Ferndale Laboratories, Inc. v. Schwarz Pharma, Inc. ( 2005 )

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 05a0041n.06
Filed: January 13, 2005
Nos. 02-2256; 02-2258
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
FERNDALE LABORATORIES, INC., )
)
Plaintiff-Appellee, )
)
v. ) ON APPEAL FROM THE UNITED
) STATES DISTRICT COURT FOR THE
SCHWARZ PHARMA, INC., ) EASTERN DISTRICT OF MICHIGAN
)
Intervenor-Defendant, )
Intervenor-Appellant, )
)
BLOCK DRUG CO., INC., )
)
Defendant-Appellant, )
)
REED & CARNICK DIVISION, )
)
Defendant. )
Before: SUHRHEINRICH, GIBBONS, and SUTTON, Circuit Judges.
JULIA SMITH GIBBONS, Circuit Judge. Ferndale Laboratories (“Ferndale”) and Reed
and Carnick (“R & C”), a division of Block Drug Company (“Block”), were parties to a supply
agreement by which Ferndale sold a prescription cream to R & C. The supply contract contained
a provision that prohibited either party from assigning the agreement without the prior written
consent of the other party. After years of engaging in transactions pursuant to this agreement, Block
entered into an asset purchase agreement with Schwarz Pharma, Inc. (“Schwarz”) to sell all of R &
C’s assets to Schwarz, including the Ferndale supply agreement. Ferndale did not consent to
Nos. 02-2256; 02-2258
Ferndale Laboratories v. Schwarz Pharma, et al.
assignment of the supply contract. To avoid offending the anti-assignment provision, Block then
entered into a supplemental distribution agreement with Schwarz, whereby Block continued
purchasing the prescription cream from Ferndale and, in turn, sold all of this cream to Schwarz for
the same price.
Ferndale filed a breach of contract claim against Block in the United States District Court
for the Eastern District of Michigan basing jurisdiction on diversity of citizenship. Schwarz later
intervened, and Ferndale amended its complaint to include a count against Schwarz for unjust
enrichment. All parties filed motions for summary judgment. The district court granted summary
judgment to Ferndale on the issue of Block’s liability and denied the motions for summary judgment
filed by Block and Schwarz. After a bench trial, the district court awarded Ferndale a judgment of
$8,304,000.00 against Block for breach of contract and $2,100,000.00 against Schwarz for unjust
enrichment.
On appeal, Block asserts that it did not materially breach its supply contract with Ferndale
and that, even if it had done so, the district court erred in calculating Ferndale’s damages resulting
from the breach. Schwarz appeals the award of unjust enrichment damages to Ferndale.
For the reasons set forth below, we affirm the grant of summary judgment to Ferndale on the
issue of Block’s liability for breach of contract. We conclude, however, that the court’s calculation
of damages for Block’s contractual breach was clearly erroneous, and we remand this issue to the
district court with instructions to enter judgment to Ferndale against Block in the amount of
$216,499.00. We also reverse the award of unjust enrichment damages to Ferndale against Schwarz
and remand this issue to the district court with instructions to enter judgment for Schwarz.
2
Nos. 02-2256; 02-2258
Ferndale Laboratories v. Schwarz Pharma, et al.
I.
Ferndale manufactures the prescription cream Analpram. In 1987, Ferndale entered into a
supply agreement with R & C. The agreement gave R & C the right to market and distribute
Analpram under R & C’s trade name, Proctocream, with the understanding that it would be a
product line extension of Block’s own Proctofoam. Among the supply agreement’s provisions was
an anti-assignment clause, which read:
Assignment
This Agreement shall not be assigned or transferred by either party except as
provided herein without the prior written consent of the other party and otherwise
shall be binding upon and inure to the benefit of the successors and assigns of the
parties hereto. Either party may freely assign or transfer this Agreement to its
wholly-owned subsidiary provided that it provides the other party hereto with written
notice of such assignment, and provided further that assignor shall remain a
guarantor of the performance and obligation of such assignee.
The agreement also contained a default provision, which provided:
Default
This Agreement may be terminated by either party hereto in the event of the breach
or default (“Default”) by the other party of the terms and conditions hereof; the party
claiming such Default shall first give written notice to the defaulting party of the
proposed termination of the Agreement, specifying the grounds therefore. The
defaulting party shall have sixty (60) days from the date of such notice to cure such
Default. If the Default is not cured during such period, this Agreement shall
terminate at the expiration of such sixty (60) day period.
(emphasis added). Under the agreement and subsequent extensions, Ferndale agreed to supply
Analpram to Block until 1998.1
1
The agreement also provided that Ferndale could continue distributing Analpram itself. We
will reference the cream at issue in the parties’ supply agreement as Analpram throughout the
3
Nos. 02-2256; 02-2258
Ferndale Laboratories v. Schwarz Pharma, et al.
In June 1995, Block entered into an asset purchase agreement with a division of Schwarz.
The purchase agreement provided that Schwarz would obtain Block’s assets, including its supply
agreement with Ferndale. Block then contacted Ferndale, seeking its consent to Block’s assignment
of the supply agreement to Schwarz. On June 22, 1995, Ferndale notified Block and Schwarz that
it would not consent to an assignment of the supply agreement. Nonetheless, the closing of the
Schwarz-Block asset purchase agreement took place on June 30, 1995. During the following week,
Ferndale’s counsel sent Block a letter stating that Ferndale believed Block’s agreement with
Schwarz violated the anti-assignment provision of the Ferndale-Block contract. Schwarz and Block
then executed a supplemental distribution agreement, which provided that Block would continue
ordering Analpram from Ferndale and would distribute the Analpram exclusively to Schwarz at the
same price it paid Ferndale for the cream.
In late 1995, Ferndale filed a complaint in district court against Block alleging breach of
contract. Schwarz intervened as a defendant. Ferndale’s complaint alleged that Block breached its
supply contract with Ferndale by contracting with Schwarz and that Schwarz was unjustly enriched
by this arrangement. On March 31, 1997, the district court granted summary judgment to Ferndale
on its breach of contract claim against Block, finding that Block had engaged in a “de facto
assignment” of the supply agreement in violation of the agreement’s anti-assignment provision. On
September 30, 1998, the court denied Schwarz’s motion for summary judgment on Ferndale’s claim
of unjust enrichment. It is around this period – three years after the closing of the asset purchase
opinion.
4
Nos. 02-2256; 02-2258
Ferndale Laboratories v. Schwarz Pharma, et al.
agreement between Block and Schwarz – that Ferndale finally stopped filling Block’s orders for
Analpram.
On September 5, 2002, following a bench trial, the district court found that Block’s de facto
assignment materially breached the supply agreement and that Ferndale was entitled to lost profits
damages from Block and unjust enrichment damages from Schwarz. The court then entered
judgment against Block in the amount of $8,304,000.00 and against Schwarz in the amount of
$2,100,000.00. Block and Schwarz each filed a timely notice of appeal of the district court’s grant
of summary judgment to Ferndale and the court’s bench trial decision.
II.
This court reviews a district court’s order granting summary judgment de novo. Laderach
v. U-Haul, 207 F.3d 825, 827 (6th Cir. 2000). Summary judgment is appropriate “if 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
a judgment as a matter of law.” Fed. R. Civ. P. 56(c). “Accordingly, summary judgment must be
entered ‘against a party who fails to make a showing sufficient to establish the existence of an
element essential to that party’s case, and on which that party will bear the burden of proof at trial.’”
Laderach, 207 F.3d at 828 (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)). The parties
do not dispute that Michigan law applies in this case.
Block presents two arguments as to why the district court erred in granting summary
judgment to Ferndale for Block’s breach of the supply contract. First, Block insists that there was
a genuine issue of material fact as to whether it challenged the inclusion of the anti-assignment
5
Nos. 02-2256; 02-2258
Ferndale Laboratories v. Schwarz Pharma, et al.
provision in its contract with Ferndale. Second, Block claims that key provisions of the Uniform
Commercial Code (U.C.C.) and its adoption in Michigan make the grant of summary judgment to
Ferndale inappropriate.
A.
The district court noted that Block did not challenge the inclusion of the anti-assignment
provision in its contract with Ferndale. Block claims that, in doing so, the court improperly credited
the testimony of Ferndale’s chairman, who stated that he insisted on the inclusion of the provision
in the supply agreement. In support of its argument, Block cites the testimony of one of its product
managers, who stated that he did not recall having a long conversation with the chairman of Ferndale
about the transferability of the supply contract. Block also points to the deposition testimony of one
of Ferndale’s attorneys, who stated that he did not remember having a substantive discussion about
the anti-assignment provision with Block’s attorneys.
We decline to find that Block’s quibble with an isolated portion of the district court opinion
defeats the grant of summary judgment. “[T]he mere existence of some alleged factual dispute
between the parties will not defeat an otherwise properly supported motion for summary judgment;
the requirement is that there be no genuine issue of material fact.” Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 247-48 (1986). The parties do not dispute that the anti-assignment provision is part
of the agreement that was executed between them. The motivation for the inclusion of this provision
simply does not present an issue of material fact, which is required to defeat a motion for summary
judgment. In addition, the contract contained an integration clause rendering the factual dispute
regarding the contract inadmissable. See UAW-GM Human Res. Ctr. v. KSL Recreation Corp., 579
6
Nos. 02-2256; 02-2258
Ferndale Laboratories v. Schwarz Pharma, et al.
N.W.2d 411, 418 (Mich. Ct. App. 1998) (integration clause in written contract is conclusive and
parol evidence is inadmissible to show agreement is not integrated in absence of fraud or incomplete
agreement). Therefore, Block cannot defeat the grant of Ferndale’s motion for summary judgment
with this argument.
B.
Block also argues that summary judgment for Ferndale was inappropriate because this case
is governed by the U.C.C., specifically U.C.C. § 2-210(2) (providing that “unless otherwise agreed,
all rights of either seller or buyer can be assigned except where the assignment would materially
change the duty of the other party, or increase materially the burden or risk imposed on him by his
contract, or impair materially his chance of obtaining return performance”) and by Michigan’s
adoption of U.C.C. § 2-210(2) at Mich. Comp. Laws § 440.2210(2). Relying on these provisions,
Block contends that its distribution arrangement with Schwarz is permitted because the U.C.C.
favors the free assignability of contractual rights except in the limited circumstances specified by
the code.
We conclude that Block’s position is untenable. The U.C.C. provision upon which Block
relies enables assignment of rights unless the contracting parties otherwise agree. U.C.C. § 2-
210(2); Mich. Comp. Laws § 440.2210(2). By including an anti-assignment clause in their supply
contract, Block and Ferndale necessarily agreed otherwise, rendering the provisions cited by Block
inapplicable to the instant case.
7
Nos. 02-2256; 02-2258
Ferndale Laboratories v. Schwarz Pharma, et al.
Block next asserts that “[p]ursuant to UCC § 2-210(3), adopted in Michigan as MCLA §
440.2210(3), a general anti-assignment clause bars only the delegation of the assignor’s duties.”2
Michigan law, as in effect at the time the parties contracted in 1987, did provide that, “[u]nless the
circumstances indicate the contrary a prohibition of assignment of ‘the contract’ is to be construed
as barring only the delegation to the assignee of the assignor’s performance.” Mich. Comp. Laws
§ 440.2210(3) (1987) (emphasis added).
We believe that this provision does not defeat the grant of summary judgment to Ferndale.
Ferndale entered into the supply agreement with Block with the express purpose that Block would
distribute Analpram as a companion product to its own hemorrhoid treatment. The supply
agreement was abundantly clear that, while Block acquired the right to market Analpram, it also had
the duty to distribute Analpram as a product line extension of its own Proctofoam:
WHEREAS, [Block] intends to offer for sale [Analpram] . . . as a line extension to
its Proctofoam and therefore anticipates having certain requirements for the
manufacture thereof; and
WHEREAS, Ferndale is willing to supply [Analpram] to [Block] for purposes of
such resale . . . .
[Block] shall market [Analpram] under its own proprietary trade names and labels
....
2
Block does not cite to the version of the U.C.C. and Michigan Compiled Laws upon which
it is relying. We will presume that Block is relying on the provisions in effect at the time of
contracting rather than to the current versions of those provisions, which relate exclusively to the
creation, attachment, perfection, or enforcement of a security interest in the seller’s interest under
a contract. See Antrim Res. v. Pub. Serv. Comm’n, 446 N.W.2d 515, 521 (Mich. Ct. App.
1989)(“The Supreme Court of the United States has stated that ‘the laws which subsist at the time
and place of the making of a contract, and where it is to be performed, enter into and form a part of
it.’”) (quoting Home Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398, 429-30 (1934)).
8
Nos. 02-2256; 02-2258
Ferndale Laboratories v. Schwarz Pharma, et al.
(emphasis added). Therefore, in light of the instruction for reading anti-assignment provisions given
in Mich. Comp. Laws § 440.2210(3) (1987), the anti-assignment provision of the supply agreement
barred Block from delegating the performance of its duty to market Analpram as a product line
extension of Proctofoam. Block breached the contract by engaging in such a delegation. Even if
we read the supply agreement as conveying to Block only the right – and not the duty – to market
Analpram, we believe that § 440.2210(3) (1987) would not relieve Block from liability for breach
of contract. Section 440.2210(3) contains the explicit condition that its own terms do not apply if
“the circumstances indicate the contrary.” As we have previously detailed, the circumstances
surrounding the execution of the supply agreement with the anti-assignment provision speak clearly
to the fact that at least one central aim of the provision was to ensure that only Block had the right
to market and distribute Analpram in the form of Proctocream. Block violated the provision by
effectively assigning this right to Schwarz. Accordingly, we affirm the grant of summary judgment
to Ferndale on the issue of Block’s breach of contract.
III.
Block next challenges the district court’s conclusion of law that the company materially
breached its supply contract with Ferndale, an issue that we review de novo. See Burzynski v.
Cohen, 264 F.3d 611, 616 (6th Cir. 2001). The court reached this conclusion after considering the
Walker factors provided by the Michigan Supreme Court to determine the materiality of a
contractual breach: (a) The extent to which the injured party will obtain
the substantial benefit which he could have
reasonably anticipated;
(b) The extent to which the injured party may be
adequately compensated in damages for lack of
complete performance;
9
Nos. 02-2256; 02-2258
Ferndale Laboratories v. Schwarz Pharma, et al.
(c) The extent to which the party failing to perform
has already partly performed or made preparations for
performance;
(d) The greater or less hardship on the party failing to
perform in terminating the contract;
(e) The wilful, negligent or innocent behavior of the
party failing to perform;
(f) The greater or less uncertainty that the party
failing to perform will perform the remainder of the contract.
Walker & Co. v. Harrison, 81 N.W.2d 352, 355 (Mich. 1957) (quotation omitted). The district court
also considered the extent to which Block’s behavior comported with good faith and fair dealing.
Block does not challenge the methodology relied upon by the district court. Rather, it argues
that it did not materially breach the contract under the Walker factors. After considering the relevant
Michigan law, we do not find Block’s position to be persuasive, and we agree with the district court
that Block materially breached its supply contract with Ferndale. Under the anti-assignment
provision, Block could not assign its right to receive and distribute Analpram without first obtaining
Ferndale’s consent to do so. Through its asset purchase agreement and distribution arrangement
with Schwarz, Block effectively assigned away its rights under the supply contract, which enabled
Schwarz ultimately to assume the crucial rights of marketing and selling Analpram. Therefore,
Block materially breached the Ferndale-Block supply contract by entering into the agreement with
Schwarz.
IV.
We now address Block’s appeal of the district court’s award of damages to Ferndale.
Specifically, Block contends that the court erred in calculating lost profits and deciding that Ferndale
did not mitigate damages. This court reviews the district court’s calculation of damages for clear
10
Nos. 02-2256; 02-2258
Ferndale Laboratories v. Schwarz Pharma, et al.
error because “‘[q]uestions raised concerning damages are essentially questions of fact.’” Canderm
Pharmacal, Ltd. v. Elder Pharms., Inc., 862 F.2d 597, 606 (6th Cir. 1988) (quoting Duty v. U.S.
Dep’t of Interior, 735 F.2d 1012, 1014 (6th Cir. 1984)); see also Adkins v. Asbestos Corp., 18 F.3d
1349, 1351 (6th Cir. 1994) (reviewing award of contract damages for clear error).
A.
The district court held that Ferndale was entitled to damages from Block in the amount of
the monetary value of the supply contract had Block fully performed under it. The court then
calculated the damages due to Ferndale by (1) concluding that Ferndale had the right to terminate
the supply contract when Block breached the contract in 1995 and (2) reasoning that damages should
constitute the profits Ferndale would have earned if the company “took back” Analpram from Block
at that time and either sold the product itself or through another distributor. As a result, the district
court awarded Ferndale damages against Block in the amount of $8,304,000.00, which represented
eighty percent of the lost profits calculation provided by Ferndale’s expert, Dr. Richard Rozek.3
Ferndale defends the district court’s calculation of damages, arguing that full performance
under the contract must recognize that Block breached the anti-assignment provision and the default
provision, which provided that the contract terminated if a party breached the contract, was given
notice of the breach and a sixty-day opportunity to cure by the non-breaching party, but nevertheless
3
The court reached this conclusion in two steps. First, the district court credited Rozek’s lost
profits calculation ($10,380,000.00). Second, the court rejected Rozek’s testimony that Ferndale
could have sold the same quantity of Analpram from July 1995 to September 1998 as Schwarz sold
of the product during that period. Instead, the court decided that Ferndale, through itself or through
another distributor, could have captured eighty percent of the Analpram market during this time.
The district court did not specify how it arrived at the eighty percent calculation.
11
Nos. 02-2256; 02-2258
Ferndale Laboratories v. Schwarz Pharma, et al.
remained in default. Block does not challenge the notion that damages should be awarded based on
its full performance under the supply agreement. Block does contend, however, that, such damages
should be aimed at placing Ferndale in the position it would have occupied if Block had not
breached the contract. Consequently, Block claims that Ferndale’s damages should be limited only
to the difference between the profits Ferndale would have earned if Block continued to perform
under the contract (i.e., had Block, not Schwarz, sold Analpram) from July 1995 to September 1998
and the profits that Ferndale actually earned during that same period (when Block was distributing
Analpram to Schwarz to sell).4 We agree with Block’s proposed theory of damages.5
It is a fundamental tenet of contract law that “[t]he remedy for breach of contract is to place
the non-breaching party in as good a position as if the contract had been fully performed.” Corl v.
Huron Castings, Inc., 544 N.W.2d 278, 280 (Mich. 1996) (emphasis added). Therefore, “the goal
in contract law is not to punish the breaching party, but to make the nonbreaching party whole.” Id.
Applying this principle to the case at hand, the district court should have only awarded damages that
4
According to Block’s expert at trial, Julie Davis, the measure of damages under this method
is $216,499.00.
5
In so doing, we expressly reject Ferndale’s claim that Block breached the anti-assignment
provision and the default provision. Quite simply, the default clause contained in the supply
agreement did not give rise to a duty or obligation on the part of either party and, therefore, was not
a contractual provision that even could be breached. The purpose and function of the default
provision was merely to provide the non-breaching party with a remedy in the event that other
contractual provisions were breached.
We also find no merit to Ferndale’s argument that a calculation of Block’s full performance
under the supply agreement requires consideration that the default provision be honored. Contrary
to Ferndale’s position, full performance considers how the parties would have performed under the
contract in the absence of contract termination.
12
Nos. 02-2256; 02-2258
Ferndale Laboratories v. Schwarz Pharma, et al.
arose naturally from Block’s breach of the supply contract. See Harris v. Citizens Ins. Co., 366
N.W.2d 11, 12 (Mich. Ct. App. 1983). Ferndale expected Block to market and sell Analpram.
Block breached the contract on June 30, 1995, by enabling Schwarz to market and sell Analpram.
Therefore, the court should have awarded damages in an amount equal to the profits Ferndale would
have generated if Block itself marketed and distributed Analpram (instead of acting as a “pass
through” to Schwarz) from June 30, 1995, to September 1998, when Ferndale ceased supplying
Block with Analpram, minus the profits that Ferndale actually earned as a result of Schwarz’s
distribution of Analpram during this period.
In calculating lost profits in the manner that it did, the district court found “that both
Ferndale and Block contemplated that at the time the parties entered into the Supply Agreement,
damages, including lost profits, would be at issue if the contract was breached, given that Ferndale’s
interest in contracting with Block was to increase its sales.” The district court then attempted to
apply a principle adopted by Michigan courts from Hadley v. Baxendale, 9 Exch. 341, 156 Eng. Rep.
145 (1854): “The general rule in breach of contract actions is that damages recoverable for a breach
of contract are those arising naturally from the breach or those which were within the parties’
contemplation at the time of contracting.” Harris, 366 N.W.2d at 12; see also Lawrence v. Will
Darrah & Assocs., Inc., 516 N.W.2d 43, 48 (Mich. 1994) (noting that, under the Hadley rule, the
damages recoverable for breach of contract are those that naturally arise from the breach or that “can
reasonably be said to have been in contemplation of the parties at the time the contract was made”)
(quotation omitted). While the parties may have contemplated lost profits as damages for a breach
of the supply agreement, the only support for the proposition that the parties reasonably
13
Nos. 02-2256; 02-2258
Ferndale Laboratories v. Schwarz Pharma, et al.
contemplated lost profits using the methodology adopted by the district court is Ferndale’s assertion
that, but for Block’s breach of the termination and anti-assignment provisions of the contract,
Ferndale would have sold Analpram itself.
Ferndale put forth no evidence showing that the parties ever contemplated such damages or
that such damages reasonably could have been said to be within the contemplation of the parties.
The only evidence to which Ferndale refers in support of such a damage calculation is the testimony
of its chairman and CEO James T. McMillan II that Block’s obligation when the supply agreement
terminated was to return the cream to Ferndale. While this testimony may describe Block’s
responsibility, it says nothing about Ferndale’s intentions to sell Analpram itself or use another
distributor or choose any other course of action. In addition, and perhaps even more significantly,
the actual events of this case belie the district court’s theory. Block breached the supply agreement
– and Ferndale became aware of such breach – in 1995. Ferndale nonetheless continued distributing
Analpram to Block until 1998. Therefore, at the time of the breach, Ferndale did not cease selling
Analpram to Block and begin distributing Analpram itself. Rather, Ferndale continued to allow
Block to distribute Analpram for three years after the breach.6 These facts weaken Ferndale’s
assertion that, but for Block’s contractual breach, it would have taken measures to distribute
6
In its brief, Ferndale states that it continued to perform for years beyond Block’s breach
because it feared that Block would bring suit against Ferndale for contractual breach if Ferndale
ceased supplying Analpram. Besides the fact that we see no evidence in the record that Block
somehow coerced Ferndale into supplying Analpram, we note that any perception of vulnerability
by Ferndale was completely unfounded because “[h]e who commits the first substantial breach of
a contract cannot maintain an action against the other contracting party for failure to perform.”
Ehlinger v. Bodi Lake Lumber Co., 36 N.W.2d 311, 316 (Mich. 1949) (quotation omitted).
14
Nos. 02-2256; 02-2258
Ferndale Laboratories v. Schwarz Pharma, et al.
Analpram itself. The damage calculation of Ferndale’s expert, Dr. Rozek, thus rests on a course of
conduct that lacks factual support in the record.
Therefore, the district court’s calculation of Ferndale’s damages was clearly erroneous, and
we vacate the district court’s award of damages against Block to Ferndale. The only evidence
presented at trial that we can discern with respect to the correct theory of damages was that of
Block’s expert, who calculated that Ferndale would have received $216,499.00 over the duration
of the contract had Block continued selling Analpram itself and not acted as a “pass-through” to
Schwarz. Ferndale does not assert that it ever posited its own calculation of damages under this
theory, and indeed our review of the record included in the joint appendix, including Ferndale’s
proposed findings of fact and conclusions of law to the district court, failed to reveal any such
calculation. Rather, Ferndale only offered evidence regarding the amount of damages to which it
claimed it was entitled under the “product take back” theory.
“It has long been the general rule of Michigan that in an action for breach of contract the
burden is upon the plaintiff to show damages.” Benfield v. H.K. Porter Co., 137 N.W.2d 273, 274
(Mich. Ct. App. 1965) (citing Callender v. Myers Regulator Co., 230 N.W. 154 (Mich. 1930)). By
failing to offer evidence of the difference in profits Ferndale would have made if Block continued
distributing cream until 1998 and the profits actually reaped during the period of Block’s breach,
Ferndale did not even attempt to meet its burden of proof under the correct theory of damages.
Because Block did offer evidence under the correct damages theory, we will accept its calculation
and remand this issue to the district court with instructions to enter judgment to Ferndale against
Block in the amount of $216,499.00.
15
Nos. 02-2256; 02-2258
Ferndale Laboratories v. Schwarz Pharma, et al.
B.
Block next argues that Ferndale failed to mitigate its damages because it continued supplying
Block with Analpram after Block breached the supply contract. Under Michigan law, “a breach of
contract imposes on the plaintiff a duty to mitigate damages. The defendant bears the burden of
proving a failure to mitigate.” Lorenz Supply Co. v. Am. Standard, Inc., 300 N.W.2d 335, 339
(Mich. Ct. App. 1980); see also Reinardy v. Bruzzese, 118 N.W.2d 952, 953 (Mich. 1962) (noting
that the burden is on the defendant to prove that plaintiff failed to mitigate). “Mitigation of damages
is a legal doctrine that seeks to minimize the economic harm arising from wrongdoing.” Morris v.
Clawson Tank Co., 587 N.W.2d 253, 263 (Mich. 1998).
We cannot agree with Block’s assertion. As explicitly provided by the supply agreement’s
default provision, the agreement terminated in 1995 after Ferndale gave Block written notice of
Block’s breach and the sixty-day period for Block to cure its breach had elapsed.7 Upon contract
7
As previously mentioned, the agreement’s default provision stated that the contract “shall
terminate” if one party breached the contract, the non-breaching party gave notice of the breach and
a sixty-day opportunity to cure, and the breaching party nevertheless remained in default. We agree
with the district court that Ferndale gave sufficient notice under the default provision either through
its July 7, 1995, letter to Block, stating that it believed the Schwarz-Block distribution arrangement
violated the anti-assignment provision of the supply agreement, and as a result, “Ferndale will
declare [Block] in default in accordance with the Agreement,” or through the mailing of its
complaint filed in district court to Block later that month.
Therefore, because Ferndale provided sufficient notice, and Block did not cure its default
within sixty days of such notice, the supply agreement terminated. In reaching this conclusion, we
reject Block’s claim that Ferndale’s continued sale of Analpram to Block for three years after the
breach occurred effectively waived Ferndale’s right to terminate the supply agreement. In fact,
Ferndale lacked any right to terminate the supply agreement. The agreement does not give the non-
breaching party the right to terminate the contract upon the happening of certain, specified pre-
conditions. Rather, as the plain language of the agreement reads, the agreement “shall terminate”
upon the occurrence of the stated conditions.
16
Nos. 02-2256; 02-2258
Ferndale Laboratories v. Schwarz Pharma, et al.
termination, Ferndale – in the absence of any mitigation – could have stopped selling any Analpram
to Block, and sued Block for damages in the amount of profit Ferndale would have reaped if Block
had performed under the balance of the contract. Ferndale instead continued selling Analpram to
Block, thereby making Block only liable for damages in the amount of profit Ferndale would have
received had Block not breached the contract minus the profits actually received as a result of “pass
through” sales to Schwarz. Consequently, Block has not met its burden of demonstrating Ferndale’s
failure to mitigate damages.
V.
Schwarz challenges the award of unjust enrichment damages to Ferndale in the amount of
$2,100,000.00. Specifically, Schwarz contends that it was not enriched to the detriment of Ferndale
because Ferndale continued to receive profits from the sale of Analpram during the period that Block
was distributing the cream to Schwarz. We find Schwarz’s position to be persuasive.8
Under Michigan law, the elements of an unjust enrichment claim are: “(1) receipt of a benefit
by the defendant from the plaintiff and (2) an inequity resulting to plaintiff because of the retention
of the benefit by defendant.” Barber v. SMH (US), Inc., 509 N.W.2d 791, 796 (Mich. Ct. App.
1993) (citing Dumas v. Auto Club Ins. Ass’n, 473 N.W.2d 652, 663 (Mich. 1991)). The first element
is satisfied in this case, Schwarz received a benefit from Ferndale, derived from Ferndale’s own
continued willingness to sell to Block. The second element, however, is not satisfied; no inequity
8
To the extent that Schwarz appeals the denial of its motion for summary judgment, we do
not consider such arguments because “where summary judgment is denied and the movant
subsequently loses after a full trial on the merits, the denial of summary judgment may not be
appealed.” Jarrett v. Epperly, 896 F.2d 1013, 1016 (6th Cir. 1990).
17
Nos. 02-2256; 02-2258
Ferndale Laboratories v. Schwarz Pharma, et al.
resulted to Ferndale as a result of Schwarz’s benefit. Most notably, Schwarz paid for all of the
Analpram it ever received, and therefore we cannot conclude Ferndale suffered any inequity.
Ferndale was paid, albeit by Block, for the Analpram that ultimately ended up in Schwarz’s control.
Any inequity to Ferndale, therefore, must result exclusively from the fact that Schwarz, and not
Block, ultimately distributed the product. Our award of damages to Ferndale against Block provides
Ferndale with the profits the company would have received if Block had not breached the supply
agreement but instead had continued distributing Analpram. Accordingly, we vacate the judgment
of $2,100,000.00 against Schwarz and remand this issue to the district court with instructions to
enter judgment for Schwarz.
VI.
For the foregoing reasons, we affirm the grant of summary judgment to Ferndale on the issue
of Block’s breach of contract. We vacate the judgment against Block entered by the district court
and remand this issue to the district court with instructions to enter judgment in favor of Ferndale
and against Block in the amount of $216,499.00. We also vacate the judgment entered against
Schwarz and remand with instructions to the district court to enter judgment for Schwarz on
Ferndale’s unjust enrichment claim.
18
Nos. 02-2256; 02-2258
Ferndale Laboratories v. Schwarz Pharma, et al.
SUHRHEINRICH, J., dissenting: I concur in the majority opinion with the exception of
its resolution of the unjust enrichment claim in Section V. I do not agree with the majority’s holding
that Schwarz was not unjustly enriched to the detriment of Ferndale because Ferndale continued to
receive profits from the sale of Analpram during the period that Block was distributing the cream
to Schwarz, and that any inequity to Ferndale resulted exclusively from the fact that Schwarz, not
Block, ultimately distributed the product.
The majority fails to mention that Ferndale possesses a unique asset, a prescription product
containing two active ingredients, pramoxine and hyrocortisone acetate in a 1%/1% combination
cream, that only Ferndale is authorized to manufacture by the United States Food and Drug
Administration (“FDA”). As the district court found, “only Ferndale had the right to manufacture
this cream under the ANDA [Abbreviated New Drug Application].” By virtue of the Asset Purchase
Agreement and Distribution Agreement9 for which it paid Block $106 million, Schwarz acquired
the right to purchase and market a unique asset that it could not otherwise obtain absent direct
negotiations with Ferndale. Thus, at a minimum, Schwarz acquired that right at the price negotiated
between Ferndale and Block. In other words, although “Schwarz paid for all of the Analpram it ever
received,” it paid for it at the price negotiated by Block, thereby depriving Ferndale of the
opportunity to negotiate a higher price from Schwarz. Schwarz acknowledges as much in its brief:
9
The Asset Purchase Agreement reflects that Block agreed to sell nearly all of the Reed &
Carnick assets to Schwarz, including the Ferndale/Reed & Carnick Supply Agreement. In its
findings of fact, the district court explicitly found that “[a]s part of the Asset Purchase Agreement,
Schwarz acquired the right to market the 1%,1% Protocream, either by assignment of the Supply
Agreement or by devising a mechanism whereby Schwarz would effectively have the right to market
the Protocream.” Findings of Fact and Conclusions of Law, p. 9.
19
Nos. 02-2256; 02-2258
Ferndale Laboratories v. Schwarz Pharma, et al.
Both Block and Schwarz in good faith believed that Ferndale’s consent to the
assignment of the Supply Agreement could be obtained because this type of
assignment clause is standard in the industry. The clause works to assure an assignee
can meet the expectations of the agreement. (R. 140, Troup 2/26/99 Trans. at 56-57,
Apx. 880-81) Such clauses are often present to protect the contract manufacturer and
allow a break in the contract to permit a price increase. Such clauses also protect the
contract manufacturer by not allowing assignment to a company that would
significantly reduce sales of the product. (R. 140 Troup, 1/26/99 Trans. at 56, Apx.
880) The parties believed that because Schwarz could meet those expectations,
Ferndale would consent. .... 880-82, 890.
(Intervenor Br. at 5).10
Moreover, Schwarz deprived Ferndale of Ferndale’s right to consideration for its permission
to sell the exclusive pharmaceutical product. Schwarz paid Block to assume the crucial rights of
marketing and selling Analpram. In other words, Schwarz received a benefit from Ferndale to which
it was not entitled, the right to market and sell the 1%/1% cream. See Barber v. SMH (US), Inc.,
509 N.W.2d 791, 796 (Mich. Ct. App. 1993) (citing Dumas v. Auto Club Ins. Ass’n, 473 N.W.2d
652, 663 (Mich. 1991) (stating items elements of unjust enrichment under Michigan law)). The
equities do not favor Schwarz either. As the district court found “Schwarz had taken the risk that
Ferndale might not consent to the asset sale and then willingly engaged in a Distribution Agreement
that Schwarz knew circumvented the assignment provision.” Findings of Fact and Conclusions of
Law, p. 42 See Michigan Educ. Employees Mut. Ins. Co. v. Morris, 596 N.W.3d 142, 151 (Mich.
1999) (ruling that unjust enrichment is an equitable doctrine that requires a person who has been
unjustly enriched at the expense of another to make restitution to the other); see also McFerren v.
10
The district court held that “Ferndale lost control over who had the right to sell its unique
product. Ferndale also lost the ability to negotiate the marketing of its product with another
company.” Findings of Fact, p. 24.
20
Nos. 02-2256; 02-2258
Ferndale Laboratories v. Schwarz Pharma, et al.
B&B Inv. Group, 655 N.W.2d 779, 783 (Mich. Ct. App. 2002) (“A court acting in equity looks at
the whole situation and grants or withholds relief as good conscience dictates.”) (internal quotation
marks omitted).
As the district court found, the selling price for the right to market Analpram “was
somewhere between $4.5 (Davis) and $9.6 (Rozek) million.” Findings of Fact, p.42. In determining
that Schwarz was unjustly enriched by $2.1 million, the district court calculated that Schwarz earned
$6.6 million ($8.5 million minus the selling costs) from July 1995 until Ferndale withdrew the
product. The district court then subtracted the selling price of the asset which it set at the lower
amount, $4.5 million, apparently giving weight to Schwarz’s argument that it should not be held
responsible for the selling price because it lost money. To my mind, the fact that Schwarz lost
money on the asset purchase is irrelevant to the calculation of unjust enrichment. Schwarz’s
mismanagement of the asset does not undermine the fact that Schwarz deprived Ferndale of the right
to negotiate, and receive a price for the sale of its asset, which Schwarz apparently valued at
approximately $4.5 million. Thus, I think that in calculating unjust enrichment damages, the district
court erred in subtracting the $4.5 million from the $6.6 million. I would therefore award Ferndale
$6.6 million in unjust enrichment damages against Schwarz.
For these reasons, I dissent from Section V of the majority opinion.
21