Teaching Assistants: Victor Goldberg on Lost-Volume Sellers

This is the fourth in a series of posts on Victor Goldberg's work.  Today's post is about Chapter 4 of his book, Rethinking Contract Law and Contract Design (RCL).

A post on Chapter 3 (timing for assessing damages) is here.

A post on Chapter 2 (the flexibility/reliance trade-off) is here.

The introductory post is here.

 In lost-volume cases, such as Neri v. Retail Marine, a seller can recover lost profits even though it was able to re-sell the good after breach.  Assuming an effectively infinite inventory, but for the breach, the seller would have sold twice, and so the re-sale does not mitigate its damages. I teach lost-volume sellers in my Sales course.  I feel bad about forcing lost-volume sales on students, because a lot of students have a hard time understanding when the doctrine might apply.  However, the doctrine seems like a good way to get students thinking about mitigation of damages and the contours of a party’s ability to recover for lost profits.  Lost volume cases might not arise very frequently, perhaps a product of amounts in controversy that do not justify the costs of litigation, but that does not mean the bar will not test the material.

Professor Goldberg is not enamored of the doctrine, especially because courts are wont to apply it in cases where it clearly does not apply (looking at you, then Circuit Judge Alito in Tigg v. Dow Corning) (RCL, 35-36).  As he does in Chapter 2, Professor Goldberg suggests that option pricing provides a far better solution to the lost-volume problem than the lost-volume doctrine.  Sellers know that some buyers will back out.  They rely on buyers; buyers should be willing to bargain for some flexibility.  So make buyers pay a non-refundable deposit, or the parties can agree to liquidated damages (which courts would be well-advised to enforce) as a way to protect seller’s reliance interest.  And buyers should be willing to pay a higher deposit when goods are not plentiful rather than when they are, so the UCC § 2-708(2) gets the option price backward (RCL, 36-38).

Lawyers representing Michael Jordan in In re WorldCom contended that he was entitled to lost- volume profits when a bankrupt WorldCom rejected his endorsement contract only six years into a ten-year commitment.  The bankruptcy court rejected Jordan’s claim that he was a lost-volume seller, but Professor Goldberg explains that the argument is not as preposterous at it seems.  Although MJ was only obligated to work 16 hours/year for WorldCom, and thus could have taken on other endorsement deals, he was not a lost-volume seller because he had not established that he had any interest in taking on additional deals.  He had no such interest, among other reasons, because WorldCom would argue that any such deals were mitigation.  But because MJ’s deal with WorldCom was exclusive only of endorsement deals with other telecom companies, any other endorsement deals would not have been mitigation, and the only thing that would be mitigation was taking an endorsement deal with another telecom company.  But doing so would have been a bad business decisions for MJ.  They would have made him look mercenary, like he will pimp any product (RCL, 40-43).  MJ is not the “Can you hear me now?” guy. 

Professor Goldberg faults the bankruptcy court for treating any endorsement contract that MJ would have taken as mitigation for WorldCom’s breach.  The court mistakes the interests we protect through the mitigation doctrine.  What matters in mitigation cases, Professor Goldberg argues, is not whether the alternative work taken on is comparable.  What matters is that new work is taken on that could not have been taken on but for the breach.  What the law characterizes as mitigation is really just an offset.  In MJ’s case, there could be no lost-volume problem, because MJ was not interested in a second sale.  If there was a second sale, only an endorsement deal with another telecom company would have offset his harm from WorldCom’s breach.  Professor Goldberg is sympathetic to MJ’s claim that he was entitled to full recovery because it would have been a bad business decision for him to take on a comparable endorsement deal (RCL, 44-46). 

I must admit, he loses me there.  MJ’s attorneys noted that MJ did not want to take on any more endorsement deals, as they detracted from his main goal, owning an NBA franchise.  For MJ, WorldCom’s beach was fortuitous.  He no longer had to do work that he no longer wanted to do.  I can see a legal argument for why MJ was entitled to compensation because of the breach, but I don’t see the economic argument.  MJ had protected himself contractually against a breach caused by WorldCom’s insolvency and had no duty to mitigate.  However, the Bankruptcy Code negates such contractual clauses, because they give unsecured creditors priority over secured creditors.  To the extent that the priority rules in the Bankruptcy Code made sense, I don’t see the economic argument for setting those rules aside for someone who has no interest in doing the work for which he was promised payment.