Opinion ID: 604172
Heading Depth: 1
Heading Rank: 2

Heading: Damages for Breach of the Administrator Agreement

Text: 17 The parties agree that the proper measure of damages in this case is the profits Hallmark lost as a result of Colonial's decision not to offer the proposed policy. They disagree, however, as to how such profits should be calculated and for what period such recovery should be allowed. 18 Colonial argues that even if nonrenewal of the [Marketing Agreement] did not immediately terminate or nonrenew Hallmark's rights under the Administrator Agreement, the trial court erred when it failed to limit Hallmark's recoverable damages ... to ... those profits, if any, Hallmark would have earned in the first year.... Appellant's Br. at 40. This is merely a restatement of its argument that Hallmark's rights under the Administrator Agreement were connected to Markman's rights under the Marketing Agreement. We reject this contention largely for the reasons we have already discussed in connection with the jury verdict on liability. 19 Colonial again points to an admission in Kubik's testimony. This time, Colonial maintains that Kubik conceded that Hallmark had a right to administer the product only for as long as [the Marketing Agreement] remained in effect. Appellant's Br. at 46. But we observe that Colonial has again materially mischaracterized the record by failing to place certain snippets of Kubik's testimony in context. Kubik merely acknowledged that as of the date of the [Administrator] agreement Hallmark would only be permitted to administer those policies sold pursuant to the Marketing Agreement. Tr. at 263. In contrast, Kubik had previously denied that the two agreements were inextricably linked: Q: You [Kubik] understood that under the administrator agreement that the only right you had to administer a product was a right to administer something under the marketing agreement. A: No, that's not correct. Tr. at 260. Kubik did not admit that Hallmark's rights were coterminous with Markman's rights under the Marketing Agreement. His testimony is consistent with the view that Hallmark was entitled to administer the proposed product for the entire five-year duration of the Administrator Agreement, and that at the time the Administrator Agreement was executed, the new product was to be sold by Markman. In other words, Schedule A, the provision connecting the two agreements, merely described with specificity the medical policy that was the subject of the parties' agreement. Colonial's obligation to offer the product, and Hallmark's corresponding right to administer claims made against it, existed independently, irrespective of who sold the product. See Hallmark Ins. Adm'rs, 697 F.Supp. at 324 ([A] trier of fact could reasonably conclude that the parties referenced the [Marketing Agreement] in Schedule A not to supplement the parties' rights and duties but merely to identify with specificity the medical policy listed.). 20 The jury, of course, did not have to credit this version of the parties' contractual intent. It is, however, a view adequately supported by the evidence in the record, and it was thus not error for the district court to instruct the jury: 21 If you find that the parties intended the nonrenewal and termination provision in the administrator agreement [to] govern Colonial Penn's right to renew or terminate the administrator agreement, then Hallmark's damages for lost profits are for the period of September 24, 1986, through December 31, 1991. Tr. at 1035. 5 22 Were it not for Hallmark's cross-appeal, we could simply affirm the jury's award of damages since it finds support even in Colonial's depiction of the relevant facts. 6 Hallmark has argued, however, that the district court improperly instructed the jury that, in determining Hallmark's damages, it should deduct from revenue lost as a result of Colonial's breach both fixed and variable costs. By challenging this instruction, Hallmark calls into question the propriety of the entire damage award. Tr. at 1034. 23 The law in Pennsylvania, as elsewhere, is that lost profit damages are calculated by subtracting from revenue lost as a result of the breach those costs avoided as a result of the same breach. Kutner Buick, Inc. v. American Motors Corp., 868 F.2d 614, 618 (3d Cir.1989). This rule is based on the notion that a party harmed by another's breach of contract is entitled to collect those lost net revenues that would have helped defray fixed costs and contributed to profit. 7 A central element in making this calculation, therefore, is the ascertainment of which costs vary with output and which do not (i.e., are truly fixed). Certain rules of thumb have been developed to simplify this determination. For example, if a business entity operates only a single enterprise, i.e., a single revenue producing activity, all costs are presumed to be variable (i.e., vary fully with output) and are deducted from gross revenue in determining a plaintiff's recovery. 8 Kutner Buick, 868 F.2d at 818. If a business operates more than one activity, however, fixed costs are not usually deducted from gross revenues since the business would be expected to continue operating and fixed costs would continue to be incurred. The owner would be entitled, in this situation, to collect the contribution toward fixed expenses that it would have received but for the breach. 24 Hallmark appears to be a multiple activity business. In addition to the revenue Hallmark would have received pursuant to the Administrator Agreement, Hallmark received in excess of $6 million over a three-year period from an agreement with another insurer. 9 Under Kutner Buick, Hallmark is, therefore, a multiple activity business, and, presumably, its fixed costs would in considerable part continue even if its revenue from Colonial ceased. Some or all of those fixed costs would not be deductible from lost revenues. Therefore, it was incorrect to instruct the jury to subtract Hallmark's fixed costs from the revenue Hallmark would have received pursuant to the Administrator Agreement. 25 We are left then with the question of remedy. The usually appropriate remedy for an erroneous jury instruction is a new trial. Heller Inter. Corp. v. Sharp, 974 F.2d 850, 860 (7th Cir.1992) (proper remedy for an erroneous jury instruction is a new trial, not a judgment n.o.v.). Because the present record is incomplete, i.e., it does not adequately differentiate those costs which vary with output from those which are truly fixed, we cannot simply add fixed costs to the present verdict as Hallmark suggests. A new trial is thus the only available remedy. But Hallmark has explicitly disclaimed any interest in a new trial, Appellee's Reply Br. at 6, and Colonial, on this point, would presumably prefer to retain the verdict as well. Accordingly, we will respect the parties' wishes and simply affirm the district court's award of damages. 26 For the foregoing reasons the judgment of the district court is, in all respects, AFFIRMED.