Seventh Circuit Applies Contractual Lost Profit Exclusion
BOYD v. TORNIER, INC. (August 24, 2011)
Tornier, Inc. is a national medical goods manufacturer, particularly in the joint replacement field. In 2003, it entered into exclusive distribution agreements with Boyd Medical in Missouri and Addison Medical in Iowa. The agreements provided that Boyd and Addison had exclusive distribution rights in their respective areas, that they could not sell products that competed with Tornier products, that Tornier could set sales quotas, and that the failure to meet a sales quota was grounds for termination. Even when it entered into these agreements, however, Tornier was developing a plan to convert these distributorships into dedicated Tornier outlets. Tornier told both Boyd and Addison of its plan and represented to both that they would be exclusive distributors of its new and expanded product line. Boyd and Addison began preparing for that opportunity by dropping other product lines. The truth, however, was that Tornier was not satisfied with Boyd and Addison and had already found replacement distributors. When the time came, it increased the sales quotas for both distributors and terminated them when they failed to meet the new quotas. Both Boyd and Addison went out of business and sued Tornier for breach of contract, intentional misrepresentation, and negligent misrepresentation. Magistrate Judge Wilkerson (S.D. Ill.) dismissed the negligent misrepresentation count as to Addison pursuant to Iowa law limitations on such a claim and sent the other claims to the jury. The jury found against Tornier on all claims and awarded $1.4 million in compensatory damages to Boyd, $1.1 million in compensatory damages to Addison, and $2 million in punitive damages for each. The district court set aside the punitive damages but otherwise upheld the verdict. Both parties appealed.
In their opinion, Seventh Circuit Judges Bauer, Wood, and Sykes affirmed in part, vacated in part, and remanded. The Court first addressed the breach of contract claim, which was governed by Texas law under a choice of law clause. It found that the contract specifically excluded lost profits relief after termination. Texas law, however, provides that contractual limitations on damages are not enforced when there is a bargaining disparity between the parties. The district court allowed the jury to decide whether there was a disparity as a matter of fact. The Court disagreed and vacated the compensatory damage awards. Although Boyd and Addison were dependent on Tornier, they were so by choice. They were both sophisticated businesses and could have rejected Tornier's contract demands. The Court turned to the intentional misrepresentation claims, the elements of which are: a) a false, material representation, b) that the speaker knew was false, c) spoken with the intent to deceive, d) which was justifiably relied on, and e) causing damages. Tornier challenged both the justifiable reliance and the knowledge of falsity elements. The Court affirmed the district court, finding sufficient evidence of those two elements in the record to support the jury's verdict. On Boyd's negligent misrepresentation claim, Tornier argued that the same limitation that Iowa law imposed on Addison's claim (limiting it to professionals whose business is to give advice) should be imposed on Boyd's (which was governed by Missouri law). The Court found no Missouri case that imposed such a limitation and declined the invitation to expand state law. The Court turned to tort damages. The jury's actual damage award was based on six years of lost profits assuming a 20% annual growth rate. The Court had no difficulty with the six years of lost profits, even though the distributorship contracts were of a one-year duration. Both Missouri and Iowa allow tort damages beyond a contract term if there is an ongoing relationship. There was sufficient evidence of that relationship in the record for the jury's finding. On the other hand, the assumed 20% growth rate was not supported by anything other than conjecture and hope. The Court remanded for further damage calculation. Finally, the Court addressed the punitive damage award. An award of punitive damages requires a showing of actual or legal malice. It found that Tornier's behavior, although tortious, was not vindictive or so outrageous as to meet the punitive damages standard.
The Goderstads sold their large, vintage Wisconsin home to the Ebertses for $1.85 million. Within months of their occupancy, they began to notice significant defects. The Ebertses brought a seven count complaint in the district court. American Family Mutual Insurance Company, the Goderstad’s insurer, reserved its rights, appointed counsel, and moved to intervene to protect its interests. The district court concluded that none of the claims were covered under any of the Goderstad’s policies. It granted summary judgment to American Family and certified its judgment under Rule 54 (b). The Goderstads appeal.