Ashcraft & Gerel v. Coady, Edward

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 11, 2001 Decided April 6, 2001

No. 00-7105

Ashcraft & Gerel, a general partnership organized
under the law of the District of Columbia,
Appellee

v.

Edward Paul Coady,
Appellant

Appeal from the United States District Court
for the District of Columbia
(No. 97cv01735)

John G. Roberts, Jr. argued the cause for appellant. With
him on the briefs were H. Christopher Bartolomucci, Cather-
ine E. Stetson and Mark S. London.

Stuart H. Newberger argued the cause for appellee. With
him on the brief was Barry E. Cohen. Tara W. Blanchard
entered an appearance.

 Before Henderson, Rogers and Tatel, Circuit Judges.

Opinion for the Court filed by Circuit Judge Rogers.

Rogers, Circuit Judge: Edward Paul Coady appeals the
judgment that he breached his employment contract with the
law firm of Ashcraft & Gerel and was therefore required to
pay liquidated damages to the firm. He contends that the
district court erred in denying him summary judgment on the
breach of contract claim when the firm had committed a prior
material breach of the contract and had concealed that breach
from him until long after he was fired. He also contends that
the district court erred in precluding him from introducing
any evidence of the law firm's prior breach, most significantly,
evidence of the firm's alleged "surreptitious manipulation of
income and expenses" going "to the very heart of [his]
defense and counterclaims." Finally, Coady contends that
the district court erred in refusing to strike the liquidated
damages claim as a penalty. We hold that the district court
erred in precluding the admission of evidence that was rele-
vant to Coady's defense to the breach of contract claim, and
that the error was not harmless. Accordingly, we reverse the
judgment.

I.

Coady was an attorney at the law firm of Ashcraft & Gerel
from 1989 until April 1998, when he was fired. At that time,
he was the managing attorney of the firm's Boston office, a
position he had held since 1993. Early in 1997, a number of
disagreements about his compensation and his management
of the Boston office flared up between Coady and the firm.
By letter of July 15, 1997, Coady advised the firm that it had
breached the employment contract1 by failing to pay his semi-

__________
1 The employment contract of July 29, 1993, consisted of two
parts: a "Prenuptial Agreement" specifying the apportionment of
fees generated from Coady's representation of firm clients upon his
voluntary or involuntary departure from the firm, and the "Employ-
ment Agreement" setting out the particulars of his employment,
including, among other things, provisions setting his compensation
and the amount of liquidated damages to be paid by either party

annual salary bonus and that he would exercise his contractu-
al right to take the matter to arbitration unless he was paid
by August 15. On August 1, 1997, the firm sued Coady in the
United States District Court for the District of Columbia for
breach of his contractual and fiduciary duties to the firm and
for conversion. Coady counterclaimed, alleging that the firm
had breached its contractual and fiduciary duties to him.
Coady also pursued his contractual right to arbitrate the
dispute before an arbitration panel in Boston, Massachusetts.

Coady prevailed before the arbitration panel on his claim
that the firm had breached the employment contract by
improperly "straddling" income and expenses to manipulate
his bonus compensation. "Straddling" refers to the firm's
alleged effort to "shift[ ] 1997 income into 1998 and acceler-
ate[ ] 1998 expenses in an effort to defraud [him]." The
arbitration panel found that he was therefore owed a larger
bonus in 1997 than he had received.2 The federal district
court in Massachusetts upheld the panel's ruling. However,
the United States Court of Appeals for the First Circuit
reversed, holding that the arbitration panel lacked jurisdic-
tion to consider Coady's claim that the firm had deliberately
underpaid its senior partners in 1997 in order to lower the
salary cap and thereby reduce Coady's bonus. See Coady v.
Ashcraft & Gerel, 223 F.3d 1, 10 (1st Cir. 2000). The
employment contract authorized the arbitration panel only to
interpret ambiguities in the contract, and the court viewed
Coady's claim as a breach claim, not a contract interpretation.
The court ordered that Coady's bonus claim (and the records

__________
upon a material breach of the Employment Agreement. See Coady
v. Ashcraft & Gerel, 996 F. Supp. 95, 98 (D. Mass. 1998). For each
reference, we refer to "the employment contract."

2 The arbitration panel concluded that "at least $700,000 should
have been attributed to and been available for distribution by [the
firm] as 1997 partner draw." Noting that the firm had failed to
comply with its discovery orders, the panel was unable to determine
the precise amount that Coady's 1997 bonus should have been, other
than to find that he was entitled to at least $45,000 more than he
received. The panel gave Coady the option of accepting the $45,000
or pursuing further discovery; Coady opted for the $45,000.

of the arbitration panel) be transferred to the district court in
the District of Columbia. Prior to the decision by the First
Circuit, the jury in the district court for the District of
Columbia returned a verdict that the firm had good cause to
terminate Coady from employment and that Coady had not
breached his fiduciary duties to the firm. The district court
denied Coady's motion for judgment and for a new trial under
Fed. R. Civ. P. 50(b) and 59, and granted the firm's motion for
judgment on the breach of contract claim in the amount of
$400,000, which corresponded to the liquidated damages pro-
vision in the employment contract.

II.

On appeal, Coady contends that the district court erred in
three respects. First, he challenges the district court's denial
of his motion for summary judgment on the firm's contract
claim. Our review is de novo. See, e.g., Kirkland v. District
of Columbia, 70 F.3d 629, 635 (D.C. Cir. 1995) (citing Barbour
v. Merrill, 48 F.3d 1270, 1276 (D.C. Cir. 1995); Mackey v.
United States, 8 F.3d 826, 829 (D.C. Cir. 1993)); see also
Berkeley v. Home Ins. Co., 68 F.3d 1409, 1413 (D.C. Cir.
1995).

In the district court, Coady moved for partial summary
judgment on the grounds that the firm had straddled income
and expenses between 1997 and 1998 in an attempt to deny
him the bonus to which he was entitled under the employ-
ment contract, and that this prior material breach, which the
firm concealed from him until after the firm fired him, should
preclude the firm from being able to sue him for his alleged
subsequent breach. The district court ruled that there was
no such bar because Coady's selective non-performance and
misdeeds did not constitute the type of action that he would
have been entitled to take had he been aware of the firm's
breach. In Coady's view, "[s]ettled law establishes that the
firm's prior, hidden breach relieved [him] of the obligation to
perform his duties, in whole or in part, under the employment
agreement." Looking to section 237 of the Restatement
(Second) of Contracts, he explains that this "long-standing"

rule is designed to prevent the party to the first breach from
profiting from concealing its bad acts while the party to the
later breach is penalized.

The Restatement (Second) of Contracts s 237 states that a
party's continuing obligations under a contract are condi-
tioned on there being no "uncured material failure by the
other party to render any such performance due at an earlier
time." Comment c explains that "one party's material failure
of performance has the effect of the non-occurrence of a
condition of the other party's remaining duties ... even
though the other party does not know of the failure." Illus-
tration 8 further explains:

A and B make an employment contract. After the
service has begun, A, the employee, commits a material
breach of his duty to give efficient service that would
justify B in discharging him. B is not aware of this but
discharges A for an inadequate reason. A has no claim
against B for discharging him.

As a general proposition, we take no issue with the rule in
the Restatement. Rather, we hold that Coady is not in a
position to rely on section 237. As the district court ruled in
denying him partial summary judgment, Coady's "alleged bad
acts would not have been justified [even if he had] known
about the firm's material breach. [Instead,] Coady would
have been justified in quitting or otherwise repudiating the
contract, or in suspending performance entirely ...." See,
e.g., Cities Serv. Helex, Inc. v. United States, 543 F.2d 1306,
1313 (Ct. Cl. 1976); Vermont Marble Co. v. Baltimore Con-
tractors, Inc., 520 F. Supp. 922, 927 (D.D.C. 1981) (citing
John W. Johnson, Inc. v. Basic Constr. Co., 292 F. Supp. 300
(D.D.C. 1968), aff'd, 429 F.2d 764 (D.C. Cir. 1970)); 13
Samuel Williston, A Treatise on the Law of Contracts
s 39:32, at 642-45 (Richard A. Lord ed., 4th ed. 2000). Had
Coady known of the firm's prior breach, the district court
observed, that knowledge would nevertheless not excuse his
own breaches so long as he continued to work at the firm:

Coady would be sheltered by Comment c if he had quit
or refused to perform for an inadequate reason, but this

 is not what transpired. Material breach entitles the
injured party to an election of remedies, including rescis-
sion or termination of the contract, not a license to
commit torts or otherwise breach the contract.

The district court's analysis effectively responds to Coady's
contention that imposition of an election of remedies analysis
is flawed because he was unaware of the firm's breach by its
income straddle. The only actions by Coady that could bar
the firm's breach of contract claim would be actions that he
would have been within his rights to take if he had known of
the firm's breach. Because Coady remained at the firm, he
could not ignore his obligations for performance under the
employment contract, even if he was ignorant of the firm's
breach.

The rationale for this result stems from the perverse
incentives that would arise in contractual relationships if
Coady's view was adopted. Under his approach, an employ-
ee's theft of clients and computer information could not be
considered conduct in breach of contract by an employee who
had decided to continue to work for an employer that had
previously breached an employment contract. The authori-
ties on which Coady relies do not support his contention that
the firm's prior material breach barred its suit against Coady
for his alleged later breach. Rather, those authorities sup-
port the proposition that Coady should have been allowed to
defend by presenting evidence of the firm's prior breach. See
infra Part III.

III.

Coady contends that the district court erred in denying his
alternative request to introduce evidence at trial that the firm
materially breached the employment contract by straddling
its income and expenses. The district court determined that
there was "no reason for the jury to hear any evidence
regarding [the firm's] income-straddle" because the arbitra-
tion panel "conclusively found that [the firm] did in fact
engage in such behavior" and had awarded damages to Coady
based on the firm's improper revenue manipulation. As

noted, this part of the district court's ruling predated the
decision of the First Circuit reversing the district court's
affirmance of the arbitration panel's decision.3 Even so,
Coady maintains that notwithstanding his successful pursuit
of arbitration at the time the district court ruled, he was
entitled to introduce evidence of the firm's prior material
breach as part of his defense to the firm's claim that he had
breached his contractual and fiduciary duties to the firm.

The "income straddle" evidence that Coady sought to intro-
duce at trial was based on his claim, denied by the firm at
oral argument in this court, that the law firm had manipulat-
ed its income and expenses in 1997 in order to reduce the
salaries of senior partners. This evidence was relevant be-
cause Coady's bonus was capped by the "senior partner
draw"; that is, Coady's total compensation, including his
bonus, could not exceed what the senior partners earned.
Coady contends that the "income straddle" evidence was
relevant for the additional reason that it showed that the firm
had a plan in 1997 to oust him, and thereby placed the firm's
other adverse conduct toward him in a different light.

The arbitration panel initially found that Coady had "sub-
mitted prima facie evidence of a substantial straddle of in-
come in 1997." The panel concluded that the firm's obligation
to Coady required it to follow its normal course in accounting
for income and expenses that straddle two years and that
Coady's evidence raised a substantial question about the
firm's recording of 1997 income because the firm's rebuttal
"fell far short of adequately explaining the reasons for the
substantial deposits in 1998 of certain checks bearing 1997
dates." After a further hearing affording the firm an oppor-

__________
3 Prior to the decision of the First Circuit, and before the case
went to the jury, the district court here vacated the arbitration
panel decision, as beyond its authority, to the extent that the panel
purported to decide the breach of contract issues. However, in
denying the firm's compensation counterclaim, the district court
also ruled that the parties were bound by the panel's factual finding
that the firm had intentionally manipulated its 1997 income in order
to lower Coady's bonus.

tunity to rebut Coady's prima facie case, the arbitration
panel's supplemental findings concluded that the firm "en-
gaged in a series of actions designed to artificially reduce the
'senior partner draw' for 1997, and to thereby lower the 'cap'
on Coady's bonus income ...."

The district court ruled that the "income straddle" evidence
was inadmissible at trial because the arbitration panel "con-
clusively found that the firm did in fact engage in such
behavior." Because the firm conceded that it breached Coa-
dy's contract and because the arbitration panel subsequently
awarded Coady damages based on the harm he suffered as a
result of the breach, the district court concluded that there
was no reason to introduce the "income straddle" evidence.
The court explained that

[i]f the jury finds that [the firm] wrongfully terminated
Coady, Coady will also be entitled to severance pay and
the unpaid settlement damages described in [the employ-
ment contract]. If the jury finds that [the firm] had
good cause to terminate Coady, or that Coady otherwise
breached the contract, Coady will owe [the firm] the
same amount in liquidated damages and [the firm] will be
relieved of its obligation to pay Coady the unpaid settle-
ment damages.

Upon reviewing the district court's evidentiary ruling for
abuse of discretion, see Whitbeck v. Vital Signs, Inc., 159 F.3d
1369, 1372 (D.C. Cir. 1998) (citing United States v. Smart, 98
F.3d 1379, 1386 (D.C. Cir. 1996)), we hold that the district
court erred when it ruled that the arbitration panel decision
precluded Coady from introducing at trial--as part of his
defense to the firm's breach claims--evidence of the firm's
manipulation of his bonus. The cases that Coady cites sup-
port his contention that he was entitled to introduce such
evidence as part of his defense. For example, in Mardell v.
Harleysville Life Ins. Co., 31 F.3d 1221 (3d Cir. 1994),
vacated on other grounds, 514 U.S. 1034 (1995), the Third
Circuit noted that "[i]n contract actions, if one party commits
a material breach, the other party may generally use it to
justify nonperformance even if, at the time of its own nonper-

formance, the second party was unaware of the first party's
material breach." Id. at 1231 n.16 (citing College Point Boat
Corp. v. United States, 267 U.S. 12, 15-16 (1925); Restate-
ment (Second) of Contracts s 385, cmt. a; s 225 & cmt. e;
s 237 & cmt. c (1981)). Similarly, in Western Auto Supply
Co. v. Sullivan, 210 F.2d 36 (8th Cir. 1954), the Eighth
Circuit noted that "it seems to be generally accepted by
well[-]considered decisions that a party to a contract may
defend on the ground that there existed at the time a legal
excuse for non-performance by him although he was ignorant
of that fact at the time of the breach." Id. at 39-40 (citations
omitted). These authorities indicate not--as Coady main-
tains--that the firm was barred by its alleged prior breach
from suing Coady for his subsequent breach, but that Coady
would be entitled to introduce evidence of the firm's prior
material breach as part of his defense to the firm's claims
that he breached the employment contract.

The record makes clear that Coady did not seek to intro-
duce evidence of the "income straddle" in an attempt to
duplicate damages already awarded him by the arbitration
panel. Nor, as the firm argued, did Coady seek simply to
introduce evidence that he had won his case before the
arbitration panel; rather, he wanted to introduce evidence of
the underlying facts. Evidence may properly be used in
different proceedings for different purposes. Cf., e.g., United
States v. Spicer, 57 F.3d 1152, 1158 n.2 (D.C. Cir. 1995)
(discussing Brown v. Felsen, 442 U.S. 127 (1979)); 18
Charles Alan Wright et al., Federal Practice & Procedure
s 4422 (1981). Here, in defense to the firm's claim that he
had breached the employment contract, Coady sought to
show that the firm had "long planned to oust him from the
Boston office and had pressured him in every way to achieve
that intended result." Admission of this evidence was not
barred by the fact that it was the basis for the arbitration
panel's award. See Leone v. Mobil Oil Corp., 523 F.2d 1153,
1158 (D.C. Cir. 1975) (citing Alexander v. Gardner-Denver
Co., 415 U.S. 36, 60 (1974)).

The question remains whether the error was harmless. In
determining whether an error is harmless, the court mea-

sures the harm in terms of "whether the error had substan-
tial and injurious effect or influence in determining the jury's
verdict, not merely whether the record evidence is sufficient
absent the error to warrant a verdict of guilt." United States
v. Johnson, 231 F.3d 43, 47 (D.C. Cir. 2000) (citing Smart, 98
F.3d at 1390). Consequently, an evidentiary error is harm-
less if "(1) the case is not close, (2) the issue not central, or (3)
effective steps were taken to mitigate the effects of the error
...." Rogers v. Ingersoll-Rand Co., 144 F.3d 841, 846 (D.C.
Cir. 1998) (quoting Carter v. District of Columbia, 795 F.2d
116, 132 (D.C. Cir. 1986)).

Coady contends that evidence that the firm sought to drive
him away lacked the "smoking gun" of the firm's income
straddle. As the case went to the jury, the jury heard what
Coady describes as the firm's "detailed story of Coady's
alleged malfeasances, but not Coady's defense," and "al-
though the jury was instructed that [the firm] had a duty to
deal fairly and in good faith with [him], [the jury] never heard
the key evidence supporting the conclusion that [the firm] had
utterly failed to meet that standard." Coady maintains,
therefore, that his defense was

prejudiced ... beyond repair. Instead of hearing the
full story of the parties' troubled relationship, including
[the firm's] surreptitious attempts to force Coady out of
the firm by substantially decreasing his compensation,
the only complete story the jury heard was [the firm's]--
a tale chock full of anecdotes about Coady's allegedly
disloyal acts, and a tale devoid of the pivotal counter-
evidence of [the firm's] bad faith.

In Coady's view, "[t]he evidence [he] had available of [the
firm's] actions and was permitted to share with the jury
would have taken on an entirely different light if the factfin-
der had known that, before those actions, [the firm] had
begun to straddle income and expenses with an eye to driving
Coady from the firm." The firm maintains that the district
court properly ruled that the evidence was inadmissible be-
cause it did not excuse Coady's breaches and, in any event,

Coady presented "considerable evidence of bad faith" on the
part of the firm.

At trial, the firm introduced evidence that Coady had
breached his contractual and fiduciary duties to it in numer-
ous ways. Evidence relating to deliberate acts of misconduct
included Coady's attempt to steal clients and to sabotage the
firm's computer database. As the firm explained at oral
argument in this court, most of the evidence regarding Coa-
dy's breach focused on his conspiracy with a former associate
and the fact that he did not inform the firm that the associate
had left the firm. Coady's defense attempted, in turn, to
show that the firm had planned to oust him from its Boston
office for a long time. For example, he introduced evidence
that in late 1996, he requested that the firm make him a
senior partner, as he was the only managing attorney not also
a senior partner. The firm denied his request. In the
beginning of 1997, the firm told Coady that he must hire for a
litigating position a new attorney who had no trial experience
but who was the nephew of one of the senior partners.
Coady resisted and was subsequently "threatened" that if he
did not comply with the directive, his career would be "histo-
ry." In June 1997, Coady was told that he could henceforth
communicate with only certain partners in the Washington,
D.C. office. In January 1998, the firm rejected Coady's
request for reimbursement for expenses incurred in attending
an annual conference on toxic tort litigation. This represent-
ed the first time such a reimbursement request by Coady was
denied. In addition, the firm began refusing to pay monthly
office expenses for the Boston office. Coady also introduced
evidence that the firm did not inform him of its affiliation with
another Boston firm.

The court need not be in a position to evaluate the "income
straddle" evidence in order to conclude that without hearing
about the firm's "income straddle," the jury could reasonably
have viewed the evidence that Coady introduced in his de-
fense as involving disputes likely to arise between an employ-
er and its employee. Deciding whom to make a managing
partner, whom to hire, and what expenses to pay are deci-
sions that employers normally make, and an employee might

not always agree with those decisions; the firm could reason-
ably argue it was entitled to make these decisions under the
employment contract. Denying a contractually entitled bo-
nus, however, is conduct of a different order. Evidence that
the firm had improperly shifted revenues and expenses be-
tween 1997 and 1998 could well have affected the jury's
assessment of the totality of the firm's adverse conduct
toward Coady. From evidence that the firm would go so far
as to violate its contractual obligation and its duty to act in
good faith toward Coady by manipulating income and ex-
penses in order to deny Coady his full bonus, a jury could
reasonably conclude that the firm's other conduct was to be
viewed in a different light. See, e.g., Ciullo v. United States,
325 F.2d 227, 229-30 (D.C. Cir. 1963). Such evidence would
have exposed the jury to venal conduct by the firm that was
otherwise missing. Under the circumstances, the evidence
was central to Coady's defense, and in the absence of any
steps by the district court to mitigate the effects of the error,
we hold that denying Coady the opportunity to present
evidence of the firm's income straddle was not harmless
error.

IV.

Finally, Coady's contention that the district court erred in
refusing to strike the firm's claim for liquidated damages is
meritless. Our review is de novo. See, e.g., American Nat'l
Bank & Trust Co. v. Regional Transp. Auth., 125 F.3d 420,
439 (7th Cir. 1997) (citing Lake River Corp. v. Carborundum
Co., 769 F.2d 1284, 1290 (7th Cir. 1985)); Ruckelshaus v.
Broward County Sch. Bd., 494 F.2d 1164, 1165 (5th Cir.
1974).

This circuit has long recognized the validity of liquidated
damages provisions, observing in Progressive Builders, Inc. v.
District of Columbia, 258 F.2d 431, 433-34 (D.C. Cir. 1958),
that so long as the amount agreed to by the parties prior to
the breach is reasonable, the court will uphold the provision:
"[There is] difficulty of laying down any narrower test than
the reasonableness in each particular case of the sum agreed

upon as compensation for the breach." Id. (quoting 3 Samuel
Williston, A Treatise on the Law of Contracts s 2214 (rev.
ed. 1936)). Under District of Columbia law, liquidated-
damages clauses are valid and enforceable. See, e.g., Horn &
Hardart Co. v. National Rail Passenger Corp., 843 F.2d 546,
550 (D.C. Cir. 1988) (citing Vicki Bagley Realty, Inc. v.
Laufer, 482 A.2d 359, 368 (D.C. 1984)); Burns v. Hanover
Ins. Co., 454 A.2d 325, 327 (D.C. 1982). Coady, too, acknowl-
edges that liquidated damages provisions can be legitimate,
but he contends that the $400,000 amount is unenforceable on
public policy grounds and because it is a penalty inasmuch as
the contractual provision had no relationship to the actual
damages suffered or anticipated. The authorities on which
he relies, however, fail to advance his cause.

The Restatement (Second) of Contracts s 356(1) states that

[d]amages for breach by either party may be liquidated
in the agreement but only at an amount that is reason-
able in the light of the anticipated or actual loss caused
by the breach and the difficulties of proof of loss. A
term fixing unreasonably large liquidated damages is
unenforceable on grounds of public policy as a penalty.

Id.; see also Davy v. Crawford, 147 F.2d 574, 575 (D.C. Cir.
1945); Kingston Constructors, Inc. v. WMATA, 930 F. Supp.
651, 656 (D.D.C. 1996), aff'd, 172 F.3d 919 (D.C. Cir. 1998).
Coady contends that where parties provide that one fixed
sum be awarded as damages for any material breach, courts
should "look askance at the liquidated damages provision."
He also points to the prohibition in Rule 5.6 of the D.C. Rules
of Professional Conduct on a law firm "restrict[ing] the rights
of a lawyer to practice after termination of the [employment]
relationship ...." District of Columbia Bar, District of
Columbia Rules of Professional Conduct s 5.6(a) (2001).

Our response can be brief. First, the employment contract
did not specify that all breaches triggered the liquidated
damages provision; rather, only those breaches deemed "ma-
terial" triggered the payment of liquidated damages. See
Horton v. Horton, 487 S.E.2d 200, 204 (Va. 1997); 15 Samuel
Williston, A Treatise on the Law of Contracts s 44:55, at

231-33 (Richard A. Lord ed., 4th ed. 2000). Second, in
context, the liquidated damages amount was not unreason-
able. When Coady was first hired by the firm in 1993, the
amount of liquidated damages was set at $50,000. In 1994,
the employment contract was amended to set the liquidated
damages amount in increments: breaches occurring from
1994 to 1996 would carry an award of $150,000; breaches in
1997, $300,000; and breaches in 1998, $400,0000. Increasing
the amount of damages each year was justified to reflect
Coady's increasing value to the firm and his increased respon-
sibilities within the firm. See, e.g., Mercer Management
Consulting, Inc. v. Wilde, 920 F. Supp. 219, 237 (D.D.C. 1996)
(citing Ellis v. Hurson Ass'n, Inc., 565 A.2d 615, 618 (D.C.
1989)). Coady was not only the head of the Boston office,
but, according to the firm, he was "the only lawyer in that
office with substantial experience in the firm's Boston prac-
tice areas." Consequently, the firm can reasonably argue
that his termination for cause would likely be disruptive and
create both considerable losses and expenses while the firm
sought to replace him. Indeed, a firm partner testified that
the estimated business opportunities lost as a result of Coa-
dy's termination was between $1 million and $1.5 million.

Finally, Rule 5.6 of the District of Columbia Rules of
Professional Conduct is inapplicable because the liquidated
damages were not linked to Coady's decision to compete with
the firm. See District of Columbia Bar, Opinions of the
Legal Ethics Committee of the District of Columbia Bar
Interpreting the Code of Professional Responsibility, Nos.
77 & 97 (1984). Notwithstanding testimony by a firm partner
that the liquidated damages provision was designed to penal-
ize an attorney who sought to compete with the firm, the
terms of the employment contract are readily distinguishable
from a contract not to compete. Cf. Hackett v. Milbank,
Tweed, Hadley & McCloy, 654 N.E.2d 95, 97-102 (N.Y. 1995).
Rather, the liquidated damages provision was like that ap-
proved in Mercer, 920 F. Supp. at 237.

Accordingly, we affirm the district court's denial of judg-
ment on the ground that the firm was not barred from suing
Coady for breach of contract by reason of its own prior

material breach of the contract, and we affirm the district
court's refusal to strike the firm's claim for liquidated dam-
ages. However, because Coady was prejudiced by the denial
of an opportunity to introduce evidence of the firm's income
straddle, we reverse the judgment and remand the case to
the district court.