Medcom Holding v. Baxter Travenol Labs ( 1999 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 99-1883 & 99-2092
Medcom Holding Company,
Plaintiff-Appellant, Cross-Appellee,
v.
Baxter Travenol Laboratories, Inc.,
and Medtrain, Inc.,
Defendants-Appellees, Cross-Appellants.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 87 C 9853--Suzanne B. Conlon, Judge.
Argued October 25, 1999--Decided December 23, 1999
Before Easterbrook, Manion, and Rovner, Circuit
Judges.
Easterbrook, Circuit Judge. After twelve years of
litigation, which have witnessed three jury
trials and two prior appeals, this complex
commercial case is nearing its end. Medcom
Holding Co. v. Baxter Travenol Laboratories,
Inc., 106 F.3d 1388 (7th Cir. 1997), and its
predecessor, 984 F.2d 223 (7th Cir. 1993), lay
out the details. All that matters for current
purposes is that Medcom Holding ("MHC") has
recovered a judgment of about $7 million as
damages for misrepresentations Baxter made in
connection with the sale of a line of business to
MHC in 1986. MHC then sought attorneys’ fees on the
strength of this indemnity clause in its contract
with Baxter:
[Baxter agrees] to pay, perform and
discharge and indemnify and hold [MHC]
harmless from and against any loss, damage
or expense (including reasonable attorneys’
fees) . . . resulting from (i) any breach
by [Baxter] of this Agreement: [or] (ii)
any inaccuracy in or breach of any of the
warranties, representations, covenants or
agreements made by [Baxter] herein, in any
Schedule hereto, or in any other
certificate, document, instrument or
affidavit required to be furnished by
[Baxter] to [MHC] in accordance with the
provisions of this Agreement ... .
Baxter concedes that MHC is entitled to recover
reasonable attorneys’ fees under this language,
but the parties could not agree on the
appropriate amount. The district court awarded MHC
approximately $4.3 million for fees and expenses,
plus $1.5 million in prejudgment interest. 1999
U.S. Dist. Lexis 499 (N.D. Ill. Jan. 11, 1999). MHC
contends that the principal amount is too low;
Baxter insists that it is too high and that
prejudgment interest is unavailable. We begin
with the dispute about interest.
Although the suit began under the federal
securities laws, MHC ultimately recovered under
Illinois law, which also supplies rules for the
meaning and enforcement of the indemnity
agreement. The district court asked whether
prejudgment interest is available under 815 ILCS
205/2, a statute that has been understood to
allow prejudgment interest on damages for breach
of contract only when the amounts are "fixed or
easily computed" prior to judgment. See, e.g.,
National Wrecking Co. v. Coleman, 139 Ill. App.
3d 979, 984, 487 N.E.2d 1164, 1167 (1st Dist.
1985); Richman v. Chicago Bears Football Club,
Inc., 127 Ill. App. 3d 75, 77-78, 468 N.E.2d 487,
489-90 (1st Dist. 1984). Relying on South Bend
Lathe, Inc. v. Amsted Industries, Inc., 925 F.2d
1043, 1048-49 (7th Cir. 1991), the district judge
held that "Medcom’s expenses were known and
calculated at the time Medcom incurred them,
justifying the award of prejudgment interest." MHC
received and paid legal bills in determinate
amounts; the total could be mechanically
calculated, unlike (say) damages for lost
profits. Baxter replies that, although what MHC
paid its lawyers was easy to calculate, how much
of this could be shifted to Baxter under the
indemnity was debatable; to this MHC rejoins that
legal uncertainty about the extent of liability
does not defeat prejudgment interest under 815
ILCS 205/2 when the amount of the debt is
mechanically ascertainable once legal issues have
been resolved. E.g., First National Bank Co. v.
Insurance Co. of North America, 606 F.2d 760,
769-70 (7th Cir. 1979) (Illinois law). We need
not decide whether this rejoinder is sound,
because the indemnity clause itself supports an
award of interest.
Illinois does not treat 815 ILCS 205/2 as the
sole authority for prejudgment interest.
Contracting parties may supply their own rule of
decision, as sec.205/2 itself makes clear by
limiting its application to "the absence of an
agreement between the creditor and debtor
governing interest charges". See also, e.g.,
Blakeslee’s Storage Warehouses, Inc. v. Chicago,
369 Ill. 480, 483, 17 N.E.2d 1, 3 (1938). We
concluded in Balcor Real Estate Holdings, Inc. v.
Walentas-Phoenix Corp., 73 F.3d 150 (7th Cir.
1996), that an indemnity agreement similar to the
one between MHC and Baxter authorizes prejudgment
interest. So clear was this that the losing party
in Balcor conceded the point.
An indemnity clause is designed to make the
wronged party whole--to put it in the same
position it would have occupied had the other
side kept its promise. Baxter must "hold
harmless" MHC from "any loss" (emphasis added).
One kind of loss covered by such a promise is the
time value of money, which MHC has been unable to
use while the litigation continues. The way to
make the prevailing party whole is to provide
prejudgment interest at the market rate (rather
than the statutory 5% rate for cases in which the
contracts are silent). See People ex rel.
Hartigan v. Illinois Commerce Commission, 148
Ill. 2d 348, 406-07, 592 N.E.2d 1066, 1093
(1992); In re Estate of Wernick, 127 Ill. 2d 61,
87-88, 535 N.E.2d 876, 888 (1989). "Compensation
deferred is compensation reduced by the time
value of money." In re Milwaukee Cheese
Wisconsin, Inc., 112 F.3d 845, 849 (7th Cir.
1997). As a result, "[p]rejudgment interest is an
element of complete compensation". West Virginia
v. United States, 479 U.S. 305, 310 (1987). See
also, e.g., Milwaukee v. Cement Division of
National Gypsum Co., 515 U.S. 189; General Motors
Corp. v. Devex Corp., 461 U.S. 648 (1983); In re
Oil Spill by the Amoco Cadiz, 954 F.2d 1279,
1331-35 (7th Cir. 1992). When the contract does
everything possible to mandate complete
compensation, the court should provide
prejudgment interest at the market rate. So
although we agree with the district court that MHC
is entitled to prejudgment interest on its legal
expenses, we disagree with the judge’s decision
to award only 5% simple interest. For reasons
covered in Amoco Cadiz, the rate must be
increased to what Baxter paid to its voluntary
creditors during the same period (or, if that
amount is unknown and the parties do not agree on
a different rate, then to the prime rate).
This way of understanding prejudgment interest
presages our approach to the many disputes about
the principal amount due. The district judge
worked through each of Baxter’s objections as if
operating under a fee-shifting statute rather
than under a contract. MHC’s law firms submitted
separate bills for legal fees and expenses (such
as photocopying and secretarial overtime).
Illinois usually requires lawyers to roll
overhead into the hourly rate for purposes of
fee-shifting statutes and denies reimbursement
for separately-billed items such as delivery
services and photocopies. See Kaiser v. MEPC
American Properties, Inc., 164 Ill. App. 3d 978,
989-90, 518 N.E.2d 424, 431 (1st Dist. 1987);
Losurdo Bros. v. Arkin Distributing Co., 125 Ill.
App. 3d 267, 276, 465 N.E.2d 139, 145-46 (2d
Dist. 1984). Cf. West Virginia University
Hospitals, Inc. v. Casey, 499 U.S. 83 (1991). If
the agreement between MHC and Baxter provided for
"attorneys’ fees" alone, then Illinois’
definition of the term "attorneys’ fees" might be
conclusive (for the contract does not provide a
different definition)--though it might not be,
for Kaiser implies that overhead expenses may be
recovered separately if the law firm shows that
their reimbursement does not duplicate services
provided as part of the hourly rate. But we need
not pursue the matter, because Baxter promised to
indemnify MHC for "any loss, damage or expense
(including reasonable attorneys’ fees)". That MHC
has sought reimbursement for an "expense" that is
not part of attorneys’ fees can’t justify denying
reimbursement; it shows only that the contract
covers more than what state law provides when the
parties have not reached an agreement.
Likewise with the district judge’s conclusion
that some of the lawyers’ bills were not
sufficiently detailed to show what services were
provided, by whom, and at what hourly rate.
Itemization is required under fee-shifting
statutes, at least when the judge employs the
"lodestar" method. Itemization is far less common
when businesses pay their own lawyers, for having
attorneys keep detailed records is a cost that
many clients prefer to avoid. Balcor holds that
an indemnity agreement similar to the one between
MHC and Baxter has an implied limit to
"reasonable" fees, but that reasonableness must
be assessed using the market’s mechanisms. 73
F.3d at 153. If attorneys submit bills that meet
market standards of detail, their omission of
information to which courts resort in the absence
of agreement is of no moment. If the bills were
paid, this strongly implies that they meet market
standards. Ibid. The fees in dispute here are not
pie-in-the-sky numbers that one litigant seeks to
collect from a stranger but would never dream of
paying itself. These are bills that MHC actually
paid in the ordinary course of its business. The
indemnity requires Baxter to make MHC whole, which
means reimbursement for commercially-reasonable
fees no matter how the bills are stated.
Notice the qualification: commercially-
reasonable fees. Balcor observes that courts
interpolate a reasonableness requirement into
indemnity agreements to guard against moral
hazard--the tendency to take additional risks (or
run up extra costs) if someone else pays the tab.
Instead of doing a detailed, hour-by-hour review
after the fashion of a fee-shifting statute,
therefore, the district judge should have
undertaken an overview of MHC’s aggregate costs to
ensure that they were reasonable in relation to
the stakes of the case and Baxter’s litigation
strategy (plus the fact that this case was tried
three times and appealed twice before). One
indicator of reasonableness is that MHC paid all
of these bills at a time when its ultimate
recovery was uncertain. Another is that MHC’s
total legal fees and expenses came to about
$200,000 less than Baxter’s. Because Baxter knew
from the start that it would be required to foot
its own legal bill, the amount it incurred cannot
have been influenced by moral hazard. That MHC
laid out less than Baxter implies that it, too,
engaged in prudent cost control and therefore is
entitled to full indemnity.
By and large, the district court’s decision to
treat a contractual indemnity just like a statute
requiring fees to be shifted between strangers
favored Baxter; in one respect, however, it
worked to MHC’s benefit. Baxter contends that MHC
pursued numerous unsuccessful lines of attack: it
demanded punitive damages but did not obtain
them, tried without success to add a RICO theory,
took a premature appeal that this court
dismissed, and so on. As Baxter sees things, MHC
cannot recover for any of these unsuccessful
endeavors. Following the approach of fee-shifting
statutes, however, the district court asked
whether MHC’s endeavors were "related" to those on
which it succeeded. See Hensley v. Eckerhart, 461
U.S. 424, 435 (1983). The judge concluded that
the premature appeal was sufficiently distinct
that it could be called unrelated and sliced
$117,834 from the bill. Other aspects of MHC’s
litigation strategy, however, the district court
deemed close enough to issues on which MHC
prevailed to be compensable under Hensley. As
Baxter observes, however, the contractual
indemnity does not duplicate the federal fee-
shifting statute construed in Hensley. Under the
contract the initial question is whether the
outlay is one "resulting from" Baxter’s
misrepresentation or breach of the agreement. If
the answer is yes, then the next issue is whether
the attorneys’ fees were reasonable. Baxter
sensibly contends that a pursuit of punitive
damages, or treble damages under RICO, cannot be
traced to Baxter’s breach of contract. Perhaps MHC
had rights other than those given by contract,
but the indemnity clause does not fund MHC’s
pursuit of those claims (and in the end MHC lost
its non-contractual claims).
On remand the district court should jettison
the analogy to fee-shifting statutes and ask the
questions posed by the parties’ agreement: did
the legal expenses result from Baxter’s breach
and, if so, were the fees reasonable (that is,
were they fees that commercial parties would have
incurred and paid knowing that they had to cover
the outlay themselves)? Fees for the premature
appeal might well have been caused by the breach;
appellate jurisdiction can be uncertain when the
district judge enters an ambiguous order, and a
prudent lawyer will appeal rather than risk
forfeiture. Thus an appeal that in retrospect was
unnecessary might have been caused by Baxter’s
breach, and the expenses may well have been
reasonable. Moreover, work done in briefing the
premature appeal may well have carried over to
the later appeal that we decided on the merits;
MHC is entitled to compensation for the cost of
that legal work, which had to be done eventually,
even if the fees were incurred and paid a little
sooner than they needed to be.
Enough has been said, we think, to illuminate
the path on remand. Additional subjects on which
the parties have locked horns in this court are
just other applications of the choice between
contractual and fee-shifting-statute approaches
and therefore do not require separate discussion.
Perhaps our framework will enable the parties at
last to resolve the remaining issues amicably;
but, if not, the district court should apply the
contractual approach and bring this case to a
long-overdue conclusion.
Vacated and Remanded