Altana, Incorporated v. Abbott Laboratories ( 2008 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 07-3364
N YCOMED US INC.,
Plaintiff-Appellant,
v.
A BBOTT L ABORATORIES,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 04-C-4807—Virginia M. Kendall, Judge.
____________
A RGUED A PRIL 16, 2008—D ECIDED S EPTEMBER 8, 2008
____________
Before EASTERBROOK, Chief Judge, and W OOD and
WILLIAMS, Circuit Judges.
W OOD , Circuit Judge. Nycomed US Inc. (to which we
refer as “Altana,” its name at the time of this suit) manu-
factures and sells erythromycin ophthalmic ointment,
which is used to prevent and treat eye infections. To
manufacture the ointment, Altana uses erythromycin
powder supplied by defendant Abbott Laboratories
(“Abbott”). On one occasion, Abbott supplied to Altana
2 No. 07-3364
a batch of defective erythromycin. Under the supervision
of the Food and Drug Administration, Abbott promptly
notified Altana of the problem; Altana in turn had to recall
and destroy over 1.2 million tubes of its ointment. Faced
with this unexpected setback, Altana put its facility into
overdrive in order to make a replacement batch of oint-
ment while not falling behind on its regular manufacturing
schedule. Altana’s employees worked overtime; personnel
moved from other departments into the ointment depart-
ment to provide extra hands; and the extras also had to
work overtime in their own department so as not to let
those lines of business fall behind. Thanks to these
extraordinary efforts, Altana was able to satisfy all of its
orders for ointment. It did not turn away any customers, its
sales force did not lessen its efforts, and Altana was even
able to maintain an inventory of ointment at all relevant
times.
Abbott conceded that it was liable for all of Altana’s
direct costs in making the destroyed ointment, the cost of
destruction and disposal, and the additional costs incurred
in making the replacement product (that is, the overtime
expenses), for a total payment of $488,283.13. What else,
one might ask, is there to do? Altana has an answer: it
believes that it is entitled not only to the amounts we
have described, but also to “lost profits” of $540,159 and
“overhead costs” of $207,142.91. The parties cross-moved
for partial summary judgment on these two issues. The
district court ruled against Altana and in favor of Abbott
on both issues. It entered judgment for Altana in the
unopposed amount of $488,283.13, and Altana has ap-
pealed from the rejection of its additional demands. We
affirm.
No. 07-3364 3
I
We review summary judgment decisions de novo. Sound
of Music Co. v. 3M, 477 F.3d 910, 914 (7th Cir. 2007). Our
jurisdiction in this case is based on diversity, and the
parties agree that Illinois law governs this dispute.
A
The crux of Altana’s argument for seeking lost profits
in addition to the damages already paid by Abbott is that
it “would have made, sold and profited from the sale of,
both the product Altana was required to destroy as a
result of Abbott’s breach, and the product made in the
wake of the recall to replenish Altana’s inventory.” Altana
does not specify, however, when and how it would have
made this additional product, if the original product had
not been defective. If it would have made the ointment a
couple of months later during normal business hours, it
necessarily would have been substituting the making of
those quantities of ointment for whatever it was manu-
facturing at that future time—that is, ointment that it
made, sold, and reaped profits from. No one disputes that
Altana is in the business of making ointment, but if the
relevant time window is of unlimited scope then of
course any amount of ointment is an amount that “would
have been made” eventually. In order to replace the
recalled ointment, Altana put unusual strain on its facilities
and expended unusual resources, outside the ordinary
course of business, and the sum that Abbott agreed to
pay has fully compensated it for doing so. The record does
not show that Altana would have decided to double its
4 No. 07-3364
output, at a high cost in overtime, if Abbott had supplied
usable erythromycin. This inference is reinforced by the
fact that, having destroyed the defective half of the fruits
of this double-manufacturing, Altana still met all demand
for its product, even as its sales force continued the
same selling efforts.
To affirm the district court’s ruling on the issue of lost
profits, we need only confirm that awarding lost profits
is not necessary to put Altana in the position it would
have occupied absent the breach.
If Abbott had supplied erythromycin that met all perti-
nent quality standards, Altana would have made
1.2 million tubes of ointment, incurred the ordinary costs
of doing so, sold these tubes, and earned its ordinary
profits. Because of the defective product, Altana incurred
the following costs: (1) direct costs (materials, etc.) of
making the destroyed product; (2) costs of destroying that
product; (3) direct costs (materials, etc.) of making the
replacement product; (4) extraordinary costs (overtime)
of making replacement product.
Abbott reimbursed Altana for the first, second, and
fourth cost categories. This leaves Altana bearing only the
direct costs of making one batch of product, the replace-
ment batch, and pocketing the ordinary profit from this
batch. That is the same position it would have been in
if Abbott had not breached the contract. To award any-
thing more in damages would not be compensating
Altana for “lost profits”; it would be giving Altana a
windfall.
No. 07-3364 5
To avoid this result, Altana attempts to invoke the “lost
volume seller” doctrine. See U.C.C. § 2-708(2); Davis Chem.
Corp. v. Diasonics, Inc., 826 F.2d 678, 682 (7th Cir. 1987). This
attempt is misplaced. The district court noted that the
doctrine did not apply because Altana was not the seller in
the contract between Abbott and Altana, which is the one
at issue here. Altana responds that the doctrine ought to
apply nonetheless, because Altana is not just a buyer but
a “buyer-reseller.”
As Abbott points out, the doctrine cannot be applied
blindly in the case of a so-called buyer-reseller who is
the nonbreaching party, because in such a case there is
no automatic proof of a lost sale and therefore lost profit.
When a volume seller enters into a contract with a buyer
who then breaches by repudiating the goods, that is by
definition a lost sale suffered by the nonbreaching party.
The fact that the seller goes on to sell to other parties
does not mitigate its damages because it is a volume
seller and would have made those additional sales anyway.
When the nonbreaching party is a buyer, the breach of
contract does not necessarily mean that there was a lost
sale. Lost sales must be shown separately. In the buyer-
reseller cases cited by Altana, the nonbreaching party
sufficiently demonstrated loss of sales. See Canusa Corp. v.
A & R Lobosco, 986 F. Supp. 723, 732 (E.D.N.Y. 1997)
(applying New York law) (holding that “Canusa has
provided substantial evidence in the form of testimony of
a rising market in the relevant period” and “Lobosco does not
contest that there was a viable market for” the product,
so “the fact that Canusa sold all the [product] it
acquired does not bar it from recovering damages for
6 No. 07-3364
the loss of the [product] it could have sold if it was obtain-
able”) (emphasis added).
Although Altana contends that the ointment recall
occurred during a rising market, this case is distinguish-
able from Canusa because Altana was not simply
obtaining as much product for resale as possible; it was
buying erythromycin with which to manufacture the
product (ointment) for which demand was allegedly
increasing. Altana admitted that it did not lose a single
sale as a result of the recall and that it did not turn away
a single willing customer. Because Altana has not shown
that it would have resorted to overtime manufacturing
during the relevant period if all of the erythromycin
it received had been satisfactory, it has not shown any
evidence of sales that it would have been in a position
to consummate had the breach not occurred. Therefore,
nothing in the “lost volume seller” doctrine supports any
additional recovery for Altana.
B
Altana also claims that the district court should have
permitted it to recover a certain portion of its overhead
costs. It argues that it could not sell the destroyed batch,
and therefore could not use those revenues to help cover
its overhead costs. The district court correctly pointed out
that such a claim requires Altana to show at least one
of two things: (1) that Altana’s overhead costs increased
as a result of the breach, or (2) that Altana suffered actual
lost profits from lost sales because of the breach, implying
that the breach caused Altana to have less revenue
No. 07-3364 7
with which to cover its overhead costs than it otherwise
would have had. As we have already pointed out, Altana
has not shown that it lost any revenues, and so it had the
same amount of revenue over which to spread its over-
head costs as it would have had if the defective
erythromycin had never been delivered. As for the first
condition, Altana has submitted no evidence that its
overhead costs increased. The costs that did increase as a
result of the breach, such as wages, have already been
covered by the amount that Abbott has paid to Altana.
* * *
We A FFIRM the judgment of the district court.
9-8-08