The Minnesota Supreme Court recently clarified the application of the doctrine against disproportionate forfeiture under Minnesota contract law in Capistrant v. Lifetouch Nat’l Sch. Studios, Inc., 916 N.W.2d 23 (Minn. 2018). Minnesota courts (and other jurisdictions) have long relied on the disproportionate forfeiture doctrine as a way to prevent inequitable penalties in contracts, although the doctrine is not uniformly interpreted. In Capistrant, while the court confronted the specific question of “whether a former employee’s delay in returning his employer’s property excuses the employer from paying a commission otherwise due to the employee,” its interpretation of the disproportionate forfeiture doctrine may have wider application.
Capistrant worked as a photography and sales representative for Lifetouch, a photography services company that contracts with schools and other organizations. After he retired, Capistrant filed this action seeking to recover unpaid commissions based on his employment contract. The parties entered that contract in 1986, when Capistrant managed certain territory for Lifetouch and was compensated entirely with commissions, including “residual commissions” owed after his employment with Lifetouch ended. The contract also contained a term by which Lifetouch could terminate its obligation to make any unpaid payments of residual commissions to Capistrant if “at any time” Capistrant “breached” certain provisions. Included among those provisions was a “restriction against competition” wherein Capistrant was required, in one part, to “immediately deliver to Lifetouch all of Lifetouch’s property” at the end of his employment. The Minnesota Supreme Court referred to this as the “return-of-property” clause.
During the discovery period, Capistrant revealed that he had retained a large number of Lifetouch’s proprietary documents in violation of the return-of-property clause. Capistrant quickly returned the documents to Lifetouch and its forensic expert determined Capistrant had not disseminated the documents to outside sources. Regardless, Lifetouch argued Capistrant’s failure to comply with the return-of-property clause excused it from paying him residual commissions.
Lower court rulings
At the district court, Judge James A. Moore found that the return-of-property clause operated as a condition precedent to Lifetouch’s payment of the residual commissions, and consequently rejected Capistrant’s argument that to enforce this condition would result in a disproportionate forfeiture. In doing so, the district court concluded that “the language of the contract is clear, and equity cannot rescue Capistrant from his contractual obligations.”
But the Minnesota Court of Appeals reversed that decision. While agreeing with the district court’s decision that the return-of-property clause operated as a condition precedent, the Court of Appeals relied on the Restatement (Second) of Contracts when reasoning that “the timing of the return of property was not a material part of the contract,” and that a “forfeiture of potentially $2.6 million for retaining proprietary documents”—with no intent to compete and no evidence of disclosure of the documents—would result in a disproportionate forfeiture. To that end, the Court of Appeals determined that Capistrant’s failure to immediately return Lifetouch’s property was excused and that Lifetouch owed him the residual commissions.
Minnesota Supreme Court decision
On further appeal, the Minnesota Supreme Court affirmed the Court of Appeal’s interpretation of the disproportionate forfeiture doctrine. The Minnesota Supreme Court clarified that the doctrine of disproportionate forfeiture is properly analyzed in two sequential parts: materiality and proportionality. First, a court must ask whether the occurrence of a condition precedent was material to the contract. If it is deemed material, then the forfeiture cannot be prevented and the analysis is complete. If the condition is not material, then the court must weigh whether the forfeiture is extreme when measured against the purpose of the condition. If the forfeiture is found to be extreme, then it can be prevented by the disproportionate forfeiture doctrine.
The Minnesota Supreme Court further explained that it disfavors forfeitures of all kinds, and that this was especially true in the unique context of this case, where “the parties had been performing under the contract for 28 years before the condition became operative, and the condition came into play only as the parties’ employment relationship was ending. Moreover, the consequence of failing to comply with the return-of-property clause would be the forfeiture of millions of dollars.”
With those instructions on the disproportionate forfeiture doctrine, the Minnesota Supreme Court remanded the case to the district court for further findings on materiality and proportionality.
The statements and views expressed in this posting are my own and do not reflect those of my law firm, are intended for general informational purposes only, and do not constitute legal advice or legal opinion.