Antitrust Law Daily Seventh Circuit affirms $1 million breach of contract decision against medical bed manufacturer
Monday, March 18, 2019

Seventh Circuit affirms $1 million breach of contract decision against medical bed manufacturer

By Robert B. Barnett Jr., J.D.

A federal district court did not err in, in either its pre-trial or post-trial rulings, that resulted in an award of $1 million in damages to a medical bed distributor against a manufacturer.

A recovery by Kreg Therapeutics, a medical supply company, of more than $1 million in a breach of contract suit against VitalGo, a medical bed manufacturer, was properly decided and contained no reversible error, the Seventh Circuit has ruled. Thus, the trial court was correct both when it ruled pre-trial that Kreg was entitled to a summary judgment on all breach-of-contract issues except damages and when it ruled post-trial that Kreg was entitled to $1 million in damages, using the fair market value for the agreement at the time of the breach (Kreg Therapeutics, Inc. V. VitalGo, Inc., March 14, 2019, St. Eve, A.).

VitalGo manufactured a hospital bed called the Total Lift Bed, which inclined to near 90 degrees with the occupant harnessed and upright, to treat obese and elderly patients. In 2009, VitalGo entered into a contract with Kreg, a medical supply company, which gave Kreg exclusive distribution rights in Indiana, Illinois, Wisconsin, and Atlanta, Georgia. The rights lasted until January 31, 2011, unless Kreg made a minimum-purchase commitment of $200,000 in each of the four territories before January 31, 2011, at which point the contract would be extended one year. A few months into the agreement, Kreg and VitalGo amended it to add part of Florida, New Jersey, and St. Louis, Missouri through May 2012. In 2011, VitalGo complained via email to Kreg that it had not made the additional commitment. Kreg responded by email that it was willing to commit to the future purchases. About a week later, however, VitalGo announced that it had reached a nationwide exclusivity agreement with RecoverCare, a Kreg competitor, for the Total Lift Bed.

When VitalGo refused to fill an order from Kreg for new Total Lift Beds, Kreg filed a breach of contract suit in Illinois federal court. The complaint sought only injunctive relief. After discovery, both parties filed summary judgment motions. Applying New York law, the trial court concluded that the two agreements (the original agreement and the amendment) were separate contracts. The evidence showed that executives from Kreg and VitalGo had met in Chicago in December 2010, and in that meeting Kreg orally agreed to purchase the $800,000 worth of beds from VitalGo. Thus, Kreg had established three elements of breach as a matter of law: the existence of a contract, performance, and VitalGo’s breach. Kreg had not, however, established damages. As for the second contract, performance and breach could not be established because Kreg had only shown a willingness to purchase the beds.

Two years later, after VitalGo emerged from bankruptcy, the court held a bench trial on damages. At this point, the court allowed Kreg to amend its complaint to seek monetary damages in addition to the injunctive relief. After a two-day trial, the court awarded $642,610 in lost-asset damage plus $364,593 in prejudgment interest. VitalGo appealed the decision to the Seventh Circuit, challenging both the pre-trial summary judgment decision and the post-trial damage award.

Summary judgment decisions. VitalGo challenged the trial court’s determination that Kreg had fulfilled its part of the agreement by arguing that Kreg’s assent was made orally, in contradiction to the agreement’s requirement that the assent be in writing. The Seventh Circuit rejected VitalGo’s reading of Paragraph 23, which required that any "notice or communication" be in writing. The court concluded that the provision was ambiguous because it was absurd to suggest in the modern work environment that all contacts be sent via registered mail. The court instead read some provisions in the agreement to require a writing and others, including minimum purchase commitments, to not require it. Paragraph 23 did not extend the written requirement to all business contact. The lower court was correct to conclude that the parties’ intent was clearly to allow minimum purchase commitments to be made orally.

VitalGo also challenged the lower court’s determination, under Local Rule 56.1, that VitalGo made the minimum purchase commitment because it failed to contest that fact at a hearing (VitalGo’s attorney failed to show up for a hearing, at which point VitalGo changed attorneys). District court judges have the discretion to require strict compliance with Local Rule 56.1 (Flint v. City of Belvedere, 791 F.3d 764, 767 (7th Cir. 2015)). As a result, the lower court had every right to reach that conclusion. VitalGo next challenged the lower court’s summary judgment findings under Red. R. Civ. P. 56(g), which allows a judge to conclude that certain facts are not in dispute, even if the movant fails on its motion for summary judgment. The Seventh Circuit concluded that the lower court properly interpreted its rights under Rule 56(g) and did not err when it concluded that Kreg had proved all elements of the breach except damages. Finally, the Seventh Circuit rejected VitalGo’s argument that the trial court judge was required to enter summary judgment for VitalGo once the court concluded that the Kreg had failed to prove damages at summary judgment. The argument failed both procedurally, because VitalGo never raised this issue below, and substantively, because it was illogical. The Seventh Circuit thus affirmed the lower court’s pre-trial decisions.

Post-trial decisions. Red. R. Civ. P. 15(a) governs requests to amend pleadings before trial. Leave is freely given, when justice requires it. The Seventh Circuit concluded that the lower court did not abuse its discretion when it allowed Kreg to amend to add a damages claim. Importantly, both parties understood that damages remained the only unresolved matter after the summary judgment ruling. Thus, no delay or prejudice was involved, nor was there any evidence that the amendment was futile or sought in bad faith.

The Seventh Circuit, rejecting VitalGo’s arguments, next concluded that the court was correct in finding harm in Kreg’s loss of exclusivity rights, future income, customer base, and access to replacement parts (VitalGo had agreed in the contract to supply replacement parts for five years after the agreement ended, which it never did). The appellate court rejected all of VitalGo’s arguments that no harm came to Kreg, finding that the lower court committed no clear error in concluding that Kreg did suffer harm as a result of the breach. The lower court was also correct to conclude that Kreg could recover consequential damages because Kreg’s losses were foreseeable by VitalGo. Kreg had told VitalGo that the exclusivity protection was crucial to its business.

VitalGo’s final argument was to contest the court’s damage assessment. It contended that the court erred by using a lost-profit calculation rather than a lost-asset calculation. The Seventh Circuit rejected the idea that the lower court had based damages on profits that Kreg could have earned in the future. Instead, the court estimated a fair market value for the agreement at the time of the breach, which was the correct approach. It did what a hypothetical buyer would have done: (1) evaluate the profits expected from the agreement and (2) reduce the profits by some value to account for market risk and uncertainty. The lower court’s value for the risk and uncertainty—10.08 percent—was appropriate. VitalGo was wrong to think that the measure should have only been the value of the beds and the exclusivity because a hypothetical buyer would have received more than that. As a result, the lower court’s damage determination was correct, and the Seventh Circuit affirmed its post-trial judgment.

This case is No. 17-3005 and 17-3227.

Attorneys: Peter M. Spingola (Chapman Spingola LLP) for Kreg Therapeutics, Inc. Benjamin Patrick Gilford (Greenberg Traurig, LLP) for VitalGo, Inc.

Companies: Kreg Therapeutics, Inc.; Vitalgo, Inc.

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