DOUGLAS P. WOODLOCK, District Judge.
Plaintiff CVA Cenvet, Inc., doing business as Antech Diagnostics ("Antech"), is a national provider of veterinary laboratory services. Winchester Veterinary Group ("Winchester") operates a veterinary hospital in Winchester, Massachusetts. Antech brought this action against Winchester, alleging breach of contract of the Antech Diagnostics Service Agreement (the "Agreement") for veterinary reference lab services it had with Winchester. For its part, Winchester initially brought numerous counterclaims against Antech, but those counterclaims have since been dismissed.
By agreement of the parties, the sole issues remaining to be determined at trial were:
Following a non-jury trial regarding those issues, I set forth in this Memorandum and Order findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure. My findings of fact reflect resolution of questions of credibility presented by the evidence at trial.
Antech provides veterinary laboratory services to over equal or superior to other similar veterinary laboratories and that Antech was therefore not in breach of its warranty under the Agreement. 16,000 animal hospitals throughout North America by means of a network of more than fifty reference laboratories in the United States and Canada. Winchester is a Massachusetts-based veterinary practice, which was co-owned by Dr. Stephen Zanotti and Dr. Jonathan Diehl until Dr. Diehl's death in October 2013.
Before Winchester entered into the Agreement with Antech in the fall of 2009, it sent its laboratory tests primarily to Antech's main competitor, IDEXX Laboratories. During the years prior to Winchester's Agreement with Antech, Winchester had transferred its business between IDEXX and Antech numerous times. IDEXX and Antech competed with each other on price for Winchester's business and both companies provided Winchester with special pricing that amounted to a substantial discount off list prices.
In the summer of 2009, Winchester began discussions with representatives of Sound Technologies, Inc., d/b/a Sound-Eklin, regarding the purchase of digital x-ray equipment. Sound-Eklin is a subsidiary of VCA Cenvet, as is Antech. Winchester had been introduced to Gary Britko of Sound-Eklin through Peter Massuzo, a representative of Heska Corporation, with whom Dr. Zanotti and Dr. Diehl were discussing upgrading blood testing equipment. Britko connected Winchester to an Antech representative named Sean Hayes to see whether Antech could provide Winchester with the x-ray equipment in exchange for a contract for laboratory services with Antech.
Between September 10 and September 17, 2009, there was a series of conversations and communications between Hayes and Doctors Zanotti and Diehl. Hayes provided a written proposal and then a draft services agreement to Winchester during that period. Under the draft, Winchester would be required to use Antech for laboratory services equal to an annual minimum of $72,000, which would be $6,000 per month on average. The draft required Winchester to use Antech for all of its laboratory and diagnostic services, with the exception that Winchester could use another laboratory for up to 10% of the fees it paid in any year as well as for any services that Antech did not provide.
During the negotiations, Winchester agreed to the general terms but requested a number of changes to the draft agreement. These included allowing Winchester an additional year to make up the minimum purchases owed if they did not meet the full $360,000 minimum commitment within the sixty-month period, adding an additional sentence to clarify that Winchester could buy the equipment for one dollar if they paid a termination fee pursuant to Section 5 of the Agreement, upgrading the x-ray equipment to a larger plate size, adding a bulk rebate in line with what IDEXX had provided them, and capping any annual price increase at 6.5%. Antech agreed to each of these proposed changes. The Agreement, executed by the parties on September 17, 2009, stated that the term of the agreement was sixty months, beginning September 15, 2009.
Section 1.1.4 of the Agreement, titled Laboratory Services, states:
Section 5 of the Agreement, titled Termination and Termination Fee, states:
The chronology of the in-person meetings between the parties and their principals is not entirely clear from the evidence, but it is undisputed that there were at least two inperson meetings during the week of negotiations. At a September 10, 2009, meeting, Hayes stated in words or substance that Section 1.1.4 was added based on Winchester's request, and said "we guarantee the quality of service" and "we don't want to keep you if you're not happy. If you're not happy, you can go; we're not going to force you to stay with us."
Another face-to-face meeting between the doctors, Hayes, Lori Sachs (also of Antech), Britko, and Massuzo occurred on September 17, 2009. In this meeting, Hayes and the doctors reviewed the terms of the draft services agreement. They specifically focused on Section 1.1.4, concerning the warranty of quality, and Section 5, concerning the termination fee. While Dr. Zanotti and Hayes were discussing Section 5, Dr. Zanotti said to Hayes something to the effect of, "So I understand the contract correctly, if Winchester Vet Group decides to leave in the first year that we owe you 72,000, and if we elect to leave in the second year, we owe you 57,600, and so on, as defined by the termination fee." He testified that Hayes said "Yes" in response to the question. There was conflicting evidence about whether Dr. Zanotti specified that the payments would be for the x-ray machine
The parties communicated again by email later on September 17, 2009, after which Dr. Diehl and Dr. Zanotti signed the final version of the Agreement and faxed it to Sean Hayes at Antech.
Winchester ordered laboratory services from Antech from September 2009 through the end of February 2011. However, even during that period, Winchester spent significantly below its minimum commitment; in fact, Winchester reached its $6,000 monthly average minimum only once during that time. On February 4, 2011, Winchester signed a contract for laboratory services with IDEXX. At the time that Winchester made this switch, it harbored the belief that the cost of leaving Antech under the Agreement would be the termination fee set forth in Section 5 of the Agreement. On March 1, 2011, Winchester called Antech's courier service, which had been coming by to pick up laboratory samples every day, and told the courier to only come when Winchester called to schedule a pickup.
Kathryn Williams, a Territory Manager for Antech assigned to the New England area, received a call from the courier service on or about March 14, 2011, stating that Winchester had told the courier to stop the regular pickups. Williams and Hayes were in communication as of that date about Winchester's not sending its laboratory work to Antech. They had numerous meetings with Dr. Zanotti and Dr. Diehl between March 2011 and October 2011. Throughout those meetings, Doctors Zanotti and Diehl never told them that they were unhappy in any way with Antech's services. Instead, Winchester repeatedly stated that Massachusetts Veterinary Referral Hospital, a hospital to which Winchester referred many patients, used IDEXX and that they wanted continuity in results between the two medical providers. Despite having earlier signed a contract with IDEXX, Winchester told Antech as late as August 25, 2011, that it was under no legal obligation to use IDEXX.
Williams testified that in the August 25, 2011, meeting, Dr. Zanotti stated his opinion that Section 5 limited Winchester's liability to the prorated amount of the x-ray equipment. Hayes did not agree, but rather said that Winchester would be liable for the revenue for the laboratory services on the balance of the Agreement.
On October 7, 2011, Williams received a voicemail from Dr. Diehl stating that although Winchester had been happy with Antech, they would be using IDEXX due to the continuity concerns related to Massachusetts Veterinary Referral Hospital. Dr. Diehl offered to pay Antech the "pro-rated" equipment fee plus one dollar.
Brian Brown, the Controller of Antech, testified as to the damages calculations.
Brown has held the position of Controller since 2013, and had previously been the Assistant Controller since 2008. In his role as Controller, he oversees Antech's accounting including billing, accounts payable, internal financial statements and management reports, and the accounting and administrative aspects of services agreements between Antech and its customers. Any damages calculations performed by Antech during this litigation were either performed by or reviewed by Brown in his role as Controller.
Brown presented a report, based on Antech's financial records, showing Antech's yearly net revenue from Winchester from 2009-2011. This net revenue reflected both the discounts and rebates that Antech provided Winchester pursuant to the Agreement. The net revenue that Antech received from Winchester was $14,136 in 2009, $57,683 in 2010, and $9,707 in 2011. This revenue composed a small portion of Antech's yearly revenue— 0.005% in 2009, 0.019% in 2010, and 0.003% in 2011.
Brown testified that he conducted an analysis of Antech's lost profits as a result of Winchester's breach. He attempted to determine what Antech's costs would have been to produce the services if the contract had been fulfilled. Because Antech did not need to expend those costs, they had to be subtracted from the anticipated revenue in order to determine lost profits, not merely lost revenue. Brown distinguished between fixed costs that would not change regardless of whether Winchester performed under the Agreement, and variable costs, meaning costs that were higher or lower depending on whether Antech was fulfilling Winchester's committed purchase volume pursuant to the Agreement. He testified that Winchester's business had no impact on the staffing levels or hours of operation of any laboratory, and that Antech did not purchase or sell any equipment, open or close any laboratories, or make any changes to its business to accommodate the gain or loss of Winchester's business. Therefore, costs like rent, equipment, and salaries were classified as fixed costs. Other costs were classified as variable costs, for example, consumable materials used in tests and the costs of transportation. Because Antech did not have data individualized for the Winchester Agreement specifically, Brown looked to cost data for the company as a whole.
Brown and Bruce Bargmann, the Vice President of Finance and Administration at Antech, conducted a detailed analysis determining whether costs in each of a large number of highly specific cost categories were "fixed" or "variable" during 2009-2012. Brown testified about the reasoning behind whether a number of these cost categories were determined to be fixed or variable costs. Brown determined that variable costs represented 30.6% of Antech's total 2012 United States laboratory services revenue. In previous years, total variable costs as a percentage of total revenue had been 28.6% in 2009, 29.3% in 2010, and 30.1% in 2011.
Based on this data for the company as a whole, Brown next applied it Winchester specifically. The number that he used was the total price of services that Winchester had committed to over the course of the Agreement ($360,000), minus the amount Winchester had already paid ($81,526.42), resulting in expected net revenue over the remainder of the agreement of $278,473.58. He then subtracted the variable costs, which he calculated based on the company-wide data as being as being 30.6% of the net revenue ($85,212.92). This resulted in a lost profits calculation of $193,260.66.
Brown acknowledged that there are numerous assumptions built into his expectation damages model. He testified that determining the costs specifically attributable to Antech would require a tremendous investment of time and resources, and that Antech does not have the technological capacity to do so at this time. Brown agreed that the major assumption that is built into his lost profits model is that the percentage variable costs necessary to service Winchester would be in line with the company average, and that this percentage does not materially change from client to client.
Brown testified, however, to ways in which Winchester was not an average client. He stated that Winchester was three times larger than Antech's average client. He testified that Winchester received approximately a 65% discount off list price, whereas the average discount for all clients was 45% off list price and 51% for clients in contracts. Brown testified that he did not take the larger percentage discount provided to Winchester or potential economies of scale for larger clients like Winchester in areas like transportation into account when he calculated lost profits.
Brown also testified that in the early stages of litigation, he had calculated Antech's lost profits by deducting both variable and fixed costs from expected revenue so long as they were direct costs. He later changed the methodology by which he calculated Antech's lost profits, deducting only variable costs and not fixed costs, even when the fixed costs were for things like salaries and equipment without which it would be impossible to service Winchester.
In addition to Brown's testimony about lost profits, he also testified that Antech provided Winchester with numerous discounts and rebates. While Antech purchased $81,526.42 in services, the list price for those services was $233,465.45. The difference between those two prices, $151,939.03, is the value of discounts and rebates that Antech provided Winchester on the services that Winchester purchased.
Dr. Zanotti testified that that the discounts and rebates they received from Antech were designed to match those that they were already receiving from IDEXX and were in line with past discounts provided by Antech in the absence of a contract. Dr. McCammon, an Antech customer and head of another veterinary practice, testified that he too regularly received significant discounts from Antech.
The parties agree that under Section 6 of the Agreement California law governs Antech's claim for breach of contract. Under California law, the elements of this cause of action are (1) the existence of a contract, (2) plaintiff's performance or excuse for nonperformance, (3) defendant's breach, and (4) the resulting damages to the plaintiff." Oases W. Realty, LLC v. Goldman, 250 P.3d 1115, 1121 (Cal. 2011) (citing Reichert v. General Ins. Co., 442 P.2d 377, 381 (Cal. 1968)). Winchester disputes the validity of the Agreement, arguing fraudulent inducement. Assuming, however, that a valid contract was entered into, the primary dispute is one of damages. Winchester argues that Section 5 of the Agreement functions as a liquidated damages clause and alternatively that Antech is estopped from collecting more than the termination fee laid out in Section 5. If Section 5 does not control the question of damages, Winchester acknowledges that lost profits or reliance damages are the proper method of analysis but disputes Antech's calculations.
A preliminary issue, relevant to a number of the conclusions set forth below, is the question of what, if any, role extrinsic evidence, such as Hayes's statements, may play in determining the intention of the parties and interpreting the Agreement. A "well-established principle mandates that unambiguous contracts be enforced according to their terms." Hyundai Am., Inc. v. Meissner & Wurst GmbH & Co., 26 F.Supp.2d 1217, 1219 (N.D. Cal. 1998). The test for admissibility of extrinsic evidence in interpreting a written document under California law "is not whether [the written document] appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible." Pacific Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 442 P.2d 641, 644 (Cal. 1968). The fact that there is an integration clause, as there is in this Agreement, does not alter the applicable rule that extrinsic evidence can be used to resolve contractual ambiguity. Lonely Maiden Prod., LLC v. Golden Tree Asset Mgmt., LP, 135 Cal.Rptr.3d 69, 75 (Cal. Ct. App. 2011).
California law requires that I consider whether the proffered extrinsic evidence helps reveal either a patent ambiguity, apparent on the face of the contract, or a latent ambiguity. I must therefore preliminarily consider all credible external evidence, including Hayes's statements in the context of negotiation and discussion of the Agreement, and then consider whether the language of the contract "in the light of all the circumstances is fairly susceptible of either one of the two interpretations contended for." Burch v. Premier Homes, LLC, 131 Cal.Rptr.3d 855, 865 (Cal. Ct. App. 2011)(internal quotation marks omitted). Where external evidence would "flatly contradict express terms of the agreement," however, external evidence must be rejected. Thrifty Payless, Inc. v. Mariners Mile Gateway, LLC, 111 Cal.Rptr.3d 173, 182 (Cal. Ct. App. 2010).
Applying this analysis, I conclude that while Section 5 of the Agreement does give Antech the right to terminate, it does not give that right to Winchester. The Section includes language that "Antech may Terminate this Agreement" if Winchester is in material breach and the language that the fee schedule applies "[i]f Antech elects to Terminate this Agreement." Even taking into account the conversations between Hayes and the doctors prior to their signing the Agreement, this section is not susceptible in any way to a reading either that Winchester also had a right to terminate the Agreement or that under this Section Antech was constrained to only exercising its right to the termination fee in the event of a breach.
Winchester argues that the Agreement itself is invalid because Winchester was fraudulently induced into signing the Agreement due to Hayes's statements. The doctors testified that if they had understood they would be liable for damages measured by Antech's lost profits under the contract, they would not have entered into this contract.
To prove fraud in the inducement, a party "must allege and prove that the defendant made a false representation of a material fact with knowledge of its falsity for the purpose of inducing the plaintiff to act thereon, and that the plaintiff relied upon the representation as true and acted upon it to her damage." Masingill v. EMC Corp., 870 N.E.2d 81, 88 (Mass. 2007)(citing Kilroy v. Barron, 95 N.E.2d 190 (Mass. 1950)). Under Massachusetts law, fraud claims are subject to the ordinary preponderance of the evidence standard. Compagnie De Reassurance D'Ile de France v. New England Reinsurance Corp., 57 F.3d 56, 72 (1st Cir. 1995)("under applicable Massachusetts law fraud need not be shown by anything more than the ordinary preponderance of the evidence standard applicable to civil cases in general").
The plaintiffs claim that Hayes made two misrepresentations: his statement on September 10, 2009, regarding Antech's likely response if Winchester were "not happy," and his affirmative answer to Dr. Zanotti's question on September 17, 2009, about whether Winchester would owe Antech the amounts detailed in Section 5.
I conclude that Hayes's September 10, 2009, statement about Antech's anticipated response if Winchester were "not happy" is the kind of "general, rosy affirmation," that falls within a category of "company representations [that] are `normal commercial puffing' and thus inactionable statements of opinion." NPS, LLC v. Ambac Assur. Corp., 706 F.Supp.2d 162, 171 (D. Mass. 2010). It is essentially a salesman's endorsement that cannot be considered an actionable misrepresentation upon which to found an argument for fraudulent inducement.
As to Hayes's statements to Dr. Zanotti about the termination fee, the primary question is one of reasonable reliance. Parties asserting fraudulent inducement "must show that their reliance on the alleged misrepresentation was reasonable". Celtic Dev. Corp. v. F.D.I.C., 836 F.Supp. 926, 939 (D. Mass. 1993). "It is unreasonable as a matter of law to rely on prior oral representations that are (as a matter of fact) specifically contradicted by the terms of a written contract." Masingill v. EMC Corp., 870 N.E.2d at 89; see also Sands v. Ridefilm Corp., 212 F.3d 657, 665 (1st Cir. 2000)("It was unreasonable for the plaintiff to rely on the alleged oral representations because of the express written word.").
I conclude it was unreasonable for Winchester to rely on any statement suggesting that Winchester had the ability to invoke the termination fee schedule pursuant to Section 5 of the Agreement unilaterally and without any preconditions and thereby to limit Antech's damages remedy. The language of Section 5 specifies that it applies only to Antech's decision to terminate after a breach by Winchester. Whether the alleged misrepresentation is viewed as being about a right to terminate or as a right to limit Winchester's liability in the case of a breach, the issue is the same: Does the statement I have found that Hayes made directly contradict the language of Section 5?
As discussed above, Section 5 unambiguously provides a right of termination only to Antech, not to Winchester, and gives Antech the option to terminate and receive a set fee as laid out in the termination fee schedule if Winchester breaches the Agreement. Dr. Zanotti's understanding of Hayes's affirmative answer in response to the question about what Winchester would owe if it left was rooted in interpreting the language of Section 5 itself, not in a discussion about some understanding outside the Agreement. For example, Dr. Zanotti stated that he believed that the cost of leaving would be the termination fee from Section 5 "because of the language of Section 5 of the Services Agreement and also because of the discussion that I had with Mr. Hayes on the day that we signed the Services Agreement where he represented that my understanding of the operation of Section 5 was correct." Yet Section 5 plainly does not provide that Winchester is entitled to pay the termination fee and get out of the Agreement without further damages. Therefore, to the extent that Winchester relied on a response by Hayes that Winchester understood to mean that Section 5 said otherwise, the response was directly contradicted by Section 5 and Winchester's reliance on that statement was unreasonable. Consequently, I conclude that Winchester's fraudulent inducement affirmative defense fails.
Given the existence of a valid contract, performance by Antech, and breach by Winchester, the remaining issue is that of damages.
While Winchester agrees that the text of Section 5 does not actually give it the right to terminate the Agreement, Winchester contends that Section 5 of the Agreement — interpreted in the context of statements made by Hayes — limits Antech's recovery to the termination fee schedule. I conclude that nothing in Section 5 precludes Antech's choice to pursue a damages remedy other than that laid out in the section. The language of Section 5 provides Antech the option whether or not to seek damages separate from the termination fee schedule of Section 5. In particular, I note the language that "Antech may Terminate this Agreement" if Winchester is in material breach and the language that the fee schedule applies "[i]f Antech elects to Terminate this Agreement." (emphasis added). A contract need not have a separate clause explicitly stating that one party is permitted to take a breaching party to court or that such a party may rely on common law remedies in order for a party to bring suit. That said, language of Section 5 unambiguously maintains such options for Antech upon breach by Winchester.
Equitable estoppel requires proof that the party to be estopped had knowledge of the pertinent facts and intended his conduct to be acted upon, and that the party asserting estoppel was ignorant of the true state of facts and reasonably relied to his detriment on the conduct of the party to be estopped. Berkeley Police Assn. v. City of Berkeley, 143 Cal.Rptr. 255 (Cal. Ct. App. 1977). The elements of promissory estoppel are a clear promise that a promissor reasonably expects to induce action or forbearance upon which the promissee reasonably relies. Oracle Corp. v. Falotti, 187 F.Supp.2d 1184, 1206 (N.D. Cal. 2001). The statement or promise must be clear and unambiguous. "The representation, whether by word or act, to justify a prudent man in acting upon it, must be plain, not doubtful or matter of questionable inference. Certainty is essential to all estoppels." Steinhart v. Cnty. of Los Angeles, 223 P.3d 57, 71 (Cal. 2010).
The statements made by Hayes were not the types of clear and unambiguous statements that can form the foundation for an estoppel claim. Hayes's affirmative answer to Dr. Zanotti's question about Section 5 was only as clear as Dr. Zanotti's question. Dr. Zanotti himself does not remember the precise wording of his question and there is no evidence that Dr. Zanotti asked his question in the sort of nuanced way that could provide Winchester with a clear impression that it was permitted unilaterally to invoke the termination clause. Even if the question were stated just as Dr. Zanotti testified, "if Winchester Vet Group decides to leave in the first year that we owe you 72,000, and if we elect to leave in the second year, we owe you 57,600, and so on," that question does not clearly refer to Winchester leaving and invoking the termination fee unilaterally — instead, in the context of discussing the text of Section 5, it could just as easily have been understood to be a question about what would happen if Antech terminates after Winchester leaves in the first or second year or a discussion of the value of the equipment itself rather than of the entire contract. Given the ambiguity in any of the versions of the question that Dr. Zanotti asked, reliance on the affirmative response by Hayes would be reliance on an indefinite or unclear statement. See Armstrong v. Rohm & Haas Co., 349 F.Supp.2d 71, 81-82 (D. Mass. 2004)("Reliance is not reasonable where the alleged representations are vague or indefinite.")(quoting Saxon Theatre Corp. of Boston v. Sage, 200 N.E.3d 241, 244 (Mass. 1964)).
Hayes's statement about Winchester's being able to leave if they were "not happy" is a similarly elusive statement that could not provide a foundation for reliance. It was a general, salesman-like statement rather than a concrete representation about Antech's intentions.
More fundamentally, as with fraudulent inducement, I conclude that it would be unreasonable to rely on an oral statement made during negotiations that is contradicted by the plain terms of a written agreement. "A party may not, as a matter of law, reasonably rely on an oral promise that contradicts the plain terms of a written agreement." Sussex Fin. Enterprises, Inc. v. Bayerische Hypo-Und Vereinsbank AG, 460 F. App'x 709, 712 (9th Cir. 2011)(citing Hadland v. NN Investors Life Ins. Co., 30 Cal.Rptr.2d 88, 95 (Cal. Ct. App. 1994)). Hayes's statements to Dr. Zanotti about the termination fees concern the language of Section 5 itself. Given that there is a written, signed agreement by the parties, the unambiguous language of the Agreement itself — which allows Antech to exercise, or not, its right to the termination fee — controls.
If testimony suggested that Hayes had made a statement or promise consistent with Section 5, reliance upon it may not have been unreasonable. For example, if Hayes had said that Antech promises to exercise its option to receive only the termination fee in the event of a breach, then that would have been consistent with the language of Section 5 and resolving the question whether reliance was reasonable would be more difficult. But cf. Sussex Financial Enterprises, 460 Fed.Appx. at 712 (where a written agreement specifies that one company can unwind a loan for any reason, it was unreasonable for another company to rely on an assurance that it would only do so for specified reasons). However, I need not explore whether a representation or promise about Antech's intent could reasonably be relied on here, because the evidence adduced at trial does not support that Winchester was relying on any representation consistent with Section 5. The conversations between Hayes and the doctors concerned the meaning of Section 5 and it would be unreasonable for Winchester to rely on a statement or promise contrary to the language of the written Agreement. I therefore reject Winchester's estoppel-based arguments that Antech should be restricted to damages in the amount of the termination fee.
Under California law, damages in the amount of lost profits have long been considered an appropriate remedy for breach of contract. See Grupe v. Glick, 160 P.2d 832, 839 (Cal. 1945). Damages for loss of prospective profits must be "ascertainable with reasonable certainty." Id. at 839-40. See also S.C. Anderson, Inc. v. Bank of Am. Nat'l trust & Sav. Ass'n, 30 Cal.Rptr.2d 286 (Cal. Ct. App. 1994). A plaintiff is not, however, required to establish the amount of its damages with absolute precision, though it is "required to present the best evidence of damage of which the nature of the case is capable." Id.
A plaintiff is entitled to net profits, not gross profits. Dallman Co. v. S. Heater Co., 68 Cal.Rptr. 873, 879 (Cal. Ct. App. 1968). However, where "plaintiff's expenses of operating his business are fixed and would have continued in an equal amount even if the contract had not been breached by the defendant, an award of gross profits may be allowed to the plaintiff, since, in such a situation, the gross profits involved would also constitute the net profits which the plaintiff would have earned under the agreement." Id. It is a question of fact whether particular costs will or will not be affected as a consequence of nonperformance of the contract. Oakland California Towel Co. v. Sivils, 126 P.2d 651, 652 (Cal. Dist. Ct. App. 1942). The method of dividing expenses into categories of fixed and variable is consistent with the principle underlying the lost profits method of calculating damages, which is to determine the benefit lost as the result of the breach. If the fixed expense would not change no matter whether the contract were performed, then the fixed costs play no role in the calculation of loss. See id.
The Fourth Circuit in VCA Cenvet Inc. v. Chadwell, 552 Fed. App'x. 217 (4th Cir. 2014), a decision denying summary judgment to Antech on the basis that it only provided variable and not fixed expense information and therefore the net profits could not be determined, is instructive.
The Chadwell court did not hold that, after trial, all fixed costs must be deducted regardless of whether they have any role to play in the costs that would have been incurred in performing on the particular contract at issue. The examples of "fixed" costs that the court held were not adequately addressed included those such as freight and delivery, id. at 220, which were factored in as variable costs in this case. The focus of the Chadwell court's decision was on the inadequacy of the evidence of costs presented at that stage, not a principled stance that fixed costs must necessarily be deducted in a net profit calculation. Indeed, if Chadwell did hold that fixed costs that were not affected by the contract or by the breach must be subtracted in calculating net profits, I would disagree with its legal analysis and decline to follow it. See Burruss v. Board of County Commrs. Of Frederick County, 46 A.3d 1182, 1194 (Md. 2012) (declining to apply collateral estoppel where prior decision was based on incorrect interpretation of the law). Rather, I read Chadwell as being consistent with the position that the true net profits must be considered in this damages calculation, and that true net profit is a question of fact.
I conclude that the costs that Brown identified as fixed expenses did not vary depending on whether Winchester performed or breached. Those expenses did not decrease after Winchester stopped sending its business to Antech. Antech did not need to deduct these costs to determine its net profits. Accord Animal Hosp. of Nashua, Inc. v. Antech Diagnostics, No. 11-CV-448-LM (D.N.H. Aug. 12, 2014); VCA Clinipath Labs, Inc. v. Progressive Pet Animal Hospitals, P.C., 2013 WL 6152409, *4-*5 (E.D. Mich. Nov. 22, 2013) (deducting only variable costs as "the expenses VCA would have incurred").
I conclude that Antech's individualized lost profit analysis provides a basis to establish lost profits with reasonable certainty. Calculating future lost profits necessarily involves estimates and assumptions. The question is whether Antech has presented "the best evidence" available regarding the issue. S.C. Anderson, 30 Cal.Rptr.2d 286, 290-91. I conclude that a more precise individualized analysis of the costs involved in servicing Winchester had it performed under the Agreement would be impossible and impracticable given the current technology used by Antech and the costs and time required to implement a system that would be capable of more highly individuated calculations. California law acknowledges that "absolute precision" need not be achieved for a lost profits analysis to survive. Id.
The use of averages based on an analysis of Antech's financial statements constitutes the type of analysis that can adequately form the basis of a lost profits analysis in the absence of more precisely individualized data. Historical data can supply an acceptable foundation for determining future profits. Sargon Enterprises, Inc. v. University of Southern Cal., 288 P.3d 1237, 1254 (Cal. 2012). This analysis is rooted in the specific amount owed under the Agreement and financial data from Antech; it is not speculative. C.f. Kids' Universe v. In2Labs, 116 Cal.Rptr.2d 158 (Cal. Ct. App. 2002) (lost profits were too speculative in calculation for a business that did not exist); Sargon Enterprises, 288 P.3d at 1255 (lost profits too speculative when plaintiff claimed that breach prevented small company from developing into a worldwide leader in its field).
Nevertheless, I cannot simply determine Antech's average variable costs and then apply them directly to Winchester without considering the significant ways in which the evidence has shown that Winchester was not an average client. I recognize that the average Antech client received a 45% discount off list price, whereas Winchester received a 65% discount.
While Antech may not have access to the individualized data about the variable costs relevant to Winchester individually, it has provided at least some additional information about the relative discounts that permits a more individualized assessment of net profits than simply applying the average costs for all of Antech's customers. The 30.6% variable costs figure applies to an average client. Because a calculation using that percentage necessarily uses revenue for services from a customer as a starting point, other things being equal (an assumption discussed further below), a larger-than-average discount would mean that any calculation using the 30.6% number would lead to an artificially deflated account of variable costs.
To determine how much an average client would have had to pay on laboratory services at the 45% discount rate to get the same services that Winchester would be able to get with $360,000 at the 65% rate, I first consider what the list price of the $360,000-worth of services would be. The complete list price (rather than the 35% rate at which Winchester paid for services) would be $1,028,571.
The average variable cost rate of 30.6% applied to an average client purchasing the same amount as Winchester agreed to purchase under the contract results in variable costs of $173,108.
There is reason to believe, based on Brown's testimony at trial, that transportation costs as a percentage of revenue for a larger client like Winchester would be "a little bit lower" than for the average client, other things being equal. Brown stated that transportation costs as a percentage of revenue would be lower, but said that he did not know if "a little bit lower" is correct. Brown did not take any discount related to size or economies of scale into account when he created his model of variable costs. As Brown acknowledged, leaving out information about leveraged efficiency results in a conservative estimate of lost profits. Although leaving out any leveraged efficiencies would result in a conservative estimate, using conservative inputs does not make a lost profits calculation unreliable. See, e.g., Chinese Yellow Pages v. Chinese Overseas Mktg. Serv. Corp., 2007 WL 2367800, at *9 (Cal. Ct. App. Aug. 21, 2007) (using conservative estimates to determine lost profits); W. Pet Wholesalers, Inc. v. Natura Pet Products, Inc., 2005 WL 1925858, at *5 (Cal. Ct. App. Aug. 11, 2005)(same). Given that it is Antech's burden to present evidence of a reasonably certain calculation of loss, using a conservative calculation that disregards potential benefits to Antech where they are insufficiently supported by evidence is appropriate.
I conclude that Antech is not entitled to the full value of the x-ray equipment, valued at $72,000, in addition to the lost profits. Contract damages are designed to compensate a plaintiff for its lost expectation interest, the "benefit of the bargain that full performance would have brought." New W. Charter Middle Sch. v. Los Angeles Unified Sch. Dist., 114 Cal.Rptr.3d 504, 515 (Cal. Ct. App. 2010). If Winchester had fully performed, Antech would have forgiven the amount it paid for the x-ray equipment. If Antech were allowed to recover both the value of the equipment and the lost profits, this would essentially be double recovery and Antech would improperly receive more than its due. Accord Antech Diagnostics, Inc. v. Downers Grove Animal Hosp. & Bird Clinic, P.C., 2013 WL 773034, at *8 (N.D. Ill. Feb. 28, 2013) (Antech was not permitted to recover both a loan to the animal hospital designed to be forgiven over the term of the contract as well as lost profits). I conclude that Antech may not recover additional damages for the value of the x-ray equipment.
Antech focused its lost profits damages analysis on Winchester's breach in not meeting the minimum commitments. Winchester also breached the Agreement in an additional way, through failing to use Antech on a near-exclusive basis as required by the Agreement. This additional breach, however, does not add any additional damages to a lost-profits analysis under the evidence presented at trial. Antech has not presented any evidence that Winchester would have ultimately gone over the minimum amount during the five year period such that the expected revenue would be greater than $360,000. Winchester's track record during the period that it performed suggests the opposite. Brown testified that Winchester had only met its monthly average minimum for a single month, and other than that had bought less than $6,000 of services per month during the period that they were performing. There is no evidence that Winchester was violating the near-exclusivity requirement during the period that it was not making the monthly minimums. Under the Agreement, Winchester was entitled to an additional year to meet the minimum services price of $360,000 and as of February 2011 it appeared that unless they significantly increased the quantity or price of services they ordered, they were on track to need the extra time. In the absence of any evidence that Winchester would have exceeded the $360,000 minimum, the lost profit analysis based on the minimum commitment remains the appropriate measure of damages.
If the lost profit analysis were found to be inadequately certain, Antech would still be entitled to reliance-based damages in the alternative. Reliance-based damages include "expenditures made in preparation for performance or in performance." Restatement Second of Contracts, § 349.
Antech contends that its expenditures and services provided to Winchester are the value of the x-ray equipment plus the discounts and rebates that it provided to Winchester. Antech calculates that the value of the discounts and rebates off list price amount to $151,939.09. There was significant evidence at trial, however, that list price is an inflated value and there are no circumstances under which Winchester would have paid list price. For example, Brown testified that the average discount for all customers was 45%. Hayes testified that from the beginning of Antech's negotiations with Winchester, they were discussing whether Antech would match the prices then being offered by IDEXX to Winchester without any contract. He testified that there was never any discussion about Winchester paying list price or paying more than they were then paying with IDEXX. Dr. Zanotti testified that even without any contract, Winchester had always received discounted pricing from both Antech and IDEXX. He testified that Antech's discounts were equivalent to the discounts they were receiving from IDEXX at the time they entered the Agreement.
The x-ray equipment, in contrast, was an expenditure by Antech that was made in reliance on Winchester's commitment to the Agreement. The full value of the x-ray equipment, $72,000, is the expenditure made by Antech in reliance on the Agreement and would therefore be awarded to Winchester as reliance-based damages if the lost profit calculation were insufficient. No additional expenditure was made to secure the requirement that Winchester use Antech on a near-exclusive basis, so this additional breach does not add anything to an assessment of reliance-based damages.
California provides mandatory prejudgment interest when a party is entitled to recover damages certain, Cal. Civ. Code § 3287(a), and discretionary prejudgment interest when a party is entitled to receive damages "based upon a cause of action in contract where the claim was unliquidated," id. at § 3287 (b). Antech has moved for discretionary prejudgment interest under section (b). The California statutory prejudgment interest rate for contracts is 10 percent per annum. Id. at § 3289. This calculation may run, in my discretion, from as early as the date the action was filed.
Winchester argues that no prejudgment interest is appropriate when a debtor was prevented by the act of the creditor from paying the debt. Id. at § 3287(a). Since it attempted to pay Antech $57,600 in October 2011 and the offer was rebuffed, Winchester contends that no prejudgment interest is appropriate, at least on $57,600 of the total damages amount. Winchester's attempt to pay the amount in Section 5 of the Agreement, however, does not take this amount out of consideration for purposes of prejudgment interest. First, the argument that a party was prevented from paying its debt applies only to cases that fall under § 3287(a), in which the amount owed is certain, as in a liquidated damages provision. Here, I have determined that Antech is entitled to its expectation damages related to this contract, not merely to the amounts specified in Section 5. This has required a detailed analysis of Antech's net profits, as discussed above. The amount owed was not, therefore, a certain amount as required under § 3287(a), so the exception for § 3287(a) similarly does not apply. In addition, a tender of less than the full amount due on the contract does not stop the running of interest, "since a tender, in order to be effective, must include everything to which the creditor is entitled." Lovetro v. Steers, 44 Cal.Rptr. 604, 615 (Cal. Dist. Ct. App. 1965).
The purpose of prejudgment interest under California law "is to provide just compensation to the injured party for loss of use of the award during the prejudgment period — in other words, to make the plaintiff whole as of the date of the injury." Lakin v. Watkins Assoc. Indus., 863 P.2d 179, 191 (Cal. 1993). Prejudgment interest is an element of damages, see North Oakland Med. Clinic v. Rogers, 76 Cal.Rptr.2d 743, 747 (Cal. Ct. App. 1998), and damages for breach of contract are meant to be "the amount which will compensate the party aggrieved for all the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result thereform." Cal. Civ. Code § 3300. Antech argues that Winchester's breach of contract deprived Antech of its bargained-for consideration, the agreed-to minimum yearly payments, for more than three years, and that the interest on the full amount owed as of the date of the filing of the action is the appropriate way to fully compensate Antech for the amount withheld from it through Winchester's breach.
In contrast, Winchester argues given that the contract provided for yearly minimum purchases, any prejudgment interest should be calculated only from the date on which the payments would have been due under the contract. In Currie v. Workers' Compl Appeals Bd., 17 P.3d 749 (Cal. 2001), the Supreme Court of California explained that where a plaintiff was suspended from work that would have paid a salary over time, the plaintiff was entitled to the "benefit of the moneys paid as of those dates." Id. at 754 (quoting Mass v. Board of Ed., 394 P.2d 579, 588 (Cal. 1964)). To make the plaintiff whole, the court determined that he must be paid interest as of the days he would have received the salary, because otherwise he would have "lost the natural growth and productivity of the withheld salary in the form of interest." Id.
Similarly, Winchester argues that Antech should be entitled to interest from the date on which it would have received compensation under the contract, but not for the full value of the contract as of the date the suit was filed, December 1, 2011. Under Winchester's argument, giving prejudgment interest for the full amount to Antech as of the date the suit was filed would be overcompensating Antech because the contract did not require the full $360,000 be paid as of that date. Antech notes that Currie concerns compensation under Cal. Civ. Code § 3287(a), whereas Antech seeks compensation under § 3287(b), but I do not find that the reasoning concerning when prejudgment interest is appropriate should be any different under one section of the statute rather than another. Given the purposes of prejudgment interest, to make the plaintiff whole, it would be improper for Antech to receive the benefit of interest on payments that it would not yet have received under the terms of the contract.
Where there is no prior agreement about the terms under which interest will be owed, the general rule is that "the law awards interest upon money from the time it becomes due and payable, if such time is certain and the sum is certain or can be made certain by calculation." Indem. Ins. Co. of N. Am. v. Watson, 16 P.2d 760, 765 (Cal. Ct. App. 1932). Neither Antech nor Winchester proposes what such a prorated prejudgment interest schedule would look like given the terms of this contract. The Agreement, which states that it is for a term of 60 months, under a section titled "minimum average annual fees" required Winchester to use Antech to provide laboratory services "in an amount equal to a minimum of $72,000 or a $6,000 net per month average." However, at Winchester's request, the contract also stated, "If total lab payments have not reached $360,000 within the 60 month term Antech will extend the term for an additional 12 months." Therefore, while the contract anticipated an annual minimum that came out to a certain average per month, the contract also provided that Winchester would have an entire sixth year to make up any shortfall in the contract amount. Given that the Agreement ran from September 15, 2009, the six-year period (the 60 months plus the additional 12 months) would not expire until September 15, 2015. Under the Agreement, Antech would not have had a cause of action against Winchester solely for not meeting the minimum payments until the expiration of the additional year. Of course Antech could have terminated the agreement for Winchester's violation of the exclusivity provision, but it chose not to do so by not exercising its right to the payment schedule in Section 5.
Given the plain terms of the contract, I deny prejudgment interest entirely because the contract would not have required payment of the full amount until mid-September 2015. Antech must suffer the consequences of drafting a contract without firm dates by which payment was due.
For the foregoing reasons, it is hereby ORDERED that judgment enter for the plaintiffs on the basis of these findings of fact and conclusions of law and that damages be awarded to Plaintiffs as lost profits in the amount of $105,365; no prejudgment interest is awarded.
Here, the choice of law provision in Section 6 of this Agreement does not limit itself to obligations or performance under the contract. Rather, it says that California law should be applied "both as to validity and performance." Whether such a choice of law provision should control a fraudulent inducement claim has been answered differently by certain of my colleagues. Compare, e.g., Computer Sales Int'l, Inc. v. Lycos, Inc., 2005 WL 3307507, *2 (D. Mass. Dec. 6, 2005) (Zobel, J.) (holding that choice of law clause does not apply when analyzing the validity of the contracts formation) with Neuro-Rehab Assocs., Inc. v. Amresco Comm. Fin., L.L.C., 2006 WL 1704258, *9 (D. Mass. June 19, 2006) (O'Toole, J.) (holding choice of law clause referencing "validity" of contract did apply to inducement-based claims). A definitive answer to the question is not material in this case, because California law contains a cause of action for promissory fraud, similar to Massachusetts' law of fraudulent inducement, which addresses fraudulent inducement to enter a contract. Lazar v. Superior Court, 909 P.2d 981, 984 (Cal. 1996)(requiring "(a)misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or `scienter'); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage."). For their part, both parties look to Massachusetts law for their discussion of this issue. Under the circumstances, I will analyze the issue of validity under Massachusetts law with the understanding that the analysis would be similar under California law.
