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Nycomed US Inc. v. Abbott Laboratories

September 8, 2008

NYCOMED US INC., PLAINTIFF-APPELLANT,
v.
ABBOTT LABORATORIES, DEFENDANT-APPELLEE.



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 04-C-4807-Virginia M. Kendall, Judge.

The opinion of the court was delivered by: Wood, Circuit Judge.

ARGUED APRIL 16, 2008

Before EASTERBROOK, Chief Judge, and WOOD and WILLIAMS, Circuit Judges.

Nycomed US Inc. (to which we refer as "Altana," its name at the time of this suit) manufactures and sells erythromycin ophthalmic ointment, which is used to prevent and treat eye infections. To manufacture the ointment, Altana uses erythromycin powder supplied by defendant Abbott Laboratories ("Abbott"). On one occasion, Abbott supplied to Altana a batch of defective erythromycin. Under the supervision of the Food and Drug Administration, Abbott promptly notified Altana of the problem; Altana in turn had to recall and destroy over 1.2 million tubes of its ointment. Faced with this unexpected setback, Altana put its facility into overdrive in order to make a replacement batch of ointment while not falling behind on its regular manufacturing schedule. Altana's employees worked overtime; personnel moved from other departments into the ointment department to provide extra hands; and the extras also had to work overtime in their own department so as not to let those lines of business fall behind. Thanks to these extraordinary efforts, Altana was able to satisfy all of its orders for ointment. It did not turn away any customers, its sales force did not lessen its efforts, and Altana was even able to maintain an inventory of ointment at all relevant times.

Abbott conceded that it was liable for all of Altana's direct costs in making the destroyed ointment, the cost of destruction and disposal, and the additional costs incurred in making the replacement product (that is, the overtime expenses), for a total payment of $488,283.13. What else, one might ask, is there to do? Altana has an answer: it believes that it is entitled not only to the amounts we have described, but also to "lost profits" of $540,159 and "overhead costs" of $207,142.91. The parties cross-moved for partial summary judgment on these two issues. The district court ruled against Altana and in favor of Abbott on both issues. It entered judgment for Altana in the unopposed amount of $488,283.13, and Altana has appealed from the rejection of its additional demands. We affirm.

I.

We review summary judgment decisions de novo. Sound of Music Co. v. 3M, 477 F.3d 910, 914 (7th Cir. 2007). Our jurisdiction in this case is based on diversity, and the parties agree that Illinois law governs this dispute.

A.

The crux of Altana's argument for seeking lost profits in addition to the damages already paid by Abbott is that it "would have made, sold and profited from the sale of, both the product Altana was required to destroy as a result of Abbott's breach, and the product made in the wake of the recall to replenish Altana's inventory." Altana does not specify, however, when and how it would have made this additional product, if the original product had not been defective. If it would have made the ointment a couple of months later during normal business hours, it necessarily would have been substituting the making of those quantities of ointment for whatever it was manufacturing at that future time-that is, ointment that it made, sold, and reaped profits from. No one disputes that Altana is in the business of making ointment, but if the relevant time window is of unlimited scope then of course any amount of ointment is an amount that "would have been made" eventually. In order to replace the recalled ointment, Altana put unusual strain on its facilities and expended unusual resources, outside the ordinary course of business, and the sum that Abbott agreed to pay has fully compensated it for doing so. The record does not show that Altana would have decided to double its output, at a high cost in overtime, if Abbott had supplied usable erythromycin. This inference is reinforced by the fact that, having destroyed the defective half of the fruits of this double-manufacturing, Altana still met all demand for its product, even as its sales force continued the same selling efforts.

To affirm the district court's ruling on the issue of lost profits, we need only confirm that awarding lost profits is not necessary to put Altana in the position it would have occupied absent the breach.

If Abbott had supplied erythromycin that met all pertinent quality standards, Altana would have made 1.2 million tubes of ointment, incurred the ordinary costs of doing so, sold these tubes, and earned its ordinary profits. Because of the defective product, Altana incurred the following costs: (1) direct costs (materials, etc.) of making the destroyed product; (2) costs of destroying that product; (3) direct costs (materials, etc.) of making the replacement product; (4) extraordinary costs (overtime) of making replacement product.

Abbott reimbursed Altana for the first, second, and fourth cost categories. This leaves Altana bearing only the direct costs of making one batch of product, the replacement batch, and pocketing the ordinary profit from this batch. That is the same position it would have been in if Abbott had not breached the contract. To award anything more in damages would not be compensating Altana for "lost profits"; it would be giving Altana a windfall.

To avoid this result, Altana attempts to invoke the "lost volume seller" doctrine. See U.C.C. § 2-708(2); Davis Chem. Corp. v. Diasonics, Inc., 826 F.2d 678, 682 (7th Cir. 1987). This attempt is misplaced.The district court noted that the doctrine did not apply because Altana was not the seller in the contract between Abbott and Altana, which is the one at issue here. Altana responds that the doctrine ought to apply nonetheless, because Altana is not just a buyer but a "buyer-reseller."

As Abbott points out, the doctrine cannot be applied blindly in the case of a so-called buyer-reseller who is the non-breaching party, because in such a case there is no automatic proof of a lost sale and therefore lost profit. When a volume seller enters into a contract with a buyer who then breaches by repudiating the goods, that is by definition a lost sale suffered by the non-breaching party. The fact that the seller goes on to sell to other ...


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