Although we have reported cases in which courts have denied recovery to claimants who failed to protect themselves in their contracts, a recent Seventh Circuit case illustrates an exception for fraud, intentional misrepresentation, and negligent misrepresentation. As a result, a medical goods supplier was liable to two of its terminated distributors. (Boyd Medical, et. al. v. Tornier, Inc. 7th Circuit Court of Appeals, Nos. 10-2052 and 10-2068, Aug. 24, 2011)
Tornier is a manufacturer of medical goods related to joint replacement and soft tissue repair. It uses distributors to sell its products. One of these was Boyd Medical (run by Gary Boyd) in Missouri and another was Addison Medical (run by Charles Wetherill) in Iowa. Both agreements were reciprocally exclusive - the distributors were exclusive distributors for Tornier in their respective territories and they were restricted from selling products competing with Tornier. In a statement early in the opinion which telegraphs the result, the court noted that both distributors "relied heavily on [their relationship with Tornier] for their financial health." Both distributors were terminated and shut down their businesses, resulting in claims by the distributors against Tornier. The case went to a jury, which rendered a verdict against Tornier of $1,149,000 in actual damages for Boyd and $1,100,000 actual damages for Wetherill. The jury awarded $2 million each to Boyd and Wetherill in punitive damages. The trial judge set aside the punitive damages but upheld the actual damages.
The 7th Circuit Court of Appeals affirmed the award of some damages, but eliminated others. But the court remanded the case back to the trial court for recalculation of actual damages consistent with the appeals court's decision. The damage claims the court discussed were as follows:
- Lost Profits for Breach of Contract
Unfortunately for the plaintiffs, their distributor agreement (called an Agency Agreement) included a provision stating that "neither party shall be liable to the other for any loss of profits of any kind or nature . . . arising out of termination." In spite of this provision, the trial court upheld the jury's decision to award lost profits because of the alleged disparity in bargaining power.
The appeals court disagreed. Calling the plaintiffs "successful distributors, with access to Tornier's competitors and other similarly situated companies", the distributors made their own choice to sign the Tornier agreement and must now live with the choice. So plaintiffs lost their lost profits based on breach of contract.
- Damages for Misrepresentation
The plaintiffs did better in collecting damages for misrepresentation, based on some ill-advised statements by Tornier representatives and Tornier's inconsistent (which the court called fraudulent) handling of the distributors. On the one hand, Tornier told Boyd and Wetherill that it was going to acquire bigger and better products and make them exclusive on these new product lines. Tornier encouraged Boyd and Wetherill to drop all non-Tornier products. It told them that Tornier looked forward to a "long, productive relationship" with them. In response, both distributors began dropping their non-Tornier product lines in anticipation of picking up Tornier's new products.
At the same time, Tornier had decided internally that Boyd and Wetherill were not the distributors of the future and began planning for alternative distributors to replace them. When Boyd and Wetherill failed to meet Tornier's sales quotes (which the court called "unreasonable"), Tornier terminated them and brought in their replacement. As noted, by then both distributors were dependent on Tornier and could not survive the loss of Tornier's business.
So the court concluded that there was sufficient evidence to support damages on the misrepresentation claims. But the jury awarded damages based on lost profits for six years and assumed a growth rate of 20%. This was too much for the appeals court. Even the plaintiff's own expert said that he expected medical companies to grow at less than 20% and that 20% growth was not sustainable. In this regard, the plaintiffs' timing was not favorable. The original agreements were signed in 2003 and were terminated for failing to meet 2007 quotas. But the trial was in 2009 and the severe recession turned any pre-recession growth forecasts into fantasies.
Tornier had argued that damages should be limited to one year, since the agreements were for one year terms. But the applicable law permitted lost profit damages in tort (which misrepresentation is) to exceed the term of the contract. So the plaintiffs were not limited to the term of the agreement, but the court did not provide an alternative formulation for calculating the plaintiffs' lost profits. Instead, it remanded the case to the trial court to recalculate damages "consistent with this opinion."
- Punitive Damages
Another loser for the plaintiffs. As noted above, the jury awarded the plaintiffs $2 million each, which the trial judge overturned. The appeals court agreed that punitive damages were not applicable to this situation. Punitive damages can be awarded upon a showing of "outrageous conduct that demonstrates actual or legal malice." Actual malice may be shown by spite, hatred, ill will, or vindictive motives. Legal malice may be shown by reckless indifference for an act's consequences.
The appeals court agreed that Tornier engaged in tortious behavior, even fraudulent behavior. But its behavior did not rise to the level required for punitive damages.
There are some interesting aspects to the court's decision.
- The court held the parties to their contract. The lost profits waivers in the agreements were enforced, so the distributors' claim for lost profits based on breach of contract failed.
- But the court looked beyond the contract, showing that the written contract can be just the starting point. Statements that are outside the contract can create as much, if not more, liability, particularly when, as here, the statements to the distributors were not consistent with Tornier's own internal strategy.
- Damages in tort are not limited to the term of the contract. So plaintiffs in a breach of contract action will be encouraged to find tort claims to bring in addition to breach of contract claims.
The Boyd v. Tornier case illustrates some interesting legal reasoning and principles which could favor either side in a distributor termination. But it also illustrates the consequences of some dishonest conduct that could have been avoided.