Court Opinion

ID: 2973341
Source: CourtListenerOpinion
Date Created: 2015-09-22 17:01:18.496099+00
Date Added: 2024-06-11T11:41:04.486789
License: Public Domain

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                           File Name: 06a0157n.06
                           Filed: February 28, 2006

                                            No. 04-6377

                           UNITED STATES COURT OF APPEALS
                                FOR THE SIXTH CIRCUIT

NETWORK HEALTH SERVICES, INC.,                     )
                                                   )
               Plaintiff-Appellant,                )
                                                   )         ON APPEAL FROM THE UNITED
v.                                                 )         STATES DISTRICT COURT FOR
                                                   )         THE EASTERN DISTRICT OF
                                                   )         KENTUCKY
GEORGETOWN COMMUNITY, LLC,                         )
                                                   )
               Defendant-Appellee.                 )

BEFORE:        BOGGS, Chief Judge, GIBBONS, Circuit Judge, and ROSE, District Judge.*

       ROSE, District Judge. Defendant-Appellee Georgetown Community, LLC, breached a

contract it had formed with Plaintiff-Appellant Network Health Services, Inc. Because Network

Health Services did not present evidence concerning the amount of damages it suffered, the United

States District Court for the Eastern District of Kentucky entered summary judgment in favor of

Georgetown Community on Network Health Services’ breach of contract claim. Because damages

cannot be awarded in a breach of contract claim in Kentucky if the amount of damages is

speculative, we affirm the decision of the district court.

                                                 I.

       In early 2001, Georgetown Community, a hospital located in Georgetown, Kentucky,

       *
        The Honorable Thomas M. Rose, United States District Court for the Southern District
of Ohio sitting by designation.
           Network Health Services Inc. v. Georgetown Community, LLC, No. 04-6377

wanted to add a bariatric surgery program to the services it offered. Bariatric surgery is an invasive

procedure available to some obesity patients where doctors alter the digestive process by closing off

parts of the stomach to make it smaller. Some of these operations combine stomach restriction with

a partial bypass of the small intestine. These procedures create a direct connection from the stomach

to the lower segment of the small intestine, bypassing portions of the digestive tract that absorb

calories and nutrients. As Georgetown Community had not previously managed a bariatric surgery

program, it contracted with Network Health Services, an Indiana corporation that manages bariatric

surgery programs, to assist in managing its new program.

       On May 1, 2001, Georgetown Community and Network Health Services entered into a

contract entitled “Bariatric Center Program Agreement.” Pursuant to the agreement, Network

Health Services agreed to manage Georgetown Community’s bariatric surgery program and provide

consulting services to Georgetown Community for a flat monthly fee of $8,500.00. Network Health

Services was to provide a variety of services including: “coordinating the continuum of care for each

patient admitted to the program,” providing specialized administrative consulting services such as

the insurance authorization services, executing a community education program, operating a call

center service, and advertising the bariatric center. J.A. 57-58. The term of the agreement was two

years. After the first year of the agreement, either party could terminate the agreement without

cause by providing written notice at least 90 days in advance to the other party. A non-compete

clause in the contract provides:

       During the term of this agreement and for one (1) year after expiration or earlier
       termination of this Agreement Hospital shall not, without consideration to be agreed
       between the Parties and written approval from NHS, market or enter into any
       agreement or arrangement with any other party to develop, enhance, manage, or

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          Network Health Services Inc. v. Georgetown Community, LLC, No. 04-6377

       market its bariatric surgery product line.

J.A. 60, Agreement, ¶7(a) (emphasis added).

       On December 16, 2002, Georgetown Community gave Network Health Services written

notice of its intent to terminate the agreement effective March 17, 2003. Even though the parties

had not agreed to an amount of consideration for suspending the non-compete agreement,

Georgetown Community began marketing its bariatric surgery program by conducting its own

information seminars and implementing its own advertising campaign.

       Network Health Services filed a complaint in United States District Court on August 27,

2003, asserting breach of contract with jurisdiction premised on diversity. The complaint sought

damages in an amount to be determined at trial, and attorney’s fees and costs. Georgetown

Community countered with a motion for summary judgment, asserting that the non-compete clause

is unenforceable under Kentucky law and that Network Health Services did not suffer any damages

from Georgetown Community’s actions. J.A. 16. Network Health Services responded, pointing out

that covenants not to compete are enforceable under Kentucky law and claiming its damages

amounted to “at least $8,500 per month for two years” and an “entitle[ment] by contract to a

negotiated consideration in exchange for releasing [the h]ospital from the covenant not to compete.”

J.A. 32. The district court awarded summary judgment to Georgetown Community on the theory

that Network Health Services had failed to produce any admissible evidence that might establish the

amount of damages to which it was entitled. This appeal ensued.

                                                II.

       On appeal, Network Health Services asserts that the “amount the parties would have agreed

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          Network Health Services Inc. v. Georgetown Community, LLC, No. 04-6377

had Georgetown honored its obligations and entered into post-termination negotiations is the

measure of damages in this case.” In effect, Network Health Services asserts the parties agreed to

agree to a post-termination damage award.

       As a general rule, parties may contract to agree to terms of a contract in limited situations.

See Ridgeway Coal Co., Inc. v. FMC Corp., 616 F. Supp. 404, 407 (S.D.W. Va. 1985). “To do so,

however, it is necessary that the terms to be agreed upon in the future be substantially drawn from

the initial agreement.” Id. (citing Frank Horton & Co. v. Cook Elec. Co., 356 F.2d 485 (7th Cir.

1966). The terms must be determinable “independent of a party’s mere ‘wish, will and desire...’

either by virtue of the agreement itself or by commercial practice or other usage or custom.” Id.

(citing United. States v. Orr Constr. Co., 560 F.2d 765, 769 (7th Cir. 1977) (quoting 1 CORBIN ON

CONTRACTS, § 95, at 402)). When the terms of a preliminary agreement are not determinable “an

agreement to enter into negotiations in the future cannot be enforced because the court has no means

to determine what sort of contract the negotiations would have produced.” Weitzman v. Steinberg,

638 S.W.2d 171, 175 (Tex. Ct. App. 1982). Parties can avoid this principle when they have agreed

to basic terms, leaving only nonessential elements subject to negotiations. Eckles v. Sharman, 548
F.2d 905, 909 (10th Cir. 1977). Although Kentucky law allows parties to agree to liquidated

damages, see Man O’War Rests., Inc. v. Martin, 932 S.W.2d 366, 368 (Ky. 1996), the agreement

in this case contains no such provision.

       In the absence of a liquidated damages provision, Kentucky courts require an evidentiary

basis that reasonably supports the amount of damages. Illinois Valley Asphalt, Inc. v. Harry Berry,

Inc., 578 S.W.2d 244, 245-46 (Ky. 1979).

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            Network Health Services Inc. v. Georgetown Community, LLC, No. 04-6377

                Mere uncertainty as to the amount will not preclude recovery. There
                must be presented, however, sufficient evidence on which a
                reasonable inference as to the amount of damage can be based. In
                proving a claim of loss of profits of an established business, the
                record of past profits is usually the best available evidence. Mere
                "estimates" of witnesses will not serve, if books were kept.
                McCormick states: "Opinions of witnesses as to the amount of profits
                that would have been gained are not admissible, except where the
                opinion is that of an expert [b]ased upon relevant facts."

Id. (citation omitted) (holding that the "guess estimate" of a business owner based on what might

have happened "if we had been lucky" fell short of the quality of evidence required to permit an

inference of the approximate amount of damage or to furnish a rational basis for computation of the

loss).

         In the instant case, evidence concerning the amount of profit Network Health Services had

been recognizing on the implementation of the contract would have provided a reasonable basis for

an award. Evidence of this could have been submitted in the form of an affidavit from Network

Health Services’ accountant.     Instead, Network Health Services relied upon its president’s

ambiguous assertion that the “value of the services provided [by NHS] is greater than the sum of the

monthly payments.” Br. at 14. This assertion does not allow a reasonable inference as to the

amount of damage because even if there were evidence that the value of Network Health Services’

efforts was greater than $8,500 a month, any award would have to be reduced by the unknown

amount that Network Health had to expend in the implementation of the service. In the absence of

evidence concerning the amount of Network Health Services’ profit or loss on the contract, or

evidence that would support the calculation of damages under some other theory, the amount of any

award would be speculative.

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           Network Health Services Inc. v. Georgetown Community, LLC, No. 04-6377

        Another possible theory, though one not argued by Network Health Services, is Professor

Farnsworth’s argument that the appropriate remedy for breach of a duty to negotiate is not

expectation damages but damages caused by the injured party’s reliance on the agreement to

negotiate. E. Allan Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing

and Failed Negotiation, 87 COLUM. L. REV. 217, 267 (1987). “If one party breaks off the

negotiations before the other has relied on the agreement to negotiate, there is no need to fashion a

remedy because no relief is called for. Once the other party has relied, it must prove the loss caused

by its reliance, including any lost opportunities.” Id. (footnote omitted). In the instant case,

however, Network Health Services has not provided any evidence regarding the amount of damages

it has sustained by virtue of its reliance.

        Another possible measure of damages might be what Georgetown Community would pay

to be free of the contract. It would seem that one could establish an upper limit as to what

Georgetown Community would have been willing to pay in order to get out of its contract: $76,500,

the amount of the remaining payments. Even this fails as a limit, however, because Georgetown

Community may have been willing to pay a premium above $76,500 to Network Health Services

to get out of the contract if it believed Network Health Services’ performance was so deficient that

Georgetown Community might be better off paying even more just to be rid of the mistake of

entering into the contract. While Network Health Services repeatedly asserts that the program was

profitable because of its growth, the fact that a business is growing does not assure its profitability.

Businesses often sell goods at a loss as part of calculated business plans that accept short-term losses

in hopes of long-term profitability. All the record shows is that the program grew from 6 to 30

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          Network Health Services Inc. v. Georgetown Community, LLC, No. 04-6377

operations per month. J.A. 69. We are not informed if this is better or worse than the nationwide

rate of growth in this type of surgery–better or worse than Georgetown Community might have done

on its own.

                                              III.

       The district court correctly determined that Georgetown Community was entitled to summary

judgment. Because Network Health Services produced no pleadings, depositions, answers to

interrogatories or admissions on file that would allow a jury to reasonably base an award upon

evidence regarding the amount of damages, the Court AFFIRMS the decision of the district court.

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