Designer Direct Inc v. DeForest Redevelopme , 368 F.3d 751 ( 2004 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 03-2429
DESIGNER DIRECT, INCORPORATED, doing
business as LEVIN ASSOCIATES ARCHITECTS,
Plaintiff-Appellee,
v.
DEFOREST REDEVELOPMENT AUTHORITY,
Defendant-Counter Plaintiff-Appellant,
v.
KERRY LEVIN,
Counter Defendant-Appellee.
____________
Appeal from the United States District Court
for the Western District of Wisconsin.
No. 01 C 40—John C. Shabaz, Judge.
____________
ARGUED FEBRUARY 20, 2004—DECIDED MAY 14, 2004
____________
Before FLAUM, Chief Judge, and BAUER and MANION,
Circuit Judges.
BAUER, Circuit Judge. The facts of this controversy,
based on diversity jurisdiction, were recited in our earlier
opinion, Designer Direct, Inc. v. Deforest Redevelopment
2 No. 03-2429
Authority, 313 F.3d 1036 (7th Cir. 2002), and so only those
facts relevant to the issue at hand will be discussed here. In
that opinion we reversed the trial court’s refusal to award
reliance damages to Plaintiff. Id. at 1047-50. On remand,
the trial court calculated reliance damages by using the
hourly rates agreed to in the Phase I contract—based on an
arm’s-length negotiation. That rate was then multiplied by
the number of hours Plaintiff invested in Phase III of the
redevelopment contract—the phase at issue here. Finally,
the judge reduced the calculated figure by ten percent to
account for the profits and “inevitable unrecoverable time”
due to Plaintiff’s employee’s mistakes and the like. The
award amounted to $444,927. Defendant, Deforest Redevel-
opment Authority (DRA), appealed.
Under applicable Wisconsin law, damages are a finding of
fact. Kolbe & Kolbe, Millwork Co., 476 N.W.2d 305 (Wis. Ct.
App. 1991). Therefore, we review the determination of
damages for clear error. Designer Direct, 313 F.3d at 1047-
48 (citing CSC Holdings, Inc. v. Redisi, 309 F.3d 988, 994-
95 (7th Cir. 2002)).
“Remedies for injury to a reliance interest are defined as
‘being reimbursed for loss caused by reliance on the contract
by being put in as good a position as [the plaintiff] would
have been in had the contract not been made.’ ” Reimer v.
Badger Wholesale Co., 433 N.W.2d 592, 594 (Wis. Ct. App.
1998) (quoting RESTATEMENT (SECOND) OF CONTRACTS § 344
(1981)). Such damages are usually construed to include out-
of-pocket expenditures incurred in preparation or perfor-
mance of the contract. RESTATEMENT (SECOND) OF CON-
TRACTS § 349 (1981). A plaintiff may also seek reliance
damages under a theory of lost opportunity. RESTATEMENT
(SECOND) OF CONTRACTS § 344 cmt. a. (1981). Damages
must be proven with reasonable certainty. Pleasure Time,
Inc. v. Kuss, 254 N.W.2d 463, 470 (Wis. 1977).
First, it should be noted that Plaintiff did not prove the
existence of a lost opportunity. While Designer Direct did
No. 03-2429 3
show that there was some interest from other potential
clients, it failed to name them or show that it was likely
that a contract would have been entered into but for
Designer Direct’s contract with the DRA. Therefore,
recoverable damages are limited to those losses actually
caused by Plaintiff’s reliance on the Phase III redevelop-
ment plan.
Defendant argues that the reliance damages awarded to
Plaintiff cannot be sustained. Its main complaint, beyond
the argument that Plaintiff did not prove lost opportunity,
is that Plaintiff did not show actual out-of-pocket expenses.
While the argument has some merit, it misses the mark.
Plaintiff rightly contends that there is more than one way
to skin a cat. It argues that adding up all of the expenses
paid in reliance upon the Phase III redevelopment plan
should produce the same figure as subtracting the profits
from the hourly-pay-rate-figure. Unfortunately, that
method of calculation, at least upon the facts of this case,
fails to satisfy the requirement of reasonable certainty of
damages.
Under Autotrol Corp. v. Continental Water Sys. Corp., 918
F.2d 689, 692-94 (7th Cir. 1990), overhead expenses are
recoverable as reliance damages. This is true provided that
the plaintiff seeking to recover can show that those ex-
penses were properly allocated to the breached contract,
Cyberchron Corp. v. Calldata Sys. Development, Inc., 47
F.3d 39, 46 (2d Cir. 1995), and that they would have prob-
ably obtained those overhead expenses on other projects,
Autotrol Corp., 918 F.2d at 693. Plaintiff failed to satisfy
the former.
While it appears as though most of the work being per-
formed by Plaintiff was directly related to the redevelop-
ment project, other work was being done in both the
Wisconsin field office and the main office in Des Plaines,
Illinois. Plaintiff cannot recover that portion of overhead
4 No. 03-2429
costs which is attributable to those other projects. To clar-
ify, let us say, hypothetically, that an employee of Designer
Direct spent 80% of his working hours on the redevelop-
ment project. That would mean that 20% of his salary and
benefits is not recoverable as damages. In other words, we
simply do not know what percentage of the overall working
hours were spent on Phase III of the DRA project and what
percentage of time was spent on other projects. Without
such information, we cannot determine the percentage of
benefits, and other overhead expenses that should be
allocated to the breached contract. Allowing Designer Direct
to recover those overhead expenses not allocated to the
breached contract would result in a windfall for Plaintiff.
We refuse to announce a rule forbidding Plaintiff’s
method of calculating damages. However, we suspect that
plaintiffs seeking to use such a method will find themselves
in the same quagmire as Plaintiff in this case. The fact is
that Plaintiff’s calculation is an estimated guess. While we
believe that the properly calculated damages figure will be
close to the figure previously announced, we do not
know—and therein lies the problem.
We remand with instructions to recalculate the damages.
We invite Plaintiff to supplement the record with concrete
evidence of expenditures and the percentage of overhead
costs which can be attributed to the Phase III redevelop-
ment plan. As Judge Shabaz has already found that “[i]t is
entirely reasonable to infer that had Plaintiff not invested
its efforts in this project it would have gainfully applied the
hours to another,” the inquiry on remand should focus on
determining those expenses which may be properly al-
located to the breached contract.
REVERSED AND REMANDED WITH DIRECTIONS
No. 03-2429 5
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—5-14-04