United States v. Hayes - 633 F. Supp. 1183 (M.D.N.C. 1986)

Rule:

It is the modern trend to allow liquidated damages clauses in contracts. 

Facts:

Marie Hayes is a medical doctor residing in Chapel Hill, North Carolina. In June 1978, Hayes applied pursuant to 42 U.S.C. § 254l for an award under the National Health Service Corps (NHSC) Scholarship Program to fund her study of medicine at Tufts University School of Medicine. Hayes stated in her application that she intended to specialize in family medicine and work in a rural area. Upon acceptance of her application, Hayes became obligated under the terms of the scholarship contract to perform one year of service in the NHSC for each year of scholarship awarded or two years, whichever was greater. 42 U.S.C. § 254l(f)(1)(B)(iv). Hayes was awarded a scholarship in the amount of $13,115 for the 1978-1979 school year. In June 1979, Hayes received an extension of her scholarship award to include the 1979-1980 school year in the amount of $16,430. Subsequently, Hayes was granted a deferment by the Secretary of Health and Human Services to complete a three-year residency in internal medicine at North Carolina Memorial Hospital in Chapel Hill, North Carolina. During the second year of Hayes’ residency, she notified the NHSC Scholarship Program that she had abandoned her internal medicine residency and had initiated a three-year residency in dermatology. Hayes requested permission to serve in the NHSC as a dermatologist. This request was denied, and Hayes was requested to prepare for placement. Hayes failed to participate in placement procedures and failed to perform her service under the scholarship contract. On March 25, 1985, the Government instituted this action.

Hayes admits that she is in breach of her scholarship contract and that she is indebted to the Government. However, Hayes disputes the amount of the debt and argues that 42 U.S.C. § 254o, the treble damages provision of the NHSC Scholarship Program, is penal in nature and thus is unenforceable, as it is an invalid liquidated damages provision. Hayes argues that this provision creates a genuine issue of material fact and asserts, therefore, that the case should survive the Government's motion for summary judgment. 

Issue:

Was 42 U.S.C. § 254o an invalid liquidated damages provision, thus unenforceable?

Answer:

No

Conclusion:

The court held that § 254o contained a valid and enforceable liquidated damages provision because: (1) Hayes and the United States bargained at arm's length, (2) Hayes had notice of the potential for damages when she signed the contract, and (3) the scholarship was a binding contract. The court also held that § 254o had a direct relation to actual damages because it fairly and reasonably set just compensation in the event of a breach by the scholarship recipient.