Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—6th Cir.: Damages recalculation ordered for breach of wallpaper distribution agreement, (Oct 9, 2015)

By Greg Hammond, J.D.

A district court erred by failing to calculate damages using a distributor’s own sales data in an action in which a wallpaper manufacturer breached a distribution agreement. Although the lower court properly granted partial summary judgment in favor of the distributor, the U.S. Court of Appeals in Cincinnati vacated the damages award and remanded for recalculation (Elite International Enterprise, Inc. v. Norwall Group, Inc., October 8, 2015, Cook, D.).

Patton Wallcoverings, Inc. is a wallpaper manufacturer that breached its distribution contract with Elite International Enterprise, Inc. by refusing to supply Elite with certain products. The lower court granted Elite partial summary judgment as to Patton’s liability and awarded Elite nearly $225,000 in lost profits. Both parties appealed the decision.

On appeal, Patton claims that the lower court erred by awarding Elite lost profits, improperly calculating the lost profits, and concluding that Elite reasonably mitigated its damages. Elite argued that the lower court erred in granting partial summary judgment to Patton on Elite’s contract claim and by failing to award greater damages.

Partial summary judgment. The court first considered Elite’s argument, seeking to revive its claim that Patton also breached the distribution contract by selling into the Middle East region directly and through South Korean company DID Wallcoverings. Finding that the lower court properly granted partial judgment to Patton on this claim, the appellate court ruled that the contract used the word “exclusive” in reference to Elite’s status as sales agent, but not its status as distributor. Consequently, because Elite had no exclusive right to sell, Patton could not breach the distribution contract by selling its own products in the Middle East.

Damages. Patton also challenged the lower court’s damages award on three grounds: (1) the court erred in concluding Elite was entitled to lost profits; (2) even if Elite was entitled to recover lost profits, the court abused its discretion in using DID Wallcoverings’ sales figures to estimate them; and (3) the court erred in finding Elite acted reasonably to mitigate damages.

With regard to lost profits, Patton claimed the court wrongfully speculated in using a profit margin of 50 percent when Elite’s tax returns established a true profit margin of 24 percent; attributing Elite’s sales decline to Patton’s breach rather than Elite’s pre-breach loss of major customers; and finding that Elite was unable to obtain “sales books” following the breach when it simply did not wish to pay for additional printings. Although the criticisms had some merit, according to the appellate court, they failed to demonstrate the lower court abused its discretion in choosing to award lost profits at all. Rather, the tax returns supported the lower court’s conclusion that Elite ran a profitable business and that its sales declined following the breach.

The lower court, however, did abuse its discretion in calculating Elite’s damages, the appellate court concluded. In particular, the court erred in using DID Wallcoverings’ sales figures because DID and Elite are not “identical business operations,” and the court treated DID as a supply manufacturer rather than a competing distributor. The appellate court therefore vacated the lower court’s award of damages and remanded for recalculation using Elite’s own sales data.

Lastly, the court considered Patton’s argument that the lower court erred in concluding Elite reasonably mitigated its damages. Specifically, the lower court determined that Elite’s attempt to purchase directly from DID Wallcoverings was a “clear attempt at mitigation” and it rejected the argument that Elite realistically could have made up the difference by selling other wallpaper brands. Patton argued that DID Wallcoverings could not contractually sell to Elite and gave other suggestions of what Elite could have done to better mitigate its damages. The appellate court, however, determined that whatever the merits of Patton’s suggestions, Patton failed to demonstrate that the lower court clearly erred in finding Elite met its minimal burden to mitigate damages.

The case is Nos.14-2272 and 14-2317.

Attorneys: Jonathan B. Frank for Elite International Enterprise, Inc. Matthew L. Fornshell (Ice Miller LLP) for Norwall Group, Inc. and Patton Wallcoverings, Inc.

Companies: Elite International Enterprise, Inc.; Norwall Group, Inc.; Wallcoverings, Inc.

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