth in this memo.
 

Background Facts for Memo Assignment
 
Opening a new chapter in its rivalry with Google, Microsoft on Tuesday, Oct. 3, 2017, sued the search giant and a former Microsoft executive who has been tapped by Google to run its China operations. Google is a Delaware corporation with its headquarters in California. Microsoft is also a Delaware corporation but with its headquarters in Washington state. The suit was filed in a Washington state court against Google and Kai-Fu Lee, who until recently was the corporate vice president of Microsoft’s Interactive Services Division. Google said earlier Tuesday that Lee was joining the company and would head up a new research effort in China for the Search division. Lee started working for Microsoft, in a Washington state office, in the mid-1990’s focusing on R&D for faster searches. Fresh out of graduate school, Lee and Microsoft did not sign an employment contract when he began working there. In the early 2000’s Lee was promoted to lead the search development team at Microsoft. This promotion was accompanied by a large pay increase and a new employment contract.
 

The employment contact included a non compete clause stating that Lee could not work for any direct competitor of Microsoft’s for thirteen months after he left the company. On signing the new employment contact Lee received a bonus of $200,000.In December 2016 top Microsoft executives met with Lee to discuss the poor performance of his development team. The development team was months behind on a key section of code. In that meeting Lee claims that the Microsoft executives agreed to waive his non-compete clause if his team delivered the code in the next two months. The team successfully delivered the project before the new deadline and Lee began to look for a new job. In both Kai-Fu Lee and Microsoft mutually agreed to part ways, Lee had accepted a job at Google. Please develop a business memo identifying at least two legal issues and analyzing each to address whether Microsoft is likely to be successful in its lawsuit against Google and Kai-Fu Lee.

 

Grading Rubric
 
Memos will be reviewed for accuracy in legal analysis, including the correct identification of the rule of law as well as for completeness and professional presentation. Sloppy, typo-laden or incomplete memos will not meet the foregoing standard and will be rejected as incomplete and will not be graded. Each memo is required to include the following sections: Executive Summary; Background Facts; Issue statement (please identify at least 2 legal issues); Rule of Law; Analysis and Conclusions. Each issue should have a corresponding rule of law, analysis and conclusion section.
 
Legal Research and Reference Materials
 
Memos are required to include at least 3 legal citations for identifying relevant points of law included in the memo to address the issues identified and analyzed in the memos. For purposes of this memo, students are confined to using the legal principles as described in the Restatement, UCC, case law and principles set forth in Smith & Roberson’s Business Law, 17th Edition, West Publishing Co. (2017).
 

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Memorandum

 
Executive Summary
 
This memo reviews whether a court will enforce a contract’s liquidated damages provision in circumstances where the liquidated damages significantly exceed the actual damages incurred. Ultimately, this memo concludes that a court could find a liquidated damages provision to be enforceable even where the actual damages are significantly less when the parties to the contract were experienced negotiators and represented by counsel during the contract’s negotiation.
 

Background
 
• California and Hawaiian Sugar Company (C&H) grows sugarcane in Hawaii and transports it to California for processing.
• The availability of ships for transportation immediately after harvesting is imperative.
• C&H decided to build their own ship made from a tug and barge, and contracted with Halter Marine (tug) and Sun Ship (barge) to execute their shipping plan.
• In the final contract meeting, senior management and legal counsel were present for both C&H and Sun Ship.
• The contract included a liquidated damages provision that called for a $17,000 per day payment by Sun Ship for every day the barge was delayed. The barge and tug were both significantly delayed.
• Sun Ship paid the $17,000 per day but then sued to recover it on the grounds that if the liquidated damages provision were not present, C and H’s legal remedy for monetary damages would be significantly less.
 

Issue

 
Was the liquidated damages provision valid when the actual damages were significantly less?
 

Rule of Law

 

Under common law, a contract may contain a liquidated damages provision by which the parties agree in advance to the damages to be paid in event of a breach. Such a provision will be enforced if it amounts to a reasonable forecast of the loss that may or does result from the breach. If, however, the sum agreed upon as liquidated damages bears no reasonable relationship to the amount of probable loss that may or does result from breach, it is unenforceable as a penalty.
 

Analysis&Conclusion

 
A court would conclude that the liquidated damages provision was valid. Although the actual damages sustained were less than the liquidated damages, C&H could introduce evidence of consequential damages from loss of revenues, in addition to actual damages. These losses likely influenced the parties’ agreement on the amount of liquidated damages as a reasonable forecast of a potential loss. Common law provides that liquidated damages are considered reasonable in light of the anticipated or actual harm. Moreover, although exact damages to C&H were impossible to calculate at the inception of the contract, the liquidated damages provision had been adopted by the parties after an arms-length negotiation in which they were all represented by sophisticated representatives.
 
Product code: Law-QA14
 
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