Caudill v. Keller Williams Realty, Inc., No. 15-3313 (7th Cir. 2016)
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Caudill, the owner of a real estate brokerage, sued Keller Williams for breach of a 2001 franchise contract. Caudill's position as Regional Director of Keller Williams was terminated in 2010; her franchise was terminated in 2011. The suit settled with an agreement including a prohibition against disclosure of its terms, except to tax professionals, insurance carriers, and government agencies; those recipients had to promise to keep them in confidence. Any violation entitled the victim to damages of $10,000. Months later, Keller Williams issued an FDD (Franchise Disclosure Document) to about 2000 existing or potential franchisees and other parties, describing Caudill’s lawsuit in detail. The FDD was not required by the Federal Trade Commission under 16 C.F.R. 436.2(a). Caudill sought $20 million (2000 x $10,000) in damages. The district judge rejected her claim, noting that under Texas law a liquidated damages clause is enforceable only if “the harm caused by the breach is incapable or difficult of estimation and … the [specified] amount of liquidated damages is a reasonable forecast of just compensation.” The Seventh Circuit affirmed. It is unreasonable to suppose, without evidence, that the dissemination of the FDD caused Caudill a $20 million loss. Although the burden of proving that a liquidated damages clause is actually a penalty clause is on the defendant, Keller Williams established that there was no basis for the requested damages.
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In the United States Court of Appeals For the Seventh Circuit ____________________ No. 15 3313 JANA CAUDILL, et al., Plaintiffs Appellants, v. KELLER WILLIAMS REALTY, INC., Defendant Appellee. ____________________ Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 13 C 4693 — Charles P. Kocoras, Judge. ____________________ ARGUED MAY 19, 2016 — DECIDED JULY 6, 2016 ____________________ Before WOOD, Chief Judge, and POSNER and ROVNER, Cir cuit Judges. POSNER, Circuit Judge. Jana Caudill, the principal plaintiff in this diversity suit for breach of contract governed by Tex as law, is an Indiana resident who owns a real estate broker age company named Leaders. The defendant, Keller Wil liams, is a Texas corporation that franchises real estate firms like the plaintiffs’ and in 2001 had franchised Caudill’s com pany, with the result that it operated under the Keller Wil 2 No. 15 3313 liams name. Later she was made a Regional Director of Kel ler Williams. Their relationship soured, however. Her posi tion was terminated in 2010 and her company’s franchise the following year. Her suit, filed in a federal district court in Indiana, was transferred to a federal district court in Texas and settled in 2012. The settlement agreement included a prohibition against disclosure of its terms, including the amount paid Caudill in the settlement. The agreement allowed certain en tities, such as tax professionals, insurance carriers, and gov ernment agencies, to receive the disclosures, but the recipi ents had to promise to keep them in confidence. The agree ment contained a liquidated damages provision which stat ed that because damages for violations of the prohibition against disclosure of a settlement term “are not susceptible to precise quantification,” any such violation would entitle the victim (in this case Caudill) to damages of $10,000. Three months after the court in Texas dismissed Caudill’s suit pursuant to the settlement agreement, Keller Williams issued what is called an FDD (Franchise Disclosure Docu ment) to some 2000 existing or potential franchisees and oth er interested firms or persons. None of the recipients was permitted by the settlement agreement to receive such dis closures. And the FDD failed to require recipients to keep the disclosed information confidential. In violation of the set tlement agreement the FDD described Caudill’s lawsuit against Keller Williams in detail—it had alleged a variety of violations of tort and contract law and of state statutes—and noted that the case had been dismissed after the parties had settled. The FDD also disclosed both the total amount paid by the defendants to Caudill and her company and the share No. 15 3313 3 of the settlement that Keller Williams’ insurer had contribut ed. The Federal Trade Commission requires the FDD to be sent to “a prospective franchisee … 14 calendar days before the prospective franchisee signs a binding agreement with, or makes any payment to, the franchisor or an affiliate in connection with the proposed franchise sale,” 16 C.F.R. § 436.2(a); see also id. § 436.5(c) (the FDD must also include information about past litigation). But so far as appears Kel ler Williams sent the FDD not only to on the verge of becoming franchisees of Keller Williams, as required by the regulations, but also to other potential franchisees, including renewing franchisees (who are not generally entitled to such disclosures under the regulations, id. § 436.1(t)), Keller Wil liams employees, and regional owners (not defined). Caudill contends that this widespread dissemination of the FDD was a violation of the confidentiality clause of the settlement agreement, and that since the liquidated damages clause specifies damages of $10,000 for each breach of the confidentiality clause she is entitled to $20 million (2000 x $10,000) in damages. The district judge disagreed, noting that under Texas law a liquidated damages clause is en forceable only if “the harm caused by the breach [of the con tract] is incapable or difficult of estimation and … the amount of liquidated damages [specified in the contract] is a reasonable forecast of just compensation.” Phillips v. Phillips, 820 S.W.2d 785, 788 (Tex. 1991) (emphasis added). The relevance of the second requirement lies in the twin facts that Caudill‘s suit is for breach of contract and that penalty clauses in contracts are (and long have been, see, e.g., Durst v. Swift, 11 Tex. 273, 281–82 (1854)) unenforceable 4 No. 15 3313 under Texas law, as under common law generally. “The basic principle underlying contract damages is compensa tion for losses sustained and no more; thus, we will not en force punitive contractual damages provisions.” FPL Energy, LLC v. TXU Portfolio Management Co., L.P., 426 S.W.3d 59, 69 (Tex. 2014). Or as we explained in Lake River Corp. v. Carbo rundum Co., 769 F.2d 1284, 1289–90 (7th Cir. 1985) (applying Illinois law), “a liquidation of damages must be a reasonable estimate at the time of contracting of the likely damages from breach, and the need for estimation at that time must be shown by reference to the likely difficulty of measuring the actual damages from a breach of contract after the breach occurs. If damages would be easy to determine then, or if the estimate greatly exceeds a reasonable upper estimate of what the damages are likely to be, it is a penalty.” And though the reasonableness of a liquidated damages provi sion is ordinarily its reasonableness at the time of contract ing, “when there is an unbridgeable discrepancy between liquidated damages provisions as written and the unfortu nate reality in application, we cannot enforce such provi sions.” FPL Energy, LLC v. TXU Portfolio Management Co., L.P., supra, 426 S.W.3d at 72. The district judge thought it unreasonable to suppose, at least in the absence of evidence—and there was virtually none—that the dissemination of the FDD beyond the limits specified in the settlement agreement had caused a $20 mil lion loss to Caudill. Although the burden of proving that a liquidated damages clause is actually a penalty clause is on the defendant in an action to enforce the clause, id., Keller Williams was able to show that there was no basis for sup posing the damage to have been anywhere near an average of $10,000 per unauthorized recipient of the disclosure. Cau No. 15 3313 5 dill failed to identify a single recipient who had come to think less of her or her company as a result of it, or a single referral that she had lost—failures of proof that demolished her claim to $20 million in damages. And, though this was icing on the cake, Keller Williams presented evidence that any fluctuations in Caudill’s annual profits could be best ex plained by factors other than disclosure, such as the termina tion of her business relationship with Keller Williams. The judge concluded that “actual damages do not exist,” and even if that’s something of an exaggeration Keller Wil liams had succeeded in showing that “the actual loss [suf fered by Caudill] was not an approximation of the stipulated [in the settlement agreement] sum.” Healix Infusion Therapy, Inc. v. Bellos, No., 11–02–00346–CV, 2003 WL 22411873, at *2 (Tex. App. Oct. 23, 2003). One can, it is true, imagine Caudill’s business being seri ously harmed by the disclosure of the terms of settlement. The disclosure alleged a frightening catalog of wrongs com mitted by Keller Williams, including “breach of contract, fraudulent misrepresentation to induce a contract, tortious interference with contract, promissory estoppel, unjust en richment, fraudulent misrepresentation to induce a written contract, breach of a written contract, tortious interference with a written contract, … violation of [the] Illinois Wage Payment and Collection Act, breach of the franchise agree ment, and violation of the Indiana Deceptive Franchise Prac tices Act.” Reading this litany of alleged wrongs might in deed scare off prospective business partners and clients, fearing to become targets of Caudill should they enter into a business relationship with her and the relationship sour. But this is speculation. 6 No. 15 3313 The facts also scotch Caudill’s alternative request for a permanent injunction against further disclosure by Keller Williams of the terms of the settlement agreement. Should Keller Williams violate the confidentiality provision of the settlement agreement by making a disclosure not required by state or federal law, and measurable harm to Caudill re sult, she will be free to seek further relief, whether monetary or injunctive. AFFIRMED
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