Opinion ID: 2814816
Heading Depth: 2
Heading Rank: 4

Heading: Damages Clause

Text: Graham argues the district court erred in its application of Wisconsin law in finding that Section 6.u of the Agent Agreement was a valid stipulated-damages clause rather than an unenforceable penalty.6 He asserts the Agent Agreement’s use of the word “forfeiture” unambiguously shows the parties intended it to be a penalty. He further contends American Family did not prove that its damages from the breach of the Agent Agreement were difficult to ascertain. Finally, he claims the assessed stipulated damages are disproportionate to American Family’s actual damages. The parties tried to the court the issue of whether the stipulated-damages clause of the Agent Agreement was an enforceable stipulated-damages clause. American Family presented a forensic accountant and expert on valuation and damages, Joseph Kenyon. Kenyon testified about the difficulty of estimating damages at the time of contracting and his calculation of American Family’s actual damages caused by Graham’s breach. Graham did not present an expert. The trial court found the clause to be an enforceable stipulated-damages clause. 5 Graham argues the district court could give both an instruction defining “dishonest” and a contra proferentum instruction because there were other terms in the agreement that were ambiguous. Graham asserts that the contra proferentum instruction would apply to these other terms, thus complying with Wisconsin law. Graham did not raise this argument to the district court, however, and we do not consider arguments raised for the first time on appeal. See Wiser v. Wayne Farms, 411 F.3d 923, 926 (8th Cir. 2005). 6 The parties agree Wisconsin law applies to this issue. -10- Both parties rely on the test set forth in Wassenaar v. Panos, 331 N.W.2d 357, 362–63 (Wis. 1983), to support their arguments about whether the stipulated-damages clause in the Agent Agreement should be enforced. Under Wassenaar, whether a stipulated-damages clause should be enforced is a question of law for the district court. Id. at 360. We review the district court’s resolution of disputed facts and inferences under a clearly erroneous standard. Id. at 361. Whether those facts demonstrate that the clause is reasonable is a question of law. Id. Though our review of that determination is de novo, we give some deference to the district court because the determination of reasonableness is so closely intertwined with the facts supporting the ruling. Id. The party contesting a stipulated-damages clause bears the burden of showing it should not be enforced. Id. at 361, 367. “The overall single test of validity is whether the clause is reasonable under the totality of the circumstances.” Wassenaar, 331 N.W.2d at 361–62. To determine whether the clause should be enforced, Wisconsin courts consider whether the parties intended to provide for damages or a penalty; the difficulty of accurately estimating or proving damages; and whether the stipulated damages are a reasonable forecast of the harm actually caused by the breach. Id. at 362–63. Of these factors, the parties’ subjective intent is generally considered the least important in determining if a stipulated-damages clause is objectively reasonable. Id. at 363. The second factor, the “difficulty of ascertainment” test, helps assess the reasonableness of the clause; the harder it is to estimate or prove damages, the more likely a stipulated-damages clause will be considered reasonable. Id. The third factor concerns whether the stipulated-damages clause reasonably forecast actual damages; stipulated damages that are proportional to actual damages are more likely to be found reasonable. Id. at 364. In determining whether a stipulated-damages clause is reasonable, courts must look at both “the harm anticipated at the time of contract formation and the actual harm at the time of breach (or trial).” Id. at 364. -11- On appeal, Graham argues that the use of the word “forfeit” in the Agent Agreement shows the parties intended the clause to be a penalty rather than a valid stipulated-damages clause. While Graham’s argument has some merit, “[t]he label the parties apply to the [stipulated-damages] clause . . . is not conclusive.” Wassenaar, 331 N.W.2d at 363.7 Therefore, the word “forfeit” is not determinative, and we must also look at whether the injury caused by the breach was difficult to estimate at the time of the contract and whether the stipulated damages reasonably forecasted the harm caused by the breach. To determine if the injury caused by Graham’s breach is difficult to ascertain, we consider [T]he difficulty of producing proof of damages at trial; the difficulty of determining what damages the breach caused; the difficulty of ascertaining what damages the parties contemplated when they contracted; the absence of a standardized measure of damages for the breach; and the difficulty of forecasting, when the contract is made, all the possible damages which may be caused or occasioned by the various possible breaches. Wassenaar, 331 N.W.2d at 363–64. Joseph Kenyon testified that, at the time the Agent Agreement was signed, it would have been “nearly impossible” to estimate the damages American Family might suffer as a result of a breach of the non-inducement clause. Kenyon testified that there are many factors that can affect the damages caused by the breach, such as the number of customers an agent has, the mix of policy types, the changes in premium levels, and “whether those policies came from the personality of Mr. Graham versus the American Family name.” These variables, he said, can vary widely over a period of years. 7 Graham argues that the district court erred in considering Caves’s testimony on the issue of intent. Whether this was error does not affect our analysis because we do not rely on Caves’s testimony. -12- Graham does not assert that the parties could have ascertained at the time of contract what damages a future breach might cause. Instead, he argues that American Family’s damages were easy to prove at the time of the breach. As support, Graham points out that American Family confirmed it lost 591 policies and believed it lost an additional 406 policies due to his inducement. He asserts it is a simple task to calculate the profit American Family would have made from these 997 policies. That may be true. But Graham offered the court no way to calculate American Family’s lost profit from those 997 policies. And Graham overlooks the fact that American Family did present evidence of the estimated actual damages sustained as a result of Graham’s breach. Kenyon testified he had determined American Family’s damages to be somewhere within a range of $800,000 and $1,350,000. He estimated American Family lost premium profits of $135,000 in the year 2011 for the 591 policies it confirmed actually went to Graham during 2011, the non-inducement year. He then calculated American Family’s lost premium profits for those 591 policies out to Graham’s likely retirement age, taking into account the normal policy attrition rate—that is, the number of policies usually cancelled every year. After discounting that number back to present dollars, he determined American Family’s damages for those 591 policies to be $800,000. Kenyon next compared the 2011 attrition rate of Graham’s former policyholders with American Family’s normal attrition rate. Kenyon estimated another 406 policies American Family lost in 2011 probably transferred to Graham because Graham’s former policyholders had “higher than normal” attrition rates. He calculated American Family’s lost premium profits for 2011 from those 406 policies was $93,000. Kenyon estimated this caused an additional $550,000 in lost profits,8 8 Kenyon testified he used the same methodology to estimate this higher benchmark. He first estimated what American Family’s lost premium profits were for -13- giving him the higher benchmark of $1,350,000. Graham’s extended earnings, $938,000, was within Kenyon’s range. Graham argues the factual record does not support Kenyon’s estimated range. He asserts there is no proof the 591 policies transferred during 2011 went to his agency because of improper inducement rather than for some other reason. Graham further contends it was pure speculation to assume an additional 406 policies went to his agency based solely on the “higher than normal” policy attrition rates during 2011. He claims Kenyon’s higher estimate is flawed because it compared his attrition rate with attrition rates expected when an agent retires, rather than when an agent is terminated and starts a new agency. He also contends American Family is only entitled to damages for 2011 because after 2011 he could have pursued his former customers anyway. Graham asserts that once Kenyon’s “overly speculative and unsupported post-inducement projections are set aside”—that is, Kenyon’s projected losses for 2012 and beyond—American Family’s damages were no more than $228,000. Graham asserts this is grossly disproportionate to the stipulated damages of $938,000. Graham’s points are well-taken. But he offered no evidence to support them. For example, he argues that Kenyon’s reliance on the “higher than normal” policy attrition rates to estimate that an additional 406 policies went to Graham’s agency during 2011 was improper; but he failed to present evidence to show how, why, or to what extent that estimate is inaccurate. Similarly, whether post-2011 damages should have been included (because Graham was allowed to pursue his former customers after 2011) is a fact-intensive issue. Yet the only evidence the district court heard on this issue was from Kenyon, who said that post-2011 damages had to 2011 and then projected that number out to Graham’s likely retirement age, reducing the profits each year for the typical policy attrition rate. He then discounted that amount back to present dollars. -14- be included because it was unlikely that all of the customers who switched policies from American Family to Graham’s new agency in 2011 would have done so in 2012 or later absent Graham’s inducement during 2011. According to Kenyon, “most people historically keep their insurance with the same company.” In addition, Kenyon testified, customer loyalty plays an important role in the insurance industry; had another American Family agent been given an opportunity to develop a relationship with those customers in 2011, it is likely a certain percentage of them would have stayed with American Family. And Graham offered no evidence at all to support his assertion that retirement is materially different than termination for purposes of analyzing attrition rates. As the party trying to set aside the stipulated-damages clause, it was Graham’s burden, not American Family’s, to “prov[e] facts which would justify the trial court’s concluding that the clause should not be enforced.” Wassenaar, 331 N.W.2d at 361. Finally, Graham argues the district court erred as a matter of law in finding that the stipulated-damages clause was a reasonable forecast of American Family’s damages because the amount of damages in the clause is not connected to any actual harm that results from a breach. He asserts that, regardless of the circumstances triggering application of the stipulated-damages clause, the penalty remains the same: forfeiture of the entire amount of extended earnings as of the date of the breach. As a result, Graham argues, the clause does not, and cannot, provide a reasonable forecast of compensatory damages. Whether American Family suffered no damages, few damages, or substantial damages from a breach of an Agent Agreement, the stipulated damages are the same. Viewed in this way, the stipulated-damages clause in American Family’s Agent Agreement gives us significant pause. The loss of an agent’s entire extended earnings, regardless of the nature or timing of the breach, seems a penalty. Under a different set of circumstances, with different evidence presented to the district court, such a clause might very well be unenforceable. We also suspect that a “standardized -15- measure of damages” could be formulated for calculating stipulated damages in cases like this one. It is difficult to imagine that the amount of money that happens to be in an agent’s extended earnings account at the time of a breach is a reasonable amount of stipulated damages in every case. A set formula that takes into consideration factors that affect the amount of damages based on the nature and circumstances of the breach would likely more accurately link the amount of stipulated damages to actual damages. But here, the district court heard evidence that it was difficult to estimate damages at the time of the contract and that the amount of stipulated damages was proportional to the actual damages resulting from Graham’s breach. Based on that evidence, the district court found the stipulated-damages clause of the Agent Agreement was a reasonable stipulated-damages clause. See Wassenaar, 331 N.W.2d at 361 (the determination of whether a damages clause is enforceable involves determinations of fact and law). On the record before us, we cannot say the district court erred in its finding.