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July 2017

Los Angeles Team Obtains Defense Verdict in Federal Jury Trial with $76 Million in Lost Profits Damages at Stake

Gordon Rees Scully Mansukhani Los Angeles partners Calvin Davis and Aaron Rudin with significant assistance from senior counsel Margaret Drugan obtained a defense verdict in a federal jury trial alleging wrongful termination of nine multi-state distribution contracts in which the plaintiff was claiming $76 million in lost profits as well as punitive damages.

The plaintiff was represented throughout the case and at trial by a team of attorneys from the San Francisco, Palo Alto and New York offices of Wilson, Sonsini Goodrich & Rosato.  Plaintiff was also represented by the Washington, DC office of Foley & Lardner. 

The firm's client is a nationwide issuer of furniture protection products, and in particular furniture protection plans or warranties. It sold these products through a network of regional distributors. The plaintiff is the single largest distributor for the products, spanning a geographic area that covers roughly one third of the United States (nine territories throughout 11 states).  The distribution contracts between the parties required the plaintiff to purchase a certain amount of product every month for each territory.  Because the plaintiff maintained only one warehouse in its home state of Pennsylvania, for much of the business relationship, it was impossible for the firm's client to track where purchases from our client were ultimately intended.

This difficulty came to an end in 2013 with the introduction of electronic furniture protection plans (EFPPs) which allowed the client to “geo-code” exactly where products were being purchased.  With this new tool a determination was made that the plaintiff was in violation of the quotas for June and July of 2013 for three of its territories.  After breach notices went out and the plaintiff could not prove it had met the quotas, our client terminated the agreements.  However, the client never actually enforced the terminations and worked with the plaintiff for months to try and resolve the situation including discussing new contracts that better recognized the modern realities of the business that had changed substantially over the years, going from a physical product business (sprays and coatings) to EFPPs. The parties seemed on the verge of resolving matters when the plaintiff suddenly filed an action in federal court in the Eastern District of California alleging (1) wrongful termination of the three agreements, (2) breach of the implied covenant of good faith and fair dealing for threatening to terminate the other six contracts, (3) multiple claims alleging our client’s violation of franchise laws, (4) breach of a side agreement for payment to the plaintiff for commissions owed on a customer of our client who was selling in the plaintiff’s territories, (5) breach of one of the distribution contracts for our agreement with an online support service for furniture retailers which the plaintiff claimed was selling in their territory, (5) a claim for tortious interference with contract against a sister company of our client based on its alleged involvement in wrongdoing, and, (6) unfair competition claims under Business & Professions Code 17200. Gordon & Rees’s attorneys filed a defensive counterclaim seeking declaratory relief and alleging breach of contract claims against the plaintiff.

Prior to trial, Gordon & Rees's attorneys were able to obtain several favorable rulings which narrowed the scope of the case and strengthened their hand for trial.  At trial the firm's attorneys received a directed verdict with respect to the claim involving sales to the online company.  In addition, the plaintiff abandoned their claims regarding the side agreement, the franchise law claims and Business & Professions Code 17200.

At trial, the plaintiff claimed that termination of the three contracts was groundless and that, even if they were justified, the defendants prevented them from curing the breach.  The plaintiff also claimed the defendants threatened to terminate the rest of their distribution network thus paralyzing their operations.  The plaintiff presented an expert economist who testified that they had suffered $76 million in lost profits as a result of the firm's client’s conduct. 

Gordon & Rees attorneys presented evidence that not only were the defendants under quota but their director of operations had admitted as much.  We explained to the jury that our clients were open to withdrawing the breach notices if the plaintiff could produce records showing we were wrong.  Although they agreed to do so, they never did.  In addition, Gordon & Rees's attorneys demonstrated that the plaintiff was under quota because they were attempting to run the business as a skeleton operation with one salesperson covering the entire territory. Gordon & Rees presented testimony that the patriarch of the plaintiff has referred to the distribution contracts as “beachfront property” – meaning they were highly one sided in favor of distributors and he was holding onto them as an investment to sell in the future. Their lack of attention to the business was demonstrated on cross-examination of the plaintiff’s president who acknowledged not knowing who its largest customer was or how many distribution contracts it had with the firm's client.  Gordon & Rees attorneys argued to the jury that plaintiff was doing the minimum necessary in these territories just to hold onto the contracts, and, in the case of the three territories in issue, less than the minimum.   Finally, the firm's attorneys presented evidence through our own forensic accountant that the plaintiff’s damages claim was wildly speculative and bore no relationship to reality or any past performance by the plaintiff’s business.

After a day and a half in deliberations, the jury returned a unanimous verdict in Gordon & Rees's favor, rejecting every cause of action from the plaintiff as well as their damages analysis.

This is the third trial victory for Davis and attorneys working with him in the Los Angeles office in the last six months.

The lead Gordon & Rees attorneys on this case would like to thank paralegal Randall Stubblefield and legal secretaries Sandy Halvorsen and Monine Zerby for their assistance in achieving this result.

Calvin E. Davis
Margaret M. Drugan
Aaron P. Rudin