Business Machines Sales and Service, Inc., Respondent, vs. Robert E. Murphy, Appellant.

Business Machines Sales and Service, Inc., Respondent, vs. Robert E. Murphy, Appellant. A04-1154, Court of Appeals Unpublished, April 19, 2005. This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (2004).

  STATE OF MINNESOTA

IN COURT OF APPEALS

A04-1154

 

Business Machines Sales and Service, Inc.,
Respondent,

vs.

Robert E. Murphy,
Appellant.

 

Filed April 19, 2005 Reversed and remanded

Peterson, Judge

 

Hennepin County District Court

File No. CT9914896

 

Andrew S. Birrell, R. Travis Snider, Birrell & Newmark, LTD, 333 South Seventh Street, Suite 2270, Minneapolis, MN  55402 (for respondent)

 

Bruce A. Finzen, David L. Mitchell, John P. Morgan, Robins Kaplan Miller & Ciresi, LLP, 800 LaSalle Avenue, 2800 LaSalle Plaza, Minneapolis, MN  55402 (for appellant)

 

            Considered and decided by Klaphake, Presiding Judge; Kalitowski, Judge; and Peterson, Judge.

U N P U B L I S H E D   O P I N I O N

PETERSON, Judge

In this appeal from the judgment and denial of posttrial motions after a second trial on damages in a breach-of-contract action, appellant argues that the district court erred in admitting and relying on the testimony of respondent's expert witness; improperly expanded the scope of damages in its construction of a consulting agreement; improperly rejected testimony considering actual market circumstances; and ignored remand instructions from a prior appeal.  We reverse and remand.

FACTS

            Respondent Business Machines, Sales and Service, Inc. (BMS) is a corporation that sells and leases computers, business equipment, and supplies. In 1997, appellant Robert E. Murphy sold his 50% interest in BMS and entered into a consulting contract with the company.

            The consulting contract required appellant to use his best efforts to sell BMS products and BMS to pay appellant a commission of 40% of the net gross profit[1] on all product sales, provided that he achieved a monthly minimum net gross profit of $6,000 on sales of BMS products.  Bus. Mach. Sales & Servs., Inc. v. Murphy, No. C6-01-1720, 2002 WL 1315610, at *1 (Minn. App Jun. 18, 2002) (Murphy I).  Appellant received exclusive access to 21 BMS accounts and was required to sell only BMS products to these accounts, provided BMS products were available and competitively priced. Id. The term of the contract was 48 months.  Id.  After appellant's sales experienced a significant downturn and efforts to restructure the terms of the contract failed, appellant stopped working for BMS. Id. at *1-*2.  In September 1999, BMS sued appellant for breach of the consulting contract.  Id. at *2.  Following a bench trial, the district court found that appellant breached the contract by, inter alia, failing to produce the $6,000 per month in net gross profits that he had committed to producing.  Id.  The district court calculated damages by multiplying the $6,000 monthly commitment by the number of months in the contract that appellant failed to produce the $6,000 monthly commitment, and subtracting commission.  Id.  Judgment was entered in favor of BMS for $111,600 plus interest and costs. 

            Appellant appealed, arguing that the district court erred by construing the $6,000 commitment as a guarantee.  Id.  This court held that the contractual term "commit" is not synonymous with a "guarantee" and remanded for a new trial on damages while affirming the district court's conclusion that appellant breached the contract.  Id. at *3-5.  This court instructed the district court to "make findings on the reasonably certain amount of net gross profits that [appellant] would have generated in light of market circumstances, had he used his best efforts to perform in the remaining months of the contract."  Id. at *4.  This court also instructed that on retrial, appellant be given an opportunity to raise his claim that BMS failed to mitigate damages.  Id.

The damages issue was retried to the district court in January 2004.  Before trial, appellant moved to exclude the testimony of BMS's expert witness, Kenneth Hirschey. Hirschey provides consulting services to small businesses, including litigation support regarding economic and labor matters, and teaches business courses at two Minnesota universities.  Appellant argued that Hirschey's methodology for proving lost profits was unreliable, unhelpful, and not generally accepted by economists.  The district court found that appellant's argument went to the weight of the testimony, not its admissibility, and denied appellant's motion.  Appellant renewed his motion following Hirschey's testimony, and the district court again denied the motion.

Hirschey testified that the total damages to BMS were in the range of $106,000 to $148,000.  Hirschey began with the premise that "one of the best indications of future performance is past activity," and predicted that appellant would have continued to generate equivalent sales into the future, or at a minimum, the contractual amount of $6,000 per month.  Hirschey testified that he then factored in normal wage-rate growths for sales persons with similar experience, unemployment rates, and market conditions to arrive at a "basis escalation factor" that he used to arrive at the minimum projected gross profit, and an expected projected gross profit.

Hirschey's expert report explains that Hirschey multiplied the $6,000 monthly minimum net gross profit in the contract by the national average annual real wage growth[2] for the United States business sector, as reported in the February 2002 Economic Report of the President for the relevant years, to arrive at a minimum projected net gross profit total of $106,241 during the relevant time period.  To arrive at an expected net gross profit of $148,953, Hirschey multiplied appellant's average monthly net gross profit in the first 17 months of the contract period, $8,300, by the same national average annual real wage growth rate for each year of the relevant period.

Under cross-examination, Hirschey could not identify any authority that supports using the national average annual wage growth in the United States business sector to project sales or gross-profit growth in a single industry.  Hirschey also could not identify any authority that links the national average annual real wage growth to an increase in gross profits in a particular business segment. Hirschey did not identify the specific economic-damages analysis method that he used, but testified that the components he used are outlined in a treatise by Gerald D. Martin, Determining Economic Damages.  Hirschey testified that he did not use either the "before and after" or the "yardstick" method of calculating lost profits.[3]  He also testified that he did not examine BMS's consolidated financial statements because he believed that overall corporate earnings were not relevant to understanding the market conditions at the point in time of the breach.

            Appellant did not present any expert testimony to rebut Hirschey's testimony.  His witnesses included Michael Forde, Graham Lant, and Charles Palmer, who were customers to whom he sold or leased office equipment while under contract with BMS.  Forde testified that due to market circumstances, his need for computers and other office equipment declined and that the person who was put in charge of procuring business equipment had other contacts that she worked with and based her purchasing decisions on price.  Lant and Palmer testified that during the relevant period, their organizations began using a national vendor instead of BMS.

            Appellant testified at trial about his efforts to sell to the 21 BMS accounts to which he had exclusive access under the contract.  The district court found that appellant's testimony was not credible.  Appellant admitted selling $19,156.51 in competitive products to BMS customers during the relevant period, and on appeal, he concedes that this breach caused damages of $19,156.51.  Appellant did not present any evidence regarding failure to mitigate damages.

            Based on Hirschey's testimony, the district court found that BMS's total loss of net gross profits due to appellant's breach of the consulting contract was $148,953.  The court found that appellant did not present any evidence regarding mitigation, and it did not reduce the damage award for any failure to mitigate.  Appellant moved for amended findings or a new trial, asserting that (1) BMS presented only speculative evidence of its damages; (2) BMS failed to prove that it mitigated its damages; (3) the contract limits any damages in excess of $6,000 per month; and (4) the district court erred by (a) failing to take judicial notice of evidence; (b) failing to discredit Hirschey and his analysis; and (c) discrediting appellant's testimony and failing to adopt appellant's testimony concerning the market conditions during the relevant period.  The district court denied the motion, finding that it was essentially a motion for reconsideration.  This appeal followed.

D E C I S I O N

Findings of fact, whether based on oral or documentary evidence, will be set aside only if clearly erroneous, and a reviewing court defers to the district court's evaluation of witness credibility.  Minn. R. Civ. P. 52.01.  A district court's decision on a purely legal issue is independently reviewed.  Frost-Benco Elec. Ass'n v. Minn. Pub. Utils. Comm'n, 358 N.W.2d 639, 642 (Minn. 1984).  Findings of fact that result from an error of law are clearly erroneous.  Reserve Mining Co. v. State, 310 N.W.2d 487, 490 (Minn. 1981).

Hirschey's Expert Testimony

Appellant argues that Hirschey's testimony about the damages BMS incurred as a result of the breach of contract should have been excluded as unreliable under the Minnesota Frye-Mack standard.  The district court found that appellant's arguments went to the weight of Hirschey's testimony, not its admissibility, and did not address whether Hirschey's methodology satisfied the Frye-Mack standard.  "A reviewing court must generally consider only those issues that the record shows were presented and considered by the trial court in deciding the matter before it."  Thiele v. Stich, 425 N.W.2d 580, 582 (Minn. 1988) (quotation omitted).  Because the record does not show that the district court considered whether Hirschey's methodology satisfied the Frye-Mack standard, we will not consider this issue for the first time on appeal.  Furthermore, we need not determine whether the district court erred in finding Hirschey's testimony admissible because even if we assume that the testimony was admissible, we conclude that the testimony was not sufficient to show a loss of profits with a reasonable degree of certainty and exactness.

"The function of the expert is ‘to assist the [fact finder] in reaching a correct conclusion from the facts in evidence.'  The expert must base his opinion on facts sufficient to form an adequate foundation for an opinion and should not be allowed to speculate."  Hudson v. Snyder Body, Inc., 326 N.W.2d 149, 154-55 (Minn. 1982) (quoting Albert Lea Ice & Fuel Co. v. United States Fire Ins. Co., 239 Minn. 198, 202, 58 N.W.2d 614, 617 (1953)).

The measure of damages for breach of contract is the amount that will place the plaintiff in the same situation as if the contract had been performed.  Logan v. Norwest Bank Minn., N.A., 603 N.W.2d 659, 663 (Minn. App. 1999); see also 4 Minnesota Practice, CIVJIG 20.60 (1999) (stating that damages for breach of contract should put the non-breaching party in the same position the party would have been had the contract not been breached). 

            The general rule in Minnesota is that damages in the form of lost profits "may be recovered where they are shown to be the natural and probable consequences of the act or omission complained of and their amount is shown with a reasonable degree of certainty and exactness.  This means that the nature of the business or venture upon which the anticipated profits are claimed must be such as to support an inference of definite profits grounded upon a reasonably sure basis of facts. . . . This rule does not call for absolute certainty."  The controlling principle is that speculative, remote, or conjectural damages are not recoverable.

 

Cardinal Consulting Co. v. Circo Resorts, Inc., 297 N.W.2d 260, 266-67 (Minn. 1980) (omission in original) (quoting Appliances, Inc. v. Queen Stove Works, Inc., 228 Minn. 55, 63, 36 N.W.2d 121, 125 (1949)) (quotations omitted)).

The district court relied solely on Hirschey's analysis to reach its damages award.  To determine the minimum loss in net gross profits Hirschey multiplied the national average annual wage-growth rate across all United States business sectors for each year of the relevant period by the "contracted $6,000 per month," and then subtracted the commission that would have been paid to appellant.  To arrive at the expected loss in net gross profits, Hirschey multiplied the same national average annual wage-growth rate by the average net gross profit appellant generated during the first 17 months of the contract.  Hirschey's underlying theory is that because employees in all United States business sectors with similar job titles experienced an average of four to seven percent real wage growth during the period in which appellant breached the contract, it is likely that appellant's salary and sales would have grown by the same percentage.

But a national average wage-growth rate does not provide a basis for determining with a reasonable degree of certainty and exactness what would have been the growth in the net gross profit of a single business due to the efforts of an individual sales person.  A national average, by definition, reflects the experiences of many employees across the United States; it does not purport to describe what is occurring in a particular region or industry, much less what is occurring in a single business due to the efforts of one individual.  The fact that there was a change in the national average wage-growth rate does not prove with reasonable certainty that there would have been a comparable change in the net gross profit that appellant could have earned for BMS if he had continued working under the consulting contract.  Therefore, we reverse the judgment awarding BMS damages and remand for a new trial on damages.

Because we are remanding for a new trial on damages, it is not necessary for us to address appellant's remaining arguments regarding trial errors.  But because similar issues may arise in a new trial, we address appellant's arguments in the interests of judicial economy. 

Appellant argues that the district court impermissibly allowed BMS to expand the scope of the damages by construing the parties' agreement to require that appellant use his "best efforts" to sell not just to the 21 exclusive BMS accounts listed in the contract, but to other BMS customers as well.

Appellant contends that any damages resulting from the breach should be limited to damages caused by a failure to use his "best efforts" to maintain the 21 exclusive accounts and sales to other accounts should not be considered.  BMS argues that because appellant was permitted to sell BMS products to any BMS customers to meet his $6,000 commitment, that fact should be considered in the award of damages.

In Murphy I, this court concluded that appellant did not guarantee BMS $6,000 per month in net gross profits; rather, he "agreed to give his best effort to achieve this goal."  Murphy I, 2002 WL 1315610, at *3.  Accordingly, the district court was directed to "make findings on the reasonably certain amount of net gross profits that [appellant] would have generated in light of market circumstances, had he used his best efforts to perform in the remaining months of the contract."  Id. at *4.  Under the terms of the contract as interpreted by this court, because appellant agreed to use his best efforts to reach his sales goal of $6,000 per month, damages should include all reasonably certain net gross profits appellant would have generated, irrespective of their source.

Murphy's Testimony

            Appellant argues that it was clearly erroneous for the district court to disregard his testimony.  The record indicates that the district court did not disregard appellant's testimony; rather, the court ruled that appellant could supplement the record from the first trial but that any repetitive testimony would be stricken.  Evidentiary rulings are within the district court's discretion and are reviewed under the abuse-of-discretion standard.  Kroning v. State Farm Auto. Ins. Co., 567 N.W.2d 42, 45-46 (Minn. 1997).  The district court's decision to strike repetitive testimony was not an abuse of its discretion.  Appellant also argues that the district court erred in finding that his testimony was not credible.  Credibility determinations are the province of the fact-finder, and this court defers to those determinations.  Sefkow v. Sefkow, 427 N.W.2d 203, 210 (Minn. 1988).

Mitigating Damages

Appellant argues that the district court ignored this court's remand instruction when it rejected appellant's argument that BMS failed to mitigate its damages by failing to hire, or even attempt to hire, a replacement for appellant.  "It is the duty of the [district court] on remand to execute the mandate of [an appellate] court strictly according to its terms.  The [district] court has no power to alter, amend, or modify [this court's] mandate."  Halverson v. Village of Deerwood, 322 N.W.2d 761, 766 (Minn. 1982) (citation omitted).  In Murphy I, this court instructed that on retrial, "[Appellant] should be afforded the opportunity to raise and demonstrate the failure to mitigate."  2002 WL 1315610, at *4.

The breaching party has the burden of showing that damages could have been mitigated with reasonable diligence.  Lanesboro Produce & Hatchery Co. v. Forthun, 218 Minn. 377, 381, 16 N.W.2d 326, 328 (1944).  The district court found that appellant did not present any evidence regarding mitigation of damages.  The record supports the district court's finding.  Appellant argued in his closing memorandum that respondent did not mitigate damages by hiring a replacement, but appellant presented no evidence to support his argument.  The district court did not deny appellant an opportunity to demonstrate a failure to mitigate; appellant failed to present evidence on the mitigation issue.  We therefore conclude that the district court did not err in refusing to reduce the damages for failing to mitigate.

            Reversed and remanded.

[1] The contract defines "net gross profit" as "equal to sales revenue minus the cost of goods sold by Murphy."

[2] Hirschey testified that the real wage growth is the difference between the consumer price index and the productivity wage growth.

[3] The "before-and-after" method compares a plaintiff's profit record before the breach with its record after the breach, while the "yardstick" method relies on studies of the profits of business operations that are closely related to plaintiff's business.