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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

ALTANA, INC.,

 

 Plaintiff,

 v.

ABBOTT LABORATORIES,

 Defendant.

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 Case No. 04 C 4807

 Judge Virginia M. Kendall

MEMORANDUM OPINION AND ORDER

Altana, Inc. (“Plaintiff”) is a New York corporation in the business of producing and selling

topical prescription lotions, creams, and ointments including erythromycin ophthalmic ointment.

Erythromycin opthalmic ointment (“ointment”) is a medical ointment applied prophylactically to

prevent eye infections. Abbott Laboratories (“Defendant”) is an Illinois corporation that

manufactures Erythromycin, USP Base, Dihydrate (“base”), an ingredient in the production of

Plaintiff’s ointment. 

Plaintiff entered into a contract with Defendant whereby Defendant provided a specified

amount of base which Plaintiff then used in the production of ointment. The base provided to

Plaintiff byDefendant under this contract proved to be defective, and all ointment produced with that

base had to be destroyed. Plaintiff brings this action alleging state law claims of breach of contract

and breach of express and implied warranties. Defendant admits liability, and “concedes that

[Plaintiff] is entitled to recover the direct costs of making the products that were destroyed, the costs

of destruction and disposal, and the additional costs incurred in effecting cover (i.e., overtime).”

Still at issue is the question of whether Plaintiff is entitled to lost profits for the ointment that had
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to be destroyed. Plaintiff and Defendant have cross-moved for partial summary judgment on this

remaining issue. Because Plaintiff cannot prove any lost profits resulting from Defendant’s breach

of their contract, Defendant’s motion for partial summary judgment is granted, and Plaintiff’s motion

for partial summary judgment is denied.

Statement of Facts

In 2002, Plaintiff, Altana, and Defendant, Abbott, entered into a contract whereby Plaintiff

purchased fifty (50) kilograms of base from Defendant for a total sum of $7,500. See Defendant’s

56.1 Statement of Fact (“Def.’s 56.1.”), ¶ 6. Plaintiff purchased this base for use in the manufacture

of ointment. See Def.’s 56.1., ¶ 7. After the base had been delivered to Plaintiff under the contract,

Defendant discovered that it was defective. See Def.’s 56.1, ¶ 9. Because of this defect, Defendant

voluntarily recalled the base under the advisement of the Food and Drug Administration. See Def.’s

56.1, ¶ 11; Plaintiff’s 56.1 Response (“Plf.’s Resp.”), ¶ 12. In response to this recall, Plaintiff

destroyed all of the finished and work-in-process ointment that had been manufactured using the

defective base. See Def.’s 56.1, ¶¶ 14, 15. Defendant does not dispute that Plaintiff was unable to

sell the ointment that was made with the defective base and, therefore, was correct in destroying the

ointment. See Plf.’s Resp., ¶ 14. Plaintiff returned all of the unused defective base to Defendant.

See Def.’s 56.1, ¶ 13.

To replace the ointment that they had to destroy, Plaintiff manufactured additional units of

ointment. See Def.’s 56.1, ¶ 17. Plaintiff produced this additional ointment to replenish its

inventory, from which it satisfies contractual commitments. See Plf.’s Resp., ¶ 17. The process of

manufacturing ointment is “a highly specialized and costly process . . . which cumulatively requires

approximately 95 days to complete.” See Plaintiff’s 56.1 Statement of Fact (“Plf.’s 56.1”), ¶¶ 22-
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23. The manufacture of replacement ointment was done at cost to Plaintiff, and involved various

adjustments to Plaintiff’s manufacturing schedule. In order to produce this additional ointment

without falling behind in overall production, Plaintiff’s employees on the ointment production line

worked overtime. See Def.’s 56.1, ¶ 18. Plaintiff also transferred employees from other departments

to the ointment production line to assist in the manufacture of the replacement ointment. See Def.’s

56.1, ¶ 20. These transferred employees then worked overtime to ensure that production within their

departments would remain on schedule. See Def.’s 56.1, ¶ 21. Through this overtime work, Plaintiff

was able to manufacture approximately the same amount of ointment as it had to destroy while

maintaining its production levels in all other departments. See Def.’s 56.1, ¶ 28. Plaintiff sold this

replacement product it manufactured at its normal profit. See Plf.’s Resp., ¶¶ 33, 36. During this

time, Plaintiff’s salespersons did not lessen their efforts to sell ointment due to Defendant’s breach.

See Plf.’s Resp., ¶ 68. Further, “[n]o customer or potential customer placed an order . . . which

[Plaintiff] was unable to fill as a result of [Defendant’s] breach and recall.” Plf’s. Resp., ¶ 39.

Finally, Plaintiff never exhausted its inventory. See Plf.’s 56.1, ¶ 62.

Standard of Review

Summary judgment is proper when “the pleadings, depositions, answers to interrogatories,

and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to

any material fact and that the moving party is entitled to judgment as a matter of law.” Fed. R. Civ.

P. 56(c). In determining whether a genuine issue of fact exists, the Court must view the evidence

and draw all reasonable inferences in favor of the party opposing the motion. Bennington v.

Caterpillar Inc., 275 F.3d 654, 658 (7th Cir. 2001); see also Anderson v. Liberty Lobby, Inc., 477

U.S. 242, 255 (1986). The Court, however, will “limit its analysis ofthe facts on summary judgment
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to evidence that is properly identified and supported in the parties’ [Local Rule 56.1] statement.”

Bordelon v. Chicago Sch. Reform Bd. of Trustees, 233 F.3d 524, 529 (7th Cir. 2000). Where a

proposed statement of fact is supported by the record and not adequately rebutted, the court will

accept that statement as true for purposes of summary judgment. An adequate rebuttal requires a

citation to specific support in the record, an unsubstantiated denial is not adequate. See Albiero v.

City of Kankakee, 246 F.3d 927, 933 (7th Cir. 2001); Drake v. Minnesota Mining & Mfg. Co., 134

F.3d 878, 887 (7th Cir. 1998) (“Rule 56 demands something more specific than the bald assertion

of the general trust of a particular matter[;] rather it requires affidavits that cite specific concrete facts

establishing the existence of the trust of the matter asserted.”).

DISCUSSION

Before reaching the substance of this dispute, the Court must determine which state’s law

to apply. A federal court sitting in diversity applies the choice-of-law rules of the state in which it

sits to determine the applicable substantive law. See Hinc v. Lime-O-Sol Co., 382 F.3d 716, 719 (7th

Cir. 2004). Under Illinois choice-of-law rules, a determination of applicable law need be made only

when the bodies of law at issue are in conflict with one another, and the parties express disagreement

over which state’s laws apply. See Wood v. Mid-Valley Inc., 942 F.2d 425, 427 (7th Cir. 1991)

(holding that “courts do not worry about conflict of laws unless the parties disagree on which state’s

law applies”). Both Plaintiff and Defendant recognize that UCC 2-715 governs this dispute, a

provision that has been adopted into both Illinois and New York law. See 810 ILCS 5/2-715; 38

N.Y. UCC § 2-715. Since the parties have not identified a conflict between the two bodies of state

law which might apply to their case, the law of the forum state – Illinois – governs the dispute. See

Massachusetts Bay Ins. Co. v. Vic Koenig Leasing, Inc., 136 F.3d 1116, 1120 (7th Cir. 1998);
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Vantassell-Matin v. Nelson, 741 F. Supp. 698, 703 (N.D. Ill. 1990) (“If all interested jurisdictions

(including the forum state) apply the same legal rule to any issue, the court should apply to that issue

the law with which it is most familiar–that of the forum”).

Because Plaintiff was able to cover, or mitigate fully against any lost profit by producing the

replacement ointment, Plaintiff is entitled to its mitigation costs, but not lost profits. In addition,

UCC 2-708, commonly known as the ‘Lost Volume Seller’ Doctrine, is not applicable because

Plaintiff is not the seller under the parties’ contract. See Allsopp Sand & Gravel v. Lincoln Sand &

Gravel, 525 N.E.2d 1185, 1187 (Ill. App. Ct. 1988). For the foregoing reasons, Plaintiff is not

entitled to damages for lost profits from the ointment that had to be destroyed.

I. Recovery of Lost Profits

A buyer that has suffered losses due to a seller’s breach of contract may recover incidental

and consequential damages. See UCC 2-715, codified at 810 ILCS 5/2-715. Section 2-715 defines

consequential damages as “any loss resulting from general or particular requirements and needs of

which the seller at the time of contracting had reason to know and which could not reasonably be

prevented by cover or otherwise.” 810 ILCS 5/2-715(2)(a). Lost profits are an element of

consequential damages. See Burrus v. Itek Corp., 360 N.E.2d 1168, 1173 (Ill. App. Ct. 1977).

In determining Plaintiff’s damages and deciding whether recovery of lost profits is

appropriate, this Court must “determine that sum of money that will put the plaintiff in as good a

position as he would have been in if both plaintiff and defendant had performed all of their promises

under the contract.” Nilsson v. NBD Bank of Illinois, 731 N.E.2d 774, 781 (Ill. App. Ct. 1999)

(quoting Illinois Pattern Jury Instructions-Civil 700.13). Specifically, “[l]ost profits will be allowed

as compensation for breach of contract where the following conditions are met: (1) the court is
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satisfied that the wrongful acts of defendant caused the loss; (2) at the time the contract was entered

into, the profits were reasonably within the contemplation of the defaulting party; and (3) the lost

profits can be proved with reasonable certainty.” F. E. Holmes & Son, 435 N.E.2d at 728.

Defendant admits that its acts caused Plaintiff some loss, but argues that Plaintiff mitigated that loss

through its production of the replacement ointment. In terms of the disputed issue, Defendant

contends that its acts did not cause Plaintiff any lost profits.

Whenever a party is injured by a breach of contract, that party is obligated to mitigate its

damages by all rational means. See Pokora v. Warehouse Direct, 751 N.E.2d 1204, 1213 (Ill. App.

Ct. 2001). In situations where a breach of contract has left the non-breaching party with an unusable

product, that party may either mitigate by procuring replacement product or, if unable to mitigate,

suffer the lost profits and be compensated therefor. See Plesniak v. Wiegand, 335 N.E.2d 131, 138-

139 (Ill. App. Ct. 1975) (stating that recovery of lost profits suffered by a truck rental business due

to the incapacitation of a rental truck is an alternative measure of damages to the cost of renting a

replacement truck (cost of cover)); Kuwait Airways Corp. v. Ogden Allied Aviation Services, 726

F. Supp. 1389, 1392 (E.D.N.Y. 1989) (“either obtain the use of a comparable [product] (and be paid

for the expense of doing so) or [if unable to mitigate] accept the loss of use (and be compensated,

equivalently, for that loss)”).

Plaintiff successfully mitigated its damages by manufacturing replacement ointment to

replace that which had to be destroyed because of the defective base. To begin, Plaintiff met all

existing orders for ointment despite the breach. See Defendant’s Exhibit D-5: Deposition Exhibit

5. Further, Plaintiff’s sales department did not decrease efforts to sell ointment because of the

breach. See Defendant’s Exhibit C: Klaum Deposition, 38. Finally, Plaintiff was able to maintain
 Plaintiff argues that it is entitled to lost profits because it eventually would have sold the replacement ointment 1

in addition to the ointment that had to be destroyed. Plaintiff’s argument ignores the fact that the replacement ointment

never would have been produced but for the defective base in the original ointment. In this regard, Plaintiff essentially

seeks to collect lost profits on two batches of ointments where only one would have been produced absent the breach.

The law does not permit such relief since Plaintiff would be placed in a better position than if the contract had been

performed. See Ollivier v. Alden, 634 N.E.2d 418, 422 (Ill. App. Ct. 1994) (“[I]t is fundamental that a monetary award

should, to the extent possible, put the nonbreaching party in the position he would have been in had the contract been

performed”).

 A party may be entitled to lost profits when a contract breach leads to the use or loss of an ingredient in the 2

manufacturing process (such as the base here) that itself represents a separate profit opportunity, but this did not occur

in the instant case. See Mississippi Chemical Corp. v. Dresser-Rand Co., 287 F.3d 359 (5th Cir. 2002) (allowing a

fertilizer manufacturer to recover lost profits because the breach forced the use of ammonia (an ingredient in the

fertilizer) that the manufacturer had in inventory, and the manufacturer was also in the business of selling ammonia

separately). Plaintiff does not submit evidence that it is in the business of selling erythromycin base on the open market,

rather the base is used solely as an ingredient in the manufacture of ointment. Therefore, the base does not represent a

separate profit opportunity, and can not be the source for recovery of lost profits.

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its inventory of ointment through production of the replacement ointment, see Plf’s 56.1, ¶ 62;

ointment which, by the admission of Plaintiff’s Chief Financial Officer, never would have been

produced were it not for Defendant’s breach. See Defendant’s Exhibit A: Dulik Deposition, 61-62. 1

In the end, byproducing and selling the replacement ointment, Plaintiff was able to realize the profits

that it had expected to gain through sale of the ointment that had to be destroyed while maintaining

its standard inventory and meeting all customer demand. See Walters v. Marathon Oil Co., 642 F.2d

1098, 1099 (7th Cir. 1981) (recovery of lost profits permitted where the non-breaching party

attempts to mitigate but is unsuccessful in doing so, and suffers lost profits as a result); Canusa

Corp. v. A & R Lobosco, 986 F. Supp. 723, 732 (E.D.N.Y. 1997) (lost profits may be awarded when

the non-breaching party is unable to achieve its expected profits during a rising market because it

does not have sufficient product to satisfy demand). Thus, due to its cover or mitigation, Plaintiff 2

suffered no lost profits.

Plaintiff argues that it is entitled to lost profits because it would have eventually sold the

replacement ointment that it had to make, but this is inapposite because the replacement ointment
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would never have been produced in the first place but for Defendant’s breach. See Defendant’s

Exhibit A: Dulik Deposition, 61-62. If Plaintiff were permitted to collect lost profits in addition to

the concessions already made by Defendant, the result would be an unconscionable windfall. See

Roboserve, 78 F.3d at 278 (citation omitted) (“a plaintiff is not entitled to a windfall”). Under such

an impermissible scenario, the Plaintiff would have paid for the production of only one batch of

ointment, but would receive the profits for two batches. Clearly, this is not the position that Plaintiff

would have been in had the contract been performed as intended by the parties. Plaintiff is entitled

to the damages that Defendant has conceded, but the addition of lost profits is not permissible.

Last, because Defendant has agreed to pay any additional costs incurred as a result of

producing the replacement ointment, Plaintiff is in as good a position as it would have been in had

the contract been performed as agreed. See Roboserve v. Kato Kagaku Co., 78 F.3d 266, 278 (7th

Cir. 1996) (“The basic principle for the measurement of contract damages is that the injured party

is entitled to recover an amount that will put him in as good a position as he would have been in had

the contract been performed as agreed”). With regard to this last point, lost profits may be awarded

when the non-breaching party is forced to manufacture replacement product through the use of

manufacturing time that would have otherwise been spent profitably. See Horizons v. Avco Corp.,

551 F. Supp. 771, 782 (D.S.D. 1982) (awarding damages where plaintiff suffered a net loss of

production time as a result of defendant’s breach); Cole Energy Development Co. v. Ingersoll-Rand

Co., 913 F.2d 1194, 1201 (7th Cir.1990) (plaintiff entitled to seek all incidental and consequential

damages resulting from production delay caused by defendant’s breach). While Plaintiff pulled

workers from other production lines to complete manufacture of the replacement ointment, all work

on those other production lines was completed as scheduled through the use of overtime. See
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Defendant’s Exhibit A: Dulik Deposition, 40. Therefore, no manufacturing time was wasted due

to the breach. Plaintiff was able to maintain its production schedule through the use of overtime and,

since Defendant already has agreed to compensate it for these overtime costs, Plaintiff is in as good

a position as it would have been if Defendant had performed under the contract. See 810 ILCS 5/1-

106(1) (“The remedies provided by this Act shall be liberally administered to the end that the

aggrieved party may be put in as good a position as if the other party had fully performed but neither

consequential or special nor penal damages may be had except as specifically provided in this Act

or by other rule of law”).

III. The ‘Lost Volume Seller’ Doctrine

The ‘Lost Volume Seller’ Doctrine, provided by UCC 2-708 and codified in Illinois law at

810 ILCS 5/2-708, is not applicable because the non-breaching party, Plaintiff, is not the seller in

the contract at issue. This provision of law “contains the formula to compute a seller’s damages

caused by a buyer’s nonacceptance or repudiation.” Allsopp Sand & Gravel v. Lincoln Sand &

Gravel, 525 N.E.2d 1185, 1187 (Ill. App. Ct. 1988) (emphasis added); see also Canusa Corp. v. A

& R Lobosco, Inc., 986 F. Supp. 723, 732 n.8 (E.D.N.Y. 1997) (“[Plaintiff] brought this action as

a buyer-reseller not a seller, and, thus, cannot avail itself of a remedy under § 2-708"). Given that

Plaintiff is the buyer, not the seller, in its contract with Defendant, the ‘Lost Volume Seller’ Doctrine

is inapposite.

CONCLUSION AND ORDER

Plaintiff successfully mitigated its damages by manufacturing replacement product. It was

able to replace the ointment that had to be discarded because of Defendant’s breach without falling

behind in the production of other products, without wasting manufacturing time that would have
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otherwise been profitably used, without foregoing additional customer orders and without reducing

its inventory. Due to this diligence, Plaintiff did not suffer a loss of profits. Given Defendant’s

concession that it will pay Plaintiff’s mitigation costs (i.e., the costs of making the ointment that was

destroyed, the costs of destruction and disposal, and the additional costs incurred in effecting cover),

Plaintiff will be in as good a position as if Defendant had performed. Reviewing all of the evidence

in the record and drawing all reasonable inferences in favor of Plaintiff, there is no genuine issue as

to any material fact that Plaintiff is not entitled to lost profits. Wherefore, Defendant’s Motion for

Partial Summary Judgment is granted, and Plaintiff’s Motion for Partial Summary Judgment is

denied. 

So ordered.

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Virginia M. Kendall, United States District Judge

Northern District of Illinois

Date: August 29, 2006