Interstate Life & Accident Insurance Company, Plaintiff-appellee, v. Rko Teleradio Pictures, Inc., Defendant-appellant, 318 F.2d 73 (6th Cir. 1963)

The pivotal question in this appeal is the amount of damages to be awarded for partial breach of a lease of real property to a television station which lease contained a provision for the payment of rent in station identification announcements.

Interstate entered into a lease agreement with Harding College whereby it agreed to acquire land and construct a new building thereon in Memphis, Tennessee to house Harding's television station. The lease was to commence upon the completion of the building and continue for ten years.

The lessee agreed to pay as rental a minimum of twenty station identification announcements each day with an advertising display which was to include the call letters "WHBQ-TV." The announcements were thus shared by each of the parties taking a portion thereof. They were known as "shared I.D." The pertinent provisions of the lease are set forth in the footnote.¹ 

The land was acquired at a cost of $30,000 and the building at $112,000. Interstate incurred additional expenses of $9,000. The total cost was $151,000. Shortly after the building was completed Harding College sold its television station to appellant RKO Teleradio Pictures, Inc. and assigned the lease to this company which assumed all the obligations of the lessee.

RKO commenced to operate the television station and furnish the I.D. announcements to Interstate. Under date of December 28, 1956 the manager of RKO wrote Interstate advising that the station had missed certain announcements and offering to supply them. Interstate replied that it was considering the matter and would write further, but failed to do so. It made no complaint until May 1959. It filed suit in the District Court to recover damages in the amount of $700,000 of which $400,000 was for the reasonable value of the omitted announcements and $300,000 for loss of profits. Under date of December 4, 1961, with leave of court, it waived and withdrew its claim for loss of profits.

The case was submitted to a jury which returned a verdict in favor of Interstate and assessed its damages for breach of contract in the amount of $150,000 and awarded it $15,900 for attorney's fees and expenses or a total of $165,900.

In this Court, the principal claim of RKO was that the verdict was grossly excessive. In an eighty page brief, RKO raised twenty points which it claimed required reversal of the District Court's judgment.

The period of time involved in the damage claim was about five years or 1,793 days. RKO admitted that it was required to give a minimum of 34,810 announcements during this period; that it actually delivered 27,496 announcements and was short 7,314. It delivered approximately 15 announcements per day.

Interstate claimed that the shortage amounted to 12,208 or approximately one-third of the station identification announcements called for under the lease.

RKO offered proof in the District Court tending to show that the shortage was inadvertent and unintentional; that it did not have an accounting system at the time for the shared station identification announcements like it had for other advertisers and no check off system against laxity of the traffic clerk who scheduled the announcements. It further claimed that the lease called for so many daily announcements that a point of saturation had been reached whereby any announcements in addition to those actually furnished had no value as advertisements, but would serve merely to annoy or irritate listeners.

On some days the station did not broadcast until noon and hence could not schedule any announcements in the morning. Interstate asserts that it makes no claim with respect to announcements not scheduled when the station was not on the air.

There was no evidence that RKO during the time in question sold to others any of the contracted for station identification announcements. During this period Interstate made reports to the Department of Insurance and Banking of the State of Tennessee and filed federal income tax returns which showed rental income received by it from the leased property in the annual amount of $9,600. This identical figure can be obtained by computing the cash rent in accordance with the formula provided in the second alternative in Paragraph 8 of the lease.

It was Interstate's contention that it was entitled to recover as damages the amount charged other advertisers by RKO for spot announcements. Interstate used the highest discount rate shown on RKO's rate cards which ranged from 25% to 60% and arrived at a value of $323,243.07 for the announcements not delivered or an average of $26.48 per announcement.

If the value of $26.48 placed by Interstate on each announcement is correct, then Interstate actually received rent for the five-year period of $598,500.96 ($26.48 × 22,602). To this should be added the amount of the verdict of $150,000 making the total rent for the five-year period of $748,500.96. The rental for the 10-year period would be twice this amount or $1,497,001.92.

This would be a fairly good return on an investment of only $151,000, particularly since Interstate still owns its land and the building which has depreciated at the agreed rate of 2% annually or $12,000 over the five-year period or $24,000 in 10 years.

To say that this was within the contemplation of Interstate and Harding College at the time they entered into the lease requires a wild stretch of the imagination. The alternative annual cash rent of $9,600, computed under the provisions of Paragraph 8 of the lease, certainly does not support this contention. Nor does Paragraph 9 which provided an option for renewal of the lease at a rental to be determined "in conformity with the square footage rental charges applicable at that time to buildings of like kind, condition and age in the City of Memphis * * *."

Under Tennessee law, the damages recoverable for breach of contract are "such as may fairly be supposed to have entered into the contemplation of the parties when they made the contract, that is such as might naturally be expected to follow its violation." Western Union Telegraph Co. v. Green, 153 Tenn. 59, 64, 281 S.W. 778, 780, 48 A.L.R. 301; Illinois Central R. R. Co. v. Johnson & Fleming, 116 Tenn. 624, 94 S.W. 600; Morristown Lincoln Mercury, Inc. v. Lotspeich Pub. Co., 42 Tenn.App. 92, 298 S.W.2d 788; 15 Am.Jur., Damages § 52 P. 451.

Morristown Lincoln Mercury, supra, was an action by a dealer against a newspaper for breach of contract to publish an advertisement for the sale of automobiles. The dealer claimed that he had contracted to purchase the automobiles but was unable to sell them at a profit because of the refusal of the newspaper to publish the advertisement. The appellate court held that the claim for loss of profits in the sale of the automobiles was too conjectural to allow recovery therefor and awarded nominal damages only. The court said: "Therefore, no actual damages having been proved, none can be recovered under the authorities heretofore cited."

Undoubtedly the reason Interstate accepted the television announcements in lieu of cash rent was to secure new business through advertising thereby increasing its profits, but we cannot consider loss of profits because Interstate has waived that claim. Its waiver was probably influenced by Tennessee law which required more proof of loss of profits than mere conjecture or guesswork.

To prove its damages, Interstate offered in evidence, over the objection of RKO, rate cards which indicated the prices at which advertising was sold by RKO to others in the quantities stated thereon. None of the cards dealt with shared station identification announcements or quantities as large as involved in the case at bar.

We think this evidence was inadmissible. Interstate's measure of damages was not the price for which RKO could sell advertising to others because, under the terms of the lease, Interstate had no right to sell the announcements to which it was entitled. If RKO were suing an advertiser for damages for failure to take advertising under a contract, it could not have recovered the full contract price when it had not furnished the advertising. This is so because the cost of furnishing the advertisement would have to be taken into account. Not all of the contract price represented profit. On the other hand, an advertiser who had not received all of the agreed announcements for which he had paid in cash could certainly recover back the proportion of his payment applicable to the omitted announcements even though he could prove no other damage.

As we view the provisions of Paragraph 8 of the lease, Interstate could discontinue taking the announcements and accept in lieu thereof either of the following two methods elected by RKO:

1. Sell its allotted time to other advertisers, or

2. receive rent in cash computed as provided for therein.

Interstate did not discontinue taking the announcements, but on the contrary continued to receive them. It did not want RKO to supply the omitted announcements. It wanted cash instead.

The trouble here is that Interstate does not want the cash rent to be computed as stipulated in the lease, but insists on obtaining in cash the fair and reasonable value of the announcements. This it cannot have because RKO did not elect to permit Interstate to sell the announcements.

The Trial Judge instructed the jury in part as set forth in the footnote.²  We think it was error for the court to instruct the jury that the plaintiff was entitled to the benefit of its bargain and could consider the rate cards in arriving at the fair and reasonable value of the television time. The fair and reasonable value of the television time was not an issue in this case. The net effect of all this undoubtedly influenced the jury to return a large verdict. RKO objected to this portion of the charge and also tendered a special request to charge which was denied.

In our judgment, the only fair measure of damages to be applied in this case is the formula agreed upon by the parties in the lease for annual cash rental. It represents what the parties thought at the time was the fair and reasonable rental value of the property payable in cash. This view is strengthened by the conduct of Interstate in reporting the rents computed in conformity therewith amounting to $9,600 annually in its federal income tax returns.

Using this formula, the computation of Interstate's damages becomes simple. Interstate received all but one-third of the announcements to which it was entitled. Its damage for one year would be one-third of $9,600 or $3,200 and for five years it would amount to $16,000. There was no evidence of other damages.

In our opinion, because of the provisions of the lease, Interstate was entitled to collect its reasonable counsel fees and expenses in the amount of $15,900. RKO did not dispute the reasonableness of the attorney's fees or expenses, but questioned its liability for the fees on the ground that there was no evidence of any obligation on the part of Interstate to pay for the same. The District Judge thought there was such evidence and submitted the issue to the jury. We think he was correct in so doing.

It follows that the verdict and judgment were excessive to the extent that they exceeded the amount of $31,900 which was the amount of Interstate's damages, attorney's fees and expenses. We do not find that the verdict was influenced by passion and prejudice.

In view of this disposition, it is unnecessary to pass upon the other errors claimed.

The judgment will, therefore, be reversed and the case remanded to the District Court for a new trial unless Interstate, within twenty days from the date hereof, remits from its judgment the sum of $134,000 and files the remittitur with the Clerk of this Court. If said remittitur is timely filed then the judgment will be affirmed in the amount of $31,900 with interest at 6% per annum from February 1, 1962.