Teaching Assistants Jeopardy: Speculative Damages for $100

This is the fifth in a series of posts on Victor Goldberg's work.  Today's post is about Chapters 5 & 6 of his book, Rethinking Contract Law and Contract Design (RCL).

A post on Chapter 4 (lost-volume damages) is here.

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.

And now on to Jeopardy:

The answer is: One case, two chapters in RCL, and six pennies.

Question: What is Freund v. Washington Square Press? 

It is not clear why Freund has become a favorite of casebooks.  Its subject matter, a professor suing a publishing house for breach of contract, likely speaks to the interests of instructors more than it does to those of students.  We can all feel deeply the pathos of the moment when Freund prevails on the merits and is awarded only nominal damages of six cents.  Thus the value of our academic toils is  reckoned in this world.  In the hereafter however, . . . one can hope. 

As Professor Goldberg explains in Chapter 5 of RCL, Freund fits into his theme of courts getting the basic facts of a case wrong.  Freund stands for the proposition that a plaintiff cannot collect damages when any calculation of damages would be speculative.  In this case, Washington Square Press (the Press) breached a contract to publish Freund's book about Eugene O'Neill.  There were lots of reasons to think it would be hard to figure out what royalties Freund could have made had the Press made good on its promise to publish his book.  However, the bigger point is that Freund did not seek such royalties.  He sought specific performance and damages for harm to his career as a tenure-track professor. 

He could have published his book himself (he was a publisher as well as an author), but he wanted the prestige associated with publication by the Press's acquirer, Simon and Schuster.  Also, the terms of the contract seem to indicate that the Press had negotiated for an option to publish.  (RCL, 48-55) If it decided not to publish, it was obligated to return Freund's manuscript to him, and he was permitted to keep his $2000 advance, which was a very large advance at the time, amounting to 1/4 of Freund's academic salary (RCL, 57).

Given the fact that the parties had bargained for an option, it is hard to see why the case was brought at all.  One relevant factor likely was the Press's demand that Freund sign a release in order to recover his manuscript.  The demand seems idiotic, as if the Press had forgotten that it had an option. Another factor was likely the appearance of a Louis Schaefer's definitive biography of O'Neill.  The first volume appeared in 1968 and would have destroyed the market for Freund's book.  The second volume (left), which was published in 1975 and won the Pulitzer Prize, rendered Freund's work unpublishable (RCL, 54, 58).  He may have had an argument that the Press's breach (or exercise of its option) hurt his chances at getting tenure, but he had gotten tenure by the time the Court of Appeals heard his case, so he had no basis for claiming damages on that account either.  Professor Goldberg's preference for allowing the parties to choose to put a price on the option to breach seems to have worked as designed in Freund.

Chodos v. West Publishing, discussed in RCL's sixth chapter, is another matter.  Despite the lack of tragedy in Freund, Chodos gives us farcical damages.  In 1995, Chodos pitched the idea of a book on fiduciary duties to Bancroft-Whitney, a division of Thomson Legal Publishing, which later merged with West.  Chodos was to be compensated with 15% of the gross revenues of the project.  Based on representations that he could expect revenues of about $1 million over a five-year period, he claimed to have invested 3600 hours in the project.  After the merger, West ran the numbers and determined it would lose $20,000 if it published the book.  It notified Chodos that it was passing (RCL, 59-60).  

Chodos alleged that the contract was illusory and sought to recover in quantum meruit for the thousands of hours of his valuable time ($400/hour) spent writing the book.  West countered that the duty of good faith and fair dealing prevented the contract from being illusory.  The District Court agreed with West and dismissed the case.  The Ninth Circuit, per Judge Reinhardt, agreed that the contract was not illusory but found that West had breached its duty of good faith and fair dealing because it was contractually obligated to publish the work if it was of good quality.  West had conceded that the work was of high quality, and so it could not refuse to publish for business reasons (RCL, 60-61).  So far, so good, but then the Ninth Circuit concluded that Chodos was entitled to recovery in quantum meruit, a remedy that was not justified given the breach of contract.  

The case was remanded to determine damages.  Chodos sought $1.44 million, the value of his time.  West argued for more like $70,000, what he likely would have made had the book been published.    Chodos maintained that his main source of income from the publication would have been the referrals and legal business he would have gotten from publication.  Chodos self-published the book, but the jury did not get to see evidence of its sales.  They were not impressive.  The jury returned a verdict of $300,000, which was upheld, without opinion, on appeal (RCL, 64-66). 

Professor Goldberg faults the courts for allowing the restitution claim to proceed.  The courts rejected contract damages as too speculative, but were they?  Wouldn't they have to be somewhere between $150,000 (15% of $1 million in expected revenue) and 15% of whatever much lower number for revenues prompted West not to publish?  Moreover, as the jury's split-the-baby approach indicates, restitution damages were no less speculative.  The parties did not make much effort to establish either West's non-existent unjust enrichment or the real value of Chodros's efforts.  If the main value he expected to get from the book was referrals, the court could have considered that he did in fact publish the book and thus should have been required to discount his recovery by the amount of benefit he received from such referrals (RCL, 67-68).  Professor Goldberg seems to think that, as the book was published in any case, the only loss Chodros suffered was delay in publication.  But there Professor Goldberg seems to be underestimating the difference in value between publishing with West and self-publishing.  If I were looking for an expert on the law of fiduciaries (and Judge Cardozo was not available), I would be far more inclined to hire someone who had published a major treatise with a leading legal publication house than  someone who self-published their work.  Moreover, without the assistance of West's marketing apparatus and distribution network, word of Chodros's work would be far less likely to reach potential clients.   

True to form, Professor Goldberg concludes by suggesting that the parties could have just negotiated for an option and avoided the headaches and the uncertain exposure to liability associated with protracted litigation.   Even though such cases rarely result in litigation, it would be a simple matter for the publisher to offer an advance in return for the right not to publish the book, notwithstanding its quality, should market conditions counsel against publication.  Absent such ideal contract design, Chodros may indeed have been entitled to damages for breach of the covenant of good faith and fair dealing.  However, the court's award of restitution damages made little sense in these circumstances (RCL, 69-70).