John Hancock Life Insurance Co. v. Abbott Laboratories

United States Court of Appeals
For the First Circuit

No. 16-1661

JOHN HANCOCK LIFE INSURANCE COMPANY ET AL.,

Plaintiffs, Appellants,

v.

ABBOTT LABORATORIES,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Douglas P. Woodlock, U.S. District Judge]

Before

Howard, Chief Judge,
Selya and Lynch, Circuit Judges.

Joan A. Lukey, with whom John A. Nadas, Stuart M. Glass, Kevin
J. Finnerty, and Choate, Hall & Stewart LLP were on brief, for
appellants.
Jeffrey I. Weinberger, with whom Gregory D. Phillips,
Elizabeth A. Laughton, and Munger, Tolles & Olson LLP were on
brief, for appellee.

July 12, 2017
 SELYA, Circuit Judge. The development of new drugs is

a costly, time-consuming, and highly speculative enterprise. In

an effort to hedge their bets, drug companies sometimes opt to

share the risks and rewards of product development with outside

investors. This appeal introduces us to that high-stakes world.

The outcome turns primarily on a contract provision that the

parties disparately view as a liquidated damages provision (and,

thus, enforceable) or a penalty (and, thus, unenforceable). A sum

well in excess of $30,000,000 hangs in the balance.

Following a lengthy bench trial, the district court held

the key provision inapposite and, in all events, unenforceable.

See John Hancock Life Ins. Co. v. Abbott Labs., Inc. (Hancock III),

183 F. Supp. 3d 277, 321, 323 (D. Mass. 2016). After careful

consideration of a plethoric record, we reverse the district

court's central holding, affirm its judgment in other respects,

and remand for further proceedings (including the entry of an

amended final judgment) consistent with this opinion.

I. BACKGROUND

Plaintiff-appellant John Hancock Life Insurance

Company,1 disappointed by the meager fruits of its multimillion-

dollar investment with defendant-appellee Abbott Laboratories

1Two affiliated corporations, John Hancock Variable Life
Insurance Company and Manulife Insurance Company, also appear as
plaintiffs and appellants. We refer to all of the plaintiffs,
collectively, as "Hancock."

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(Abbott), seeks to increase its return through litigation. In

particular, Hancock aims to recover damages under its contract

with Abbott or, in the alternative, to rescind that contract. The

parties' dispute is by now well-chronicled. See John Hancock Life

Ins. Co. v. Abbott Labs. (Hancock II), 478 F.3d 1, 2-6 (1st Cir.

2006); Hancock III, 183 F. Supp. 3d at 285-301; John Hancock Life

Ins. Co. v. Abbott Labs. (Hancock I), No. 03-12501, 2005 WL

2323166, at *1-11 (D. Mass. Sept. 16, 2005). We assume the

reader's familiarity with these opinions and rehearse here only

those facts needed to place this appeal into a workable

perspective.

A. The Agreement.

In late 1999 or early 2000 — the exact date is of no

consequence — Hancock (a financial services company) and Abbott (a

pharmaceutical manufacturer) entered into negotiations regarding

a potential investment in a menu of new drugs that Abbott was

developing. The parties chose nine specific Program Compounds

that they hoped would mature into commercially successful drugs to

treat various afflictions (such as cancer and urinary tract

blockages). During these negotiations, both Hancock and Abbott

were represented by seasoned counsel, who exchanged approximately

forty drafts of the proposed contract over a period of a year or

more.

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 On March 13, 2001, the parties signed a research funding

agreement (the Agreement). The Agreement is long and intricate,

and we outline here only those provisions that are central to an

understanding of the issues on appeal.

In the Agreement, Abbott pledged to develop the Program

Compounds in accordance with Annual Research Plans that Abbott

would submit for each Program Year over the course of a four-year

Program Term. These Annual Research Plans were to contain

"detailed statement[s] of the objectives, activities, timetable

and budget for the Research Program for every Program Year

remaining in the Program Term." Abbott prepared the first such

Annual Research Plan for attachment as an exhibit.

The parties were to fund the development of the Program

Compounds as specified in the Agreement and were meant to share in

the profits. Hancock's funding obligations are precisely defined

in section 3.1 of the Agreement: it would make four annual Program

Payments, ranging from $50,000,000 to $58,000,000 each, over the

course of the Program Term (a total of $214,000,000). Section

3.5, entitled "Hancock Funding Obligation," makes explicit that

"Hancock's entire obligation [under the Agreement] shall be

limited to providing the Program Payments set forth in [s]ection

3.1." In return for its investment, Hancock receives emoluments

based on the progress and success of the Program Compounds. These

emoluments include payments for the achievement of certain

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milestones, such as the initiation of a clinical trial or U.S.

Food and Drug Administration (FDA) approval. It also receives

royalties from any out-licensing or sales of the Program Compounds.

The Agreement saddles Abbott with both annual and

cumulative spending obligations. Annually, Abbott was responsible

for meeting the Annual Minimum Spending Target; that is, it had to

spend annually at least the sum of Hancock's contribution for that

year, plus $50,000,000, plus any shortfall from the prior year's

minimum spending target. Cumulatively, Abbott had to spend "at

least the Aggregate Spending Target" — defined as $614,000,000 —

"during the Program Term." In addition, Abbott is "solely

responsible for funding all Program Related Costs in excess of the

Program Payments from . . . Hancock."2 These obligations comprise

only Abbott's minimum spending commitment: that commitment is a

floor, not a ceiling, and Abbott projected in its first Annual

Research Plan that it would spend over one billion dollars (about

five times Hancock's expected total contribution) through the end

of 2004.

In what turned out to be a prescient precaution, the

Agreement anticipates that Abbott might not fulfill its spending

commitment. In this respect, section 3.2 of the Agreement provides

2 The district court assumed — and neither party disputes —
that both Hancock's and Abbott's contributions are to be credited
toward the Aggregate Spending Target. See Hancock III, 183 F.
Supp. 3d at 316.

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that if Abbott "fail[ed] to fund the Research Program in accordance

with" its obligations, "Hancock's sole and exclusive remedies" are

those remedies "set forth in [s]ections 3.3 and 3.4" of the

Agreement. Section 3.3, entitled "Carryover Provisions," is

divided into two subsections. If Abbott spends less than its

Annual Minimum Spending Target, Hancock is allowed, under section

3.3(a), to defer its annual Program Payments until Abbott makes up

that shortfall. Section 3.3(b) describes Hancock's remedies in

the event that Abbott did not meet its cumulative spending

obligations:

If Abbott does not expend on Program Related
Costs the full amount of the Aggregate
Spending Target during the Program Term,
Abbott will expend the difference between its
expenditures for Program Related Costs during
the Program Term and the Aggregate Spending
Target (the "Aggregate Carryover Amount") on
Program Related Costs during the subsequent
year commencing immediately after the end of
the Program Term. If Abbott does not spend
the Aggregate Carryover Amount on Program
Related Costs during such subsequent year,
Abbott will pay to . . . Hancock one-third of
the Aggregate Carryover Amount that remains
unspent by Abbott, within thirty (30) days
after the end of such subsequent year.

Section 3.4 permits Hancock to terminate future Program Payments

under certain circumstances, including Abbott's failure to

"reasonably demonstrate in its Annual Research Plan its intent and

reasonable expectation to expend on Program Related Costs during

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the Program Term an amount in excess of the Aggregate Spending

Target."

To complete the picture, the Agreement contains a full-

throated integration clause. Specifically, section 16.3 confirms

that the "Agreement contains the entire understanding of the

parties with respect to the subject matter hereof. All express or

implied agreements and understandings, either oral or written,

with respect to the subject matter hereof heretofore made are

expressly merged in and made a part of this Agreement."

B. The Fallout and the Litigation.

After the Agreement was signed, Hancock made its first

two Program Payments, totaling $104,000,000. Even so, the

relationship quickly began to fray. Abbott terminated the

development of several compounds in the first two years and

significantly reduced its spending on the development of other

compounds. At the end of 2002, Abbott informed Hancock that

Abbott's 2002 spending had been appreciably less than its Annual

Research Plan had anticipated. More troubling still, Abbott's

preliminary research plan for 2003 projected a sharp reduction in

spending for that year compared to its previous estimate and made

no mention at all of expected 2004 spending. In September of 2003,

Abbott belatedly proffered its 2003 Annual Research Plan, which

did include some projected spending for 2004. That submission,

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though, further reduced total spending and admitted that Abbott

would not reach the Aggregate Spending Target by the end of 2004.

After reviewing this document, Hancock responded that,

in view of the insufficient spending that Abbott was prepared to

undertake, it regarded its obligation to make future Program

Payments as null and void. Abbott's rejoinder was of little solace

to Hancock: it submitted a preliminary 2004 Annual Research Plan,

indicating that Abbott would expend well below its annual minimum

contribution in 2003 and would fail to reach the Aggregate Spending

Target through the end of 2004. In both the final 2003 Annual

Research Plan and the preliminary 2004 Annual Research Plan,

however, Abbott predicted that it would reach the Aggregate

Spending Target if 2005 spending were included.

Unsettled by this news, Hancock invoked diversity

jurisdiction, see 28 U.S.C. § 1332(a), and filed suit in the United

States District Court for the District of Massachusetts. That

suit sought a declaration that Abbott's failure to meet its

spending commitments terminated Hancock's obligation to make the

third and fourth Program Payments. The district court granted

summary judgment in favor of Hancock, holding that "Hancock's

obligation to make the Program Payments for 2003 and 2004

terminated when Abbott failed to demonstrate its 'intention and

reasonable expectation' to meet the . . . Aggregate Spending Target

within the four-year Program Term in its [Annual Research Plan]

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for 2003." Hancock I, 2005 WL 2323166, at *28 (quoting relevant

language from the Agreement). We affirmed. See Hancock II, 478

F.3d at 2.

Notwithstanding that Hancock was judicially relieved of

its obligation to make its last two Program Payments, it retained

its rights under the Agreement to whatever profits might be derived

from any of the Program Compounds. Hancock reports — and Abbott

does not deny — that it has received slightly more than $14,000,000

in milestone payments, out-licensing revenues, and management

fees. Comparing these receipts to its $104,000,000 investment,

Hancock alleges that it incurred a net loss of almost $90,000,000

on the benighted venture.

Corporations seldom swallow losses of this magnitude

complacently. And this case is no exception. In June of 2005 —

while Hancock I was still unresolved — Hancock filed the instant

action. It asserted that Abbott had breached the Agreement in

five ways: (1) violating its representations and warranties

through material misrepresentations and omissions regarding the

development of the Program Compounds; (2) failing to provide

Hancock with accurate spending projections; (3) refusing to pay

Hancock one-third of the Aggregate Carryover Amount in accordance

with section 3.3(b) of the Agreement; (4) failing to take

appropriate steps to out-license the Program Compounds; and

(5) obstructing Hancock's audit of Abbott's compliance with the

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Agreement. Hancock further asserted that Abbott fraudulently

induced Hancock to enter into the Agreement and, separately, that

under the indemnification provision of the Agreement, Abbott was

liable for Hancock's losses attributable to Abbott's defaults.

In October of 2006 — roughly a month after this court's

decision in Hancock II — Hancock sought leave to amend its

complaint in this case to include a prayer for rescission. Hancock

included the rescission claim in its first amended supplemental

complaint (filed in December of 2006).

The district court held a ten-day bench trial, which

ended in 2008. The court then solicited post-trial briefing and

took the case under advisement. It was not until April of 2016,

though, that the court ruled. In its opinion, the court made

extensive findings of fact and conclusions of law. See Fed. R.

Civ. P. 52(a). We summarize here only those findings and

conclusions that are helpful to an understanding of the issues on

appeal.

To begin, the court found that Abbott violated its

representations and warranties in three ways:

 Without notifying Hancock, Abbott paused one compound's

development two days before the Agreement was signed, only to

lift the hold on the day the Agreement was signed. Abbott

canceled the compound three months later. The court found

that Abbott's failure to inform Hancock of the hold on the

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 compound's development was a material omission. See Hancock

III, 183 F. Supp. 3d at 294, 306.

 Abbott represented that it intended to spend over $35,000,000

in 2001 on developing a compound intended to treat chronic

pain. Yet Abbott knew before signing the Agreement that it

actually intended to spend less than half that amount in 2001.

The court found that "this misrepresentation . . . was

material." Id. at 308-09.

 Abbott made a further material misrepresentation as to an

anti-infection compound. See id. at 310. Abbott represented

that it expected once-a-day dosing would be possible for the

four conditions that the drug was designed to treat. Yet,

the court found that, at the time the Agreement was signed,

Abbott did not have enough information to know that once-a-

day dosing would be possible for the two more severe

conditions. Since Abbott knew that once-a-day dosing was

important, this misrepresentation was material. See id.

Although these findings are emblematic of the rocky road

down which the parties' relationship traveled, they proved to be

hollow victories for Hancock. The district court ruled that

Hancock did not sufficiently prove damages attributable to

Abbott's misrepresentations and omissions because Hancock's

methods for calculating damages were "speculative and

unconvincing." Id. at 313.

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 The district court also found that Abbott breached the

Agreement by providing Hancock with spending projections that

assumed that every Program Compound would remain velivolant all

the way to FDA approval. Those projections, the court found, were

submitted in lieu of more realistic projections of expected

spending, which would have been adjusted for the risk that some

compounds might be terminated. See id. at 315. Once again,

Hancock could not recover for Abbott's breach because it did not

adequately prove damages. See id. at 316.

Moving to an issue that has become central to this

appeal, the district court concluded that Abbott had not reached

the Aggregate Spending Target. The court determined that,

including Hancock's contributions, Abbott fell $99,100,000 short

of the target. See id. at 292. Hancock argued that section 3.3(b)

entitled it to one-third of this amount, that is, an award of

approximately $33,000,000. The district court disagreed. While

it rejected Abbott's arguments that Hancock was judicially

estopped from asserting its claim under section 3.3(b) and that

the Agreement capped Abbott's spending obligation at $400,000,000,

see id. at 317, it nonetheless concluded that Hancock was not

entitled to any damages under section 3.3(b), see id. at 321, 323.

To reach this conclusion, the court identified an

"apparent implied condition," which limited Abbott's liability

under section 3.3(b) to pay Hancock one-third of the Aggregate

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Carryover Amount to situations in which Hancock made all four

Program Payments. Id. at 318-19. Striking Hancock a second blow,

the court held in the alternative that even if section 3.3(b)

applied, it constituted an unenforceable penalty. See id. at 323.

The district court did allow recovery for one of

Hancock's breach-of-contract claims. It ruled that in the course

of Hancock's audit of Abbott's compliance, Abbott "fail[ed] to

provide information and material necessary for Hancock's vendor

. . . successfully to conduct an audit." Id. at 316. The court

ordered Abbott to pay Hancock the cost of the audit, which amounted

to $198,731. See id.

Turning to Hancock's rescission claim, the court struck

that claim as "wholly irrelevant or impertinent." Id. at 303.

The court reasoned, inter alia, that rescission was inconsistent

with the enforcement of the Agreement and that Hancock had chosen

(in Hancock I) to enforce the Agreement. See id. at 302-03. Under

the doctrine of election of remedies, it could not both affirm the

contract and simultaneously seek its rescission. See id.

Finally, the district court rebuffed Hancock's claim

that Abbott was obligated under the Agreement to indemnify it for

the losses that it incurred. The court ruled that this

indemnification provision only applied to claims by third parties.

See id. at 326.

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 When the smoke cleared, the court below awarded Hancock

$198,731 in damages for Abbott's frustration of the audit, together

with $110,395.34 in prejudgment interest (a total judgment of

$309,126.34). See id. This timely appeal ensued.

II. ANALYSIS

Hancock's appeal challenges the district court's

conclusion that its remedies under section 3.3(b) are contingent

on its making all four Program Payments. Hancock also challenges

the district court's alternative holding that those remedies

constitute an unenforceable penalty. Finally, Hancock challenges

the order striking its rescission claim.

We take a layered approach to these challenges. We first

consider Abbott's contention that recovery under section 3.3(b)

should be barred on grounds rejected by the district court. We

then address the grounds upon which the district court relied.

Those grounds are attacked by Hancock, and we address the

components of Hancock's asseverational array one by one. We end

with a brief comment on prejudgment and postjudgment interest.

We approach these several issues mindful that the

Agreement contains a choice-of-law provision specifying that

Illinois law governs. In line with this provision and with the

parties' acquiescence, we apply the substantive law of Illinois

(except where otherwise specifically noted). See McCarthy v.

Azure, 22 F.3d 351, 356 n.5 (1st Cir. 1994) (explaining that "a

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reasonable choice-of-law provision in a contract generally should

be respected").

As a general matter, issues of contract interpretation

engender de novo review under Illinois law. See St. Paul Mercury

Ins. v. Aargus Sec. Sys., Inc., 2 N.E.3d 458, 478 (Ill. App. Ct.

2013). A reviewing court's principal task in interpreting a

contract is to divine the parties' intent, which is manifested

most clearly by "the plain and ordinary meaning of the language of

the contract." Id. When a fully integrated contract is

unambiguous on its face, the court will determine its meaning from

its language alone. See Air Safety, Inc. v. Teachers Realty Corp.,

706 N.E.2d 882, 884 (Ill. 1999). The court below concluded that

the Agreement was unambiguous in its pertinent aspects, see Hancock

III, 183 F. Supp. 3d at 318, 320, and neither party contests this

conclusion. We agree. Thus, the question reduces to what that

language means.

According to Hancock, section 3.3(b) requires Abbott to

pay as liquidated damages one-third of the Aggregate Carryover

Amount, that is, one-third of the difference between the Aggregate

Spending Target ($614,000,000) and the combined amount actually

spent by the parties ($514,900,000). Abbott disagrees with this

proposition for several reasons, which we examine below. All of

these reasons posit that the remedies limned under section 3.3(b)

are available only when Hancock has made all four Program Payments,

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notwithstanding that Hancock's cessation of Program Payments was

due to Abbott's breach.

A. Abbott's Rejected Defenses.

Abbott advances four rationales in support of its

conclusion, two of which were rejected by the district court. We

start with those rejected arguments.

As an initial matter, we note that those arguments are

properly before us. Although Abbott has not filed a cross-appeal,

we have jurisdiction to consider a prevailing party's alternative

arguments in defense of a judgment where, as here, the arguments

were made below. See Neverson v. Farquharson, 366 F.3d 32, 39

(1st Cir. 2004). In this instance, then, Abbott is entitled to

argue for affirmance of portions of the district court's judgment

on any ground asserted in the district court. See Mass. Mut. Life

Ins. Co. v. Ludwig, 426 U.S. 479, 481 (1976) (per curiam); United

States v. Matthews, 643 F.3d 9, 12 (1st Cir. 2011). The fact that

no cross-appeal has been filed does not lessen this entitlement.

See Neverson, 366 F.3d at 39.

1. Judicial Estoppel. Abbott asserts that Hancock's

interpretation of section 3.3(b) is foreclosed by principles of

judicial estoppel. The district court brushed this assertion

aside, see Hancock III, 183 F. Supp. 3d at 317, and so do we.

Abbott assumes that federal law applies to its judicial

estoppel defense. Yet, "[a]s judicial estoppel appears neither

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clearly procedural nor clearly substantive, there may be a

legitimate question as to whether federal or state law . . . should

supply the rule of decision." Alt. Sys. Concepts, Inc. v.

Synopsys, Inc., 374 F.3d 23, 32 (1st Cir. 2004). Here, however,

Hancock has not challenged the application of federal law to this

issue, and "a federal court sitting in diversity is free, if it

chooses, to forgo independent analysis and accept the parties'

agreement" as to which law applies. Id. (quoting Borden v. Paul

Revere Life Ins. Co., 935 F.2d 370, 375 (1st Cir. 1991)). We

proceed accordingly.3

Generally speaking, judicial estoppel "precludes a party

from asserting a position in one legal proceeding which is contrary

to a position [that] it has already asserted in another." Patriot

Cinemas, Inc. v. Gen. Cinema Corp., 834 F.2d 208, 212 (1st Cir.

1987). The doctrine "should be employed when a litigant is

'playing fast and loose with the courts,' and when 'intentional

self-contradiction is being used as a means of obtaining unfair

advantage.'" Id. (quoting Scarano v. Cent. R. Co., 203 F.2d 510,

513 (3d Cir. 1953)).

3 At any rate, federal law and Illinois law do not appear to
differ materially with respect to the elements of judicial
estoppel. Compare, e.g., Patriot Cinemas, Inc. v. Gen. Cinema
Corp., 834 F.2d 208, 212 (1st Cir. 1987), with, e.g., Seymour v.
Collins, 39 N.E.3d 961, 973 (Ill. 2015).

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 Abbott claims that, in Hancock I, Hancock argued that

"the Aggregate Spending Target represents the 'combined total' of

the parties' defined minimum and maximum contributions, i.e., $400

million from Abbott and approximately $200 million from Hancock,

and that the very purpose of the Agreement was for them to share

the financial burdens . . . in that ratio." In support, Abbott

points to two statements made by Hancock in the course of Hancock

I: that it (Hancock) was "to share the cost of certain research

and development activities" and that the Aggregate Spending Target

was "[t]he combined total of . . . Hancock's maximum funding

contribution and Abbott's minimum funding contribution." These

statements do not bear the weight that Abbott loads upon them: the

statement that costs would be shared says nothing about the amount

that each party would contribute, and the references to maximum

and minimum contributions do not necessarily import specific

dollar amounts. Indeed, the raison d'être for the Hancock I

litigation was Hancock's desire to obtain a declaration that its

maximum contribution should be limited to $104,000,000 (in which

event, Abbott's minimum contribution — on Hancock's view of the

case — would be $510,000,000).

The short of it is that we discern no friction between

Hancock's position in Hancock I and its position in the case at

hand. Consequently, we hold — as did the district court — that

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Hancock is not judicially estopped from advancing its

interpretation of section 3.3(b).

2. Abbott's "Cap" Defense. Abbott next contends that

its spending obligations are capped. In its view, the plain

language of the Agreement shows that Abbott is not, under any

circumstances, "required to spend more than its minimum $400

million share." Noting that section 3.5 provides that "Abbott

shall be solely responsible for funding all Program Related Costs

in excess of the Program Payments from . . . Hancock" and that

section 3.1 defines Hancock's Program Payments as four installment

payments totaling $214,000,000 that "Hancock shall make," Abbott

suggests that its payment responsibility is capped at the

difference between the Aggregate Spending Target and the sum of

Hancock's four Program Payments. The district court disagreed

with this suggestion, see Hancock III, 183 F. Supp. 3d at 317, as

do we.

Under Illinois law, "[a] contract must be construed as

a whole, viewing each provision in light of the other provisions."

Thompson v. Gordon, 948 N.E.2d 39, 47 (Ill. 2011). To countenance

Abbott's reading, we would have to cover much of the Agreement in

Magic Marker. For example, section 3.5 does not refer to either

Hancock's $214,000,000 contribution or its four Program Payments;

rather, it refers only to Hancock's Program Payments in general.

And even though section 3.1 refers to four installments totaling

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$214,000,000, section 3.4 delineates several conditions which, if

not complied with, "shall terminate" any obligation on Hancock's

part "to make any remaining Program Payments." Given the language

of section 3.4, Program Payments, as used in section 3.5, must

mean whatever quantum of Program Payments Hancock is obligated to

make under the Agreement — an amount that may be less than

$214,000,000. We agree with the district court that the natural

reading of section 3.5 is that "Abbott should be the only party

responsible for making payments in excess of Hancock's

contribution, not that Abbott should be responsible for paying

only the excess of the Program Payments." Hancock III, 183 F.

Supp. 3d at 318. Considering that the obvious purpose of section

3.5, which is entitled "Hancock Funding Obligation," is to set a

ceiling for Hancock's contributions, that paragraph would be a

curious place for the parties to tuck away a hidden limit on

Abbott's funding obligations.

We add, moreover, that Abbott's theory does not account

for section 3.2, which is entitled "Abbott Funding Obligation."

This provision describes Abbott's obligation, in part, as spending

"at least the Aggregate Spending Target during the Program Term."

In other words, Abbott's spending obligation is not expressed in

a fixed $400,000,000 lump sum but, rather, is expressed in terms

of Abbott's commitment to help reach the Aggregate Spending Target.

By linking Abbott's funding obligation to the Aggregate Spending

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Target, section 3.2 appears to address the precise scenario in

which Hancock's obligation to make all four Program Payments has

been relieved under section 3.4.

If the parties had wanted to restrict Abbott's minimum

contribution to $400,000,000, they surely would have said so: such

a term easily could have been inserted in the Agreement. In

sections 3.1 and 3.5, the parties capped Hancock's contribution at

a fixed amount, but they elected not to impose such a cap when

describing Abbott's contribution in section 3.2. A court should

be reluctant to infer terms that parties easily could have included

in a contract when the parties themselves chose not to include

such terms. See Klemp v. Hergott Grp., Inc., 641 N.E.2d 957, 962

(Ill. App. Ct. 1994). We hold, therefore, that the plain language

of the Agreement does not impose a ceiling of $400,000,000 on

Abbott's minimum contributions.

B. Effect of Hancock's Failure to Complete Program Payments.

The district court held, and Abbott echoes on appeal,

that Abbott's obligation to pay under section 3.3(b) was discharged

when Hancock failed to make all four Program Payments. See Hancock

III, 183 F. Supp. 3d at 319-20. The court reached this conclusion

notwithstanding our earlier decision relieving Hancock of its

obligation, in light of Abbott's breach, to make the third and

fourth Program Payments. See id. at 321; see also Hancock II, 478

F.3d at 9.

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 The district court relied principally on a Restatement

provision that "[a] party's failure to render or to offer

performance may . . . affect the other party's duties . . . even

though failure is justified by the non-occurrence of a condition."

Restatement (Second) of Contracts § 239(1) (Am. Law Inst. 1981).

In the district court's view, Hancock's refusal to make its last

two Program Payments, even though excused by Abbott's breach, was

a partial failure to render performance, which shielded Abbott's

obligation to pay under section 3.3(b). See Hancock III, 183 F.

Supp. 3d at 319.

This analysis is flawed. Hancock did not fail to render

performance in any meaningful sense but, rather, made timely

Program Payments until Abbott, by its non-performance, pulled the

rug out from under the deal. In such circumstances, we do not

think that Abbott's breach can fairly be considered the "non-

occurrence of a condition" within the purview of Restatement

(Second) of Contracts section 239(1).

If more were needed, section 239 is not the law of

Illinois. Neither Abbott nor the district court has identified

any reported Illinois case that so much as hints at the adoption

in that jurisdiction of section 239.4 "[A]s a federal court sitting

4 The district court acknowledged that no Illinois authority
supports its interpretation of section 239. See Hancock III, 183
F. Supp. 3d at 319. In an attempt to fill this gap, the court
cited to an intermediate state court opinion from a state other

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in diversity jurisdiction, we ought not 'stretch state precedents

to reach new frontiers.'" Rared Manchester NH, LLC v. Rite Aid of

N.H., Inc., 693 F.3d 48, 54 (1st Cir. 2012) (quoting Porter v.

Nutter, 913 F.2d 37, 41 (1st Cir. 1990)). Put another way,

"[c]oncerns both of prudence and of comity argue convincingly that

a federal court sitting in diversity must hesitate to chart a new

and different course in state law." Id. Here, we decline to

stretch inhospitable facts and, in the bargain, import an entirely

novel principle into the jurisprudence of Illinois law.

That ends this aspect of the matter. For both of the

reasons discussed above, it follows that the district court erred

in holding that Hancock's excused failure to complete the making

of its Program Payments foreclosed relief under section 3.3(b) of

the Agreement.

C. The "Implied Condition" Theory.

The district court's decision as to the inapplicability

of section 3.3(b) also rests on a second pillar: the court's view

that the pertinent portions of the Agreement contain an apparent

implied condition. The court wrote that "the Agreement was not

intended for [s]ection 3.3(b) to apply in situations where Hancock

than Illinois. See id. (citing Kaufman v. Byers, 823 N.E.2d 530,
537 (Ohio Ct. App. 2004)). Abbott adds only an unpublished Fifth
Circuit opinion and another intermediate state court decision, not
from Illinois. See Khan v. Trans Chem. Ltd., 178 F. App'x 419,
426 (5th Cir. 2006) (per curiam); Facto v. Pantagis, 915 A.2d 59,
63 (N.J. Super. Ct. App. Div. 2007).

- 23 -
contributed substantially less than 35% of the total funding."

Hancock III, 183 F. Supp. 3d at 320. Thus, the court seems to

have discerned an implied term to the effect that Abbott's

"obligation under [s]ection 3.3(b) is contingent upon Hancock's

contribution of the full $214 million under [s]ection 3.1." Id.

at 318. On appeal, Abbott clasps this line of defense to its

corporate bosom.

It is an elementary rule of contract interpretation that

"[i]f the words in [a] contract are clear and unambiguous, they

must be given their plain, ordinary and popular meaning."

Thompson, 948 N.E.2d at 47; see Shields Pork Plus, Inc. v. Swiss

Valley Ag Serv., 767 N.E.2d 945, 949 (Ill. App. Ct. 2002) ("[I]f

the contract terms are unambiguous, the parties' intent must be

ascertained exclusively from the express language of the contract

. . . ."). Consonant with that rule, Illinois courts ordinarily

"will not add terms to an agreement when the agreement is silent

about those specific terms." Frederick v. Prof'l Truck Driver

Training Sch., Inc., 765 N.E.2d 1143, 1151 (Ill. App. Ct. 2002).

This rule applies with particular force "when the added language

would clearly change the plain meaning of the agreement," id., and

even more so when an agreement is "completely integrated,"

Policemen's Benev. Labor Comm. v. County of Kane, 973 N.E.2d 1024,

1032 (Ill. App. Ct. 2012).

- 24 -
 To be sure, there are limited circumstances in which a

court may, by inference, import terms into a contract. One such

exception holds that when a contract cannot be administered without

some term that is critical to an assessment of the parties' rights

and duties, a court may fill the gap and supply a reasonable term.

See Barnes v. Michalski, 925 N.E.2d 323, 336 (Ill. App. Ct. 2010).

But that device is to be employed sparingly and with great

circumspection: "[a]lthough a court can declare an implied

covenant to exist, that is only where there is in the express

contract . . . a satisfactory basis which makes it necessary to

imply certain duties and obligations in order to effect the

[parties'] purposes . . . ." Mid-W. Energy Consultants, Inc. v.

Covenant Home, Inc., 815 N.E.2d 911, 916 (Ill. App. Ct. 2004).

Another exception holds that a court may sometimes infer a contract

term when the circumstances are so unforeseeable that the parties

could not reasonably have been expected to include a term

addressing the situation. See Dato v. Mascarello, 557 N.E.2d 181,

183-84 (Ill. App. Ct. 1989) (citing Restatement (Second) of

Contracts § 204). This, too, is a narrow exception that applies

only "when the parties to an agreement entirely fail to foresee

the situation which later occurs and gives rise to the dispute."

Id. at 183.

The inferred term proposed by the district court and

embraced by Abbott does not fit into any of the isthmian exceptions

- 25 -
to the general rule. For one thing, inferring such a term is in

no way essential to administering the Agreement. The formula

adumbrated in section 3.3(b) is entirely workable as it stands,

both when Hancock makes all four Program Payments and when it does

not. Courts should not add a new contractual term simply to assist

one party to a contract in obtaining a better bargain. See Klemp,

641 N.E.2d at 962.

For another thing, the scenario that developed here was

readily foreseeable. As drafted, section 3.2 affords Hancock

remedies under both sections 3.3 and 3.4 with respect to any

underspending by Abbott. Section 3.4 permits Hancock to terminate

its future Program Payments during the Program Term. It was surely

foreseeable, from the outset, that if Hancock did not make all

four Program Payments, Abbott might not reach the Aggregate

Spending Target. In that event, one would assume that Hancock

would exercise its section 3.3(b) rights — yet nothing in the

Agreement diminishes Abbott's obligations under section 3.3(b) if

and when Hancock invokes section 3.4. This court has no license

to engraft a new contractual term to address a wholly foreseeable

concatenation of events.

We add, moreover, that section 3.2 lays out Abbott's

funding obligations in both annual and cumulative increments.

Cumulatively, it requires that Abbott spend "at least the Aggregate

Spending Target during the Program Term." If Abbott "fail[s] to

- 26 -
fund the Research Program in accordance with this [s]ection," then

"Hancock's sole and exclusive remedies . . . are set forth in

[s]ections 3.3 and 3.4." The fact that the Agreement lists the

remedies conjunctively must mean that Hancock is not limited to

one or the other in the event of a breach by Abbott. See Manor

Healthcare Corp. v. Soiltest, Inc., 549 N.E.2d 719, 725 (Ill. App.

Ct. 1989) ("The words 'and' and 'or' ordinarily are not commutual

terms; they should not be considered interchangeable absent strong

supporting reasons."). Nor does anything else in the Agreement

suggest the contrary.

In all events, section 3.3(b) is pointed: "[i]f Abbott

does not spend the Aggregate Carryover Amount" during the fifth

year (that is, if Abbott does not reach the Aggregate Spending

Target during the year following the four-year Program Term),

"Abbott will pay to . . . Hancock one-third of the Aggregate

Carryover Amount that remains unspent by Abbott, within thirty

(30) days after the end of such subsequent year." Plainly, Abbott

did not spend the Aggregate Carryover Amount within the specified

time frame, and any term excusing Abbott from performance is

conspicuously lacking.

Notwithstanding this clear language, the district court

held (and Abbott argues on appeal) that section 3.3(b) was intended

only to preserve a fixed funding ratio (65/35) in situations in

which Hancock made all four Program Payments. See Hancock III,

- 27 -
183 F. Supp. 3d at 319-20. The genesis for this holding is the

notion that, if everything went smoothly, the funding ratio between

Abbott and Hancock would have been approximately 65% to 35% because

Abbott would have contributed $400,000,000 and Hancock would have

contributed $214,000,000. Seizing upon this ratio, the district

court concluded that, under section 3.3(b), some rough

approximation of it obtained "in almost every situation" in which

Hancock made all four Program Payments and Abbott nevertheless

failed to reach the Aggregate Spending Target. Id. at 319. With

this hypothesis in mind, the court surmised that the sole purpose

of section 3.3(b) was to guarantee the same funding ratio in

situations in which Hancock makes all four Program Payments but

Abbott underspends. See id. at 320.

The district court's logic does not withstand scrutiny.

Although section 3.3(b) may preserve some semblance of the 65/35

ratio when Hancock makes all four Program Payments, it does not

follow that section 3.3(b) may be invoked only in such

circumstances. After all, the Agreement's text does not limit

section 3.3(b) to situations in which Hancock has made all four

Program Payments. Equally as important, the 65/35 ratio is not

mentioned anywhere in the text of section 3.3. Here, things did

not go smoothly; Abbott failed to pay its share of the freight; as

a result, Hancock was excused from making its last two Program

Payments; and the 65/35 ratio never materialized. Indeed, the

- 28 -
Hancock II panel anticipated our holding and expressly rejected

Abbott's claim that the Agreement "required Hancock to spend half

as much as Abbott." 478 F.3d at 8 n.4.

That rejection was inevitable, given that the Agreement

both anticipates and allows a spectrum of potential funding ratios

depending on the circumstances. To offer one example (out of

several possible examples), Abbott's first Annual Research Plan

proposed spending roughly five times more than Hancock's expected

$214,000,000 contribution. We conclude, therefore, that the

existence of a 65/35 funding ratio under one set of facts cannot

contradict the plain language of the Agreement.

At the expense of carting coal to Newcastle, we remark

the obvious: a fixed funding ratio in a contract with over

$600,000,000 at stake is not a mere bagatelle. It strains

credulity to think that parties who wanted such an important term

to apply across the board would fail to include that term (or

anything like it) in their contract. This is especially true when

one considers that we are dealing with a fully integrated contract

between sophisticated parties represented by experienced lawyers,

who labored through approximately forty drafts of a detailed

document over the course of a year or more. See Policemen's

Benev., 973 N.E.2d at 1032 (refusing to add term to "completely

integrated agreement"); Mid-W. Energy, 815 N.E.2d at 916

- 29 -
(declining to add term to "clear and unambiguous" contract between

sophisticated commercial parties).

In this regard, we deem it significant that the parties

obviously knew how to include a funding ratio in a contract.

Section 3.4 of the Agreement provides for a specified funding ratio

in particular circumstances (not applicable here). The inclusion

of a fixed spending ratio in one section of a contract but not in

another creates a compelling basis for inferring that the parties

deliberately chose to omit any fixed spending ratio from the latter

provision. See generally Thompson, 948 N.E.2d at 47 (holding that

use of different terms in different sections of contract warrants

presumption that sections have different meanings); cf. Hamilton

v. Conley, 827 N.E.2d 949, 957 (Ill. App. Ct. 2005) ("[W]here one

section of a statute contains a particular provision, omission of

the same provision from a similar section is significant to show

different legislative intent for the two sections." (quoting In

re D.F., 802 N.E.2d 800, 816 (Ill. 2003) (Freeman, J.,

concurring))).

The district court's characterization of Hancock's

interpretation as "unreasonable" and "perverse," Hancock III, 183

F. Supp. 3d at 320, is insupportable.5 The court emphasized its

5 In point of fact, the district court's reading is less
reasonable than a plain-language reading. Under the district
court's construction, if Abbott shirks its funding obligations
during the Program Term, Hancock faces a Hobson's choice: it must

- 30 -
fear that any other reading would give Hancock a "windfall." Id.

(quoting Roboserve, Inc. v. Kato Kagaku Co., 78 F.3d 266, 278 (7th

Cir. 1996)). But this fear is misplaced: though the existence of

an alleged windfall may have some role in determining whether

section 3.3(b) is enforceable as a liquidated damages provision,

see infra Part II(D), a court's subjective belief that contract

terms may produce a windfall does not, without more, empower it to

disregard the plain meaning of those contract terms. Here, there

is no "more" — and in this case, as in virtually every case, it is

perilous for a court to attempt to determine the intentions of

contracting parties through its view of the fairest or most

commercially reasonable way in which to construct a transaction.

"[W]hat seems commercially unreasonable to a court [may] not [have]

seem[ed] so to the parties." XCO Int'l Inc. v. Pac. Sci. Co., 369

F.3d 998, 1005 (7th Cir. 2004). Confronted with an unambiguous

and fully integrated contract, negotiated at arms-length, a

court's duty is to give force to the agreement's plain language.

To sum up, the condition that the district court imposed

on Abbott's performance under section 3.3(b) is not found in the

language of the Agreement, which was fully integrated by virtue of

either withhold its future Program Payments (thus forgoing its
right to the damages that flow from Abbott's underspending) or
continue to make its Program Payments (thus throwing good money
after bad).

- 31 -
section 16.3.6 We will not subvert the plain language of the

Agreement by plucking out of thin air a term that the parties

easily could have included but chose to forgo. See St. Paul

Mercury, 2 N.E.3d at 478. Simply put, the Agreement does not make

Abbott's obligation under section 3.3(b) contingent on Hancock's

completion of all four Program Payments.

D. Enforceability of Section 3.3(b) Remedies.

As is true in many jurisdictions, Illinois contract law

distinguishes between liquidated damages (generally enforceable)

and penalties (generally unenforceable). A liquidated damages

clause is one that provides in advance that a breaching defendant

will pay "a specific amount for a specific breach." Jameson Realty

Grp. v. Kostiner, 813 N.E.2d 1124, 1131 (Ill. App. Ct. 2004). The

purpose of such a clause "is to provide parties with a reasonable

predetermined damages amount where actual damages may be difficult

to ascertain." Karimi v. 401 N. Wabash Venture, LLC, 952 N.E.2d

1278, 1290 (Ill. App. Ct. 2011). At least in theory, such

provisions minimize uncertainty and reduce litigation costs,

easing the burden on both the parties and the judicial system.

6 The district court did say that "other provisions in the
contract explicitly state that Abbott is obligated to comply with
[s]ection 3.3(b) only if Hancock contributes all four of the
Program Payments." Hancock III, 183 F. Supp. 3d at 318. However,
the court never identified any such provisions, and we have found
none.

- 32 -
See Restatement (Second) of Contracts § 356 cmt. a. Penalties are

a horse of a different hue. When the sum or formula that is agreed

upon in advance is not reasonably correlated with future damages

and instead acts either as a threat to secure performance or as a

punishment for non-performance, the provision is an unenforceable

penalty. See Inland Bank & Trust v. Knight, 927 N.E.2d 777, 782

(Ill. App. Ct. 2010).

Nomenclature is not dispositive. Whether a provision is

held to be a liquidated damages provision or a penalty provision

depends on the nature of the provision, not on how it is labeled.

See Penske Truck Leasing Co. v. Chemetco, Inc., 725 N.E.2d 13, 19

(Ill. App. Ct. 2000).

In this instance, Abbott agreed to section 3.3(b) after

protracted arm's-length negotiations in which both sides were

represented by seasoned counsel. Abbott now asks us to relieve it

of this bargained-for obligation on the ground that the obligation

constitutes a penalty that the law of Illinois does not tolerate.

As the party resisting enforcement of section 3.3(b), Abbott bears

the burden of proving that the provision imposes an impermissible

penalty rather than a permissible means of measuring liquidated

damages. See XCO Int'l, 369 F.3d at 1003; Penske, 725 N.E.2d at

20. Because the validity and enforceability of a putative

liquidated damages provision presents a question of law, see Fleet

Bus. Credit, LLC v. Enterasys Networks, Inc., 816 N.E.2d 619, 633

- 33 -
(Ill. App. Ct. 2004), we review de novo the district court's

determination that section 3.3(b) is an unenforceable penalty, see

Kunelius v. Town of Stow, 588 F.3d 1, 13 (1st Cir. 2009).

There is no hard-and-fast rule for separating liquidated

damages provisions from penalty provisions. Instead, each clause

"must be evaluated by its own facts and circumstances." Grossinger

Motorcorp, Inc. v. Am. Nat'l Bank & Trust Co., 607 N.E.2d 1337,

1345 (Ill. App. Ct. 1992); see Penske, 725 N.E.2d at 19.

The Illinois cases (including federal cases applying

Illinois law) send mixed messages about the degree of suspicion

with which putative liquidated damages provisions should be

viewed. On the one hand, some case law suggests that close calls

should be resolved in favor of declaring the disputed clause to be

a penalty.7 See, e.g., GK Dev., Inc. v. Iowa Malls Fin. Corp., 3

N.E.3d 804, 816 (Ill. App. Ct. 2013); Stride v. 120 W. Madison

Bldg. Corp., 477 N.E.2d 1318, 1321 (Ill. App. Ct. 1985). On the

other hand, the Illinois cases tend to give effect to the provision

in the absence of fraud or unconscionable oppression. See, e.g.,

Zerjal v. Daech & Bauer Constr., Inc., 939 N.E.2d 1067, 1074 (Ill.

App. Ct. 2010) ("In general, Illinois courts give effect to

liquidated-damages provisions so long as the parties have

7
This preference for penalties has at times been voiced by
courts upholding liquidated damages provisions. See, e.g.,
JPMorgan Chase Bank, N.A. v. Asia Pulp & Paper Co., 707 F.3d 853,
867 (7th Cir. 2013).

- 34 -
'expressed their agreement in clear and explicit terms and there

is no evidence of fraud or unconscionable oppression, a legislative

directive to the contrary, or a special social relationship between

the parties of a semipublic nature.'" (quoting Hartford Fire Ins.

Co. v. Architectural Mgmt., Inc., 550 N.E.2d 1110, 1114 (Ill. App.

Ct. 1990))); Newcastle Props., Inc. v. Shalowitz, 582 N.E.2d 1165,

1170 (Ill. App. Ct. 1991) (similar). Here, however, we need not

sort through this speckled landscape. When all is said and done,

the conclusion that section 3.3(b) is an enforceable liquidated

damages provision is inescapable.

A liquidated damages provision is enforceable as long as

three conditions are satisfied:

(1) the parties intended to agree in advance
to the settlement of damages that might arise
from a breach, (2) the amount provided as
liquidated damages was reasonable at the time
of contracting, bearing some relation to the
damages which might be sustained, and (3) the
actual damages would be uncertain in amount
and difficult to prove.

Dallas v. Chi. Teachers Union, 945 N.E.2d 1201, 1204 (Ill. App.

Ct. 2011) (citing Jameson, 813 N.E.2d at 1130). In our judgment,

all three of these conditions are satisfied here.

The first and third conditions are plainly met. As to

the first, it is clear beyond hope of contradiction that Hancock

and Abbott intended to agree in advance to the settlement of the

damages that might result from a particular kind of breach. A

- 35 -
reading of the Agreement as a whole leaves no doubt that the

parties intended that section 3.3(b) would serve as the exclusive

measure of damages in that event. The provision evinces the

parties' joint effort to fix a determinable sum as damages at the

time of contracting — and that is a hallmark of a valid liquidated

damages clause. See Grossinger, 607 N.E.2d at 1346.

We recognize, of course, that section 3.3(b) was not

described in the Agreement as either a liquidated damages provision

or a penalty provision — and it surely would have been prudent

(and easy) for the parties to have made such a designation. But

even though language in the Agreement describing the nature of the

provision would have been helpful (albeit not conclusive) in

showing the parties' intent, the absence of any such description

is a wash. See Berggren v. Hill, 928 N.E.2d 1225, 1231 (Ill. App.

Ct. 2010) (considering provision in real estate contract allowing

seller to keep earnest money in event of breach to be liquidated

damages provision even though term "liquidated damages" not used).

We may infer the parties' intent from the language and

structure of the Agreement, see Jameson, 813 N.E.2d at 1132-33,

and it is evident here that the parties intended section 3.3(b) to

operate as a liquidated damages provision. According to section

3.2, "Hancock's sole and exclusive remedies for Abbott's failure"

to fulfill its funding obligations "are set forth in [s]ections

3.3 and 3.4." Section 3.3(b), in turn, allows Hancock to recover

- 36 -
damages for Abbott's underspending in accordance with a set

formula. When parties agree to a formula to calculate a monetary

remedy that must be paid in the event of a specific type of breach,

the provision embodying that formula is normally intended to

operate as a liquidated damages provision.8 See N. Ill. Gas Co.

v. Energy Coop., Inc., 461 N.E.2d 1049, 1055 (Ill. App. Ct. 1984).

So it is here.

The third condition for a valid liquidated damages

provision is also satisfied. That condition requires that, in the

event of a breach, actual damages (viewed as of the time of

contracting) would be difficult to calculate and, thus, uncertain.

See Jameson, 813 N.E.2d at 1132. If it appeared to the parties at

the time of contracting that actual damages would be readily

calculable, a provision stipulating a materially different

(higher) amount would be a penalty, not a liquidated damages

provision. See Lake River Corp. v. Carborundum Co., 769 F.2d 1284,

1289-90 (7th Cir. 1985) (applying Illinois law); Stride, 477 N.E.2d

at 1321.

8Abbott suggests that the "intent" element is lacking because
"[t]here is no evidence that the parties intended [section 3.3(b)]
to apply where Hancock has not made its full $214 million
contribution." This argument merely reprises Abbott's previously
rejected claim that section 3.3(b) does not apply unless Hancock
makes all four Program Payments, see supra Part II(B)-(C), and we
need not repastinate that well-plowed soil.

- 37 -
 Here, it is nose-on-the-face plain that Hancock's

damages for any failure on Abbott's part to reach the Aggregate

Spending Target would have been surpassingly difficult to

calculate at the time of contracting. The Program Compounds had

to clear countless hurdles, including successful scientific

development, positive clinical testing results, regulatory

approvals, navigating the shoals of competitive forces, and the

establishment of profitable marketing and distribution

arrangements. Even if things went like clockwork, the culmination

of that process would take years. Under these circumstances, the

uncertainty associated with the successful development of the

Program Compounds is manifest and heralds a similar degree of

uncertainty about the financial returns that Hancock's investment

was likely to yield.

This uncertainty becomes pervasive when one considers

that the damages from Abbott's breach of its spending obligation

are virtually impossible to quantify in advance because section

3.3(b) seeks to approximate not Hancock's future profits in their

entirety but, rather, the amount by which those profits would be

reduced if Abbott underspent. Even with the benefit of hindsight,

the district court observed that the diminution in profits

attributable to Abbott's underspending is "inherently difficult to

quantify." Hancock III, 183 F. Supp. 3d at 321. Although the

existence vel non of uncertainty must be determined with reference

- 38 -
to the time of contracting, the inscrutability of actual damages

after the breach reinforces our conclusion that pervasive

uncertainty was baked into the cake from the very beginning.9 Cf.

Karimi, 952 N.E.2d at 1288 (considering post facto actual damages

to show uncertainty at time of contracting).

Abbott's attempt to parry this thrust is unconvincing.

It says that Hancock "[a]t various times . . . calculated its

expected rates of return on the Agreement." That is true as far

as it goes, but it does not take Abbott very far. The two estimates

to which it points differ substantially not only from each other

but also from the investment's actual performance. Incorrect and

fluctuating estimates of a party's anticipated returns are

indications that actual damages were difficult to quantify and

were therefore uncertain.10 See Jameson, 813 N.E.2d at 1133.

9 The opacity of Hancock's actual damages distinguishes this
case from Lake River, 769 F.2d at 1290, in which the Seventh
Circuit found that a provision was "a penalty and not a liquidation
of damages, because it is designed always to assure [the plaintiff]
more than its actual damages." The same cannot be said of section
3.3(b) because Hancock's actual damages are, as the district court
found, "unknowable." Hancock III, 183 F. Supp. 3d at 321.

10Abbott makes a separate argument that its underspending may
not have caused "actual harm" and that "a monetary infusion would
not have changed" the viability of the failed compounds. Whatever
merit this argument might have in determining the reasonableness
of a liquidated damages formula, it has no relevance to the
uncertainty inherent in predicting, at the time of contracting,
the damages apt to flow from Abbott's underspending.

- 39 -
 We conclude that the uncertainty of actual damages

brings this case well within the heartland of those cases in which

Illinois courts have found actual damages sufficiently uncertain

to warrant the use of a liquidated damages provision. See, e.g.,

Karimi, 952 N.E.2d at 1288; Jameson, 813 N.E.2d at 1132; Penske,

725 N.E.2d at 20; Likens v. Inland Real Estate Corp., 539 N.E.2d

182, 185 (Ill. App. Ct. 1989). Accordingly, we hold that the third

condition of the liquidated damages paradigm has been satisfied.

This leaves the question of whether section 3.3(b),

viewed from the perspective of the time of contracting, forged a

reasonable estimate of actual damages. In answering this question,

we start by rehearsing how actual damages would be measured at

common law for Abbott's breach. Under Illinois law, a non-

breaching party is entitled to damages sufficient "to place [him]

in a position that he . . . would have been in had the contract

been performed, [but] not to provide [him] with a windfall

recovery." GK Dev., 3 N.E.3d at 816 (quoting Jones v. Hryn Dev.,

Inc., 778 N.E.2d 245, 249 (Ill. App. Ct. 2002)). Such damages may

include lost profits as long as the plaintiff proves three

elements: the plaintiff first must establish "the loss with a

reasonable degree of certainty," then establish that the

"defendant's wrongful act resulted in the loss," and, finally,

establish that "the profits were reasonably within the

contemplation of [the] defendant at the time the contract was

- 40 -
entered into." InsureOne Indep. Ins. Agency, LLC v. Hallberg, 976

N.E.2d 1014, 1033-34 (Ill. App. Ct. 2012) (quoting Equity Ins.

Mgrs. of Ill., LLC v. McNichols, 755 N.E.2d 75, 80 (Ill. App. Ct.

2001)).

Because the asserted breach in this case consists of

Abbott's failure to reach the Aggregate Spending Target, Hancock

is entitled to damages reflecting the profits that it would have

garnered if Abbott had spent the required amount. Of course, even

though Abbott has breached, Hancock is still entitled to its share

of whatever profits the Program Compounds may earn. The

possibility that revenues will be forthcoming from this source

must be taken into account in gauging the reasonableness of the

section 3.3(b) formula.

To be valid and enforceable, section 3.3(b) need not

perfectly replicate actual loss. Instead, it must only bear some

relation to the loss — here, the lost profits attributable to

Abbott's underspending. See Dallas, 945 N.E.2d at 1205. The

inquiry is prospective, not retrospective: we do not compare the

amount derived by application of the liquidated damages formula to

a post facto appraisal of the actual damages. Rather, we ask

whether "the amount reasonably forecasts and bears some relation

to the parties' potential loss as determined at the time of

contracting." Karimi, 952 N.E.2d at 1288.

- 41 -
 Measuring future damages inevitably entails a certain

amount of guesswork, and we afford the parties more leeway as the

difficulty of estimating damages increases. See XCO Int'l, 369

F.3d at 1001-02; see also United Order of Am. Bricklayers & Stone

Masons Union No. 21 v. Thorleif Larsen & Son, Inc., 519 F.2d 331,

335 (7th Cir. 1975) (explaining that "the greater the difficulty

of estimating the damages, the greater will have to be the latitude

accorded to the determination of the reasonableness of the

forecast"). This principle fits neatly with the purpose of

liquidated damages provisions because "the case for a contractual

specification of damages is stronger the more difficult it is to

estimate damages." XCO Int'l, 369 F.3d at 1001.

The degree of uncertainty in this case is pronounced,

and our inquiry into the enforceability of section 3.3(b) must

take that high degree of uncertainty into account. The question

is not whether section 3.3(b) anticipates Hancock's actual damages

with precision, nor even whether its formula provided the best

possible estimate with respect to this particular breach. Given

the uncertainty of actual damages at the time of contracting,

section 3.3(b) ought to be upheld unless its formula is apt to

produce "an outlandish estimate of the damages that [the non-

breaching party] might sustain as a result of" the breach. Id. at

1003.

- 42 -
 A salient feature of section 3.3(b) is that it operates

proportionally. Liquidated damages provisions that operate on a

sliding scale, proportional to the magnitude of the breach, are

favored because they indicate that the parties were attempting in

good faith to estimate the damages likely to flow from a particular

breach. See id. at 1004; Jameson, 813 N.E.2d at 1133 (upholding

liquidated damages award that varied based on number of units). A

single, invariant sum for all breaches too frequently will yield

an unrealistic estimate of actual damages for any given breach.

See, e.g., Energy Plus Consulting, LLC v. Ill. Fuel Co., 371 F.3d

907, 909-10 (7th Cir. 2004); Checkers Eight Ltd. P'ship v. Hawkins,

241 F.3d 558, 562 (7th Cir. 2001); GK Dev., 3 N.E.3d at 817.

Two simple and related propositions fortify our

conclusion that section 3.3(b) reasonably forecasts and bears a

sufficient relation to Hancock's potential loss (as envisioned at

the time of contracting). First, it seems to us a commonsense

proposition that, in this context, higher spending is likely to

increase future profits. Second, it seems equally probable that

the amount of lost profits will be higher when the spending

shortfall is greater. One could reasonably have thought, at the

time of contracting, that a larger infusion of cash by Abbott would

make available additional resources for the development of the

Program Compounds and, at the same time, would indicate Abbott's

renewed commitment to the success of those compounds. Conversely,

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one could reasonably have thought, at the time of contracting,

that a reduced investment by Abbott would shrink the resources

available for the development of the Program Compounds and, at the

same time, would indicate a lessened commitment to the success of

those compounds, thus dampening Hancock's prospects for profits.

One could of course imagine circumstances under which additional

spending might not lead to greater profits or under which a larger

spending shortfall might not result in higher lost profits. One

or both of the sophisticated parties to this transaction

undoubtedly considered such possibilities. Yet we are not

concerned with the universe of potential eventualities but,

rather, with reasonable assumptions about the enterprise's general

prospects as viewed from the time of contracting.

Section 3.3(b) builds upon these propositions. Under

its formula, Hancock's damages increase proportionally to the

magnitude of the disparity between actual spending and the

Aggregate Spending Target. A formula that increases Hancock's

damages proportionally to the Aggregate Carryover Amount — as this

formula does — seems well-calculated to afford a reasonable

estimate of Hancock's actual damages. We hold, therefore, that

this final condition of the liquidated damages paradigm is met.

That ends this aspect of our inquiry. Inasmuch as all

three of the requisite conditions for the enforcement of a

liquidated damages provision are satisfied, section 3.3(b)

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constitutes an enforceable liquidated damages provision. Abbott

resists this determination, advancing a triumvirate of overlapping

arguments. Whether viewed singly or in combination, these

arguments fail to persuade.

To begin, it points out that the formula does not

distinguish between shortfalls caused by Hancock's reduced

contributions and shortfalls caused by Abbott's withholding of

funds. Had Hancock made all four of its scheduled Program

Payments, the Aggregate Spending Target would have been achieved.

Since Hancock's reduced contributions "caused" the shortfall,

Abbott's thesis runs, a formula that nonetheless awards Hancock

damages must unreasonably estimate damages.

This thesis twists the language of the Agreement. Under

the terms of the Agreement, it is Abbott's sole responsibility,

set out in section 3.2, to fund "at least the Aggregate Spending

Target during the Program Term." Abbott's thesis implies that its

spending obligation is capped at $400,000,000 — but the Agreement

says no such thing. Where, as here, Hancock is excused under

section 3.4 from making some future payments, Abbott's minimum

spending obligation climbs proportionally (to points above

$400,000,000). Contrary to Abbott's self-serving assertion, there

was no need for the Agreement — either as a matter of law or as a

matter of logic — to "distinguish between underspending

attributable to lower contributions by Hancock and underspending

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caused by lower contributions by Abbott." They are in essence one

and the same.

Abbott next complains that section 3.3(b), construed in

the manner that Hancock envisions, gives Hancock a greater award

the earlier the breach occurs (when Hancock has invested less).

As Abbott sees it, section 3.3(b) generates a windfall for Hancock

because Hancock is entitled to a larger award when the breach

occurs earlier in the Program Term. But this is not a windfall;

it is merely a feature of how the formula is designed to work.

The damages decrease as the spending shortfall decreases because

section 3.3(b) is meant to estimate the impact of underspending on

future profits. This design makes commercial sense: as the

spending shortfall shrinks, the adverse effect on total profits

should be less. Thus, it is reasonable to anticipate that a breach

by Abbott early in the Program Term (when much less has been spent

on the development of the Program Compounds) will have a more

deleterious effect on future profits. If the Program Term has run

its course (or nearly so) and the Aggregate Spending Target has

almost been reached, the smaller shortfall presumably would have

a less severe impact on the program's long-term profitability.11

11 Abbott's windfall concern might be justified if Hancock
could manipulate the Agreement and choose to forgo future Program
Payments in order to reap an undeserved harvest under section
3.3(b). No such danger looms, though, because Abbott controls
whether Hancock's duty to make all four Program Payments persists.
This case illustrates the point: Hancock's obligation to make its

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 An Illinois court previously has rejected an argument

analogous to Abbott's argument. In Jameson, the plaintiff (a real

estate agent) contracted with the defendant-developer for the

exclusive right to sell the units in a condominium complex. See

813 N.E.2d at 1127. The parties agreed to a damages clause, which

stipulated that if the defendant revoked the plaintiff's sales

authority, the plaintiff would be entitled to damages premised on

unrealized commissions (calculated on the basis of the full price

of unsold units). See id. After the defendant breached, he

attacked the damages clause as an unenforceable penalty. In

support, the defendant contended that the clause amounted to a

"tremendous windfall" because the measure of damages assumed that

every unit would sell at the list price and that the plaintiff

would not have to split any commissions. Id. at 1133.

The court disagreed, holding that the clause was a valid

and enforceable liquidated damages clause. See id. It explained

that the defendant's breach deprived the plaintiff of "the

opportunity to sell the units" and took away "any chance" that the

plaintiff might have had of obtaining commissions on those units.

Id. The possibility that other factors might have reduced the

last two Program Payments was excused only because Abbott had
breached (that is, Abbott had made apparent that it would not do
what was necessary to reach the Aggregate Spending Target). Seen
in this light, Hancock's reduced contribution was the direct and
foreseeable result of Abbott's underspending.

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plaintiff's actual commissions had the defendant not breached only

illustrated the difficulty of calculating actual damages at the

time of contracting. See id.

In this case, as in Jameson, the plaintiff (Hancock) was

deprived of the opportunity for which it had bargained — the chance

to reap the profits of a fully funded research program. Any doubt

about factors that might have reduced these profits only "prove

the validity of the clause [by] show[ing] just how uncertain and

difficult calculating actual damages was at the time of

contracting." Id.

Abbott's last argument strikes a similar chord. It

submits that damages should be smaller when the breach occurs

earlier in the Program Term because Hancock will have avoided more

costs. This argument taps into the principle that a non-breaching

party's damages generally ought to be reduced by the costs that

the party avoids as a result of the breach. See Sterling Freight

Lines, Inc. v. Prairie Mat'l Sales, Inc., 674 N.E.2d 948, 951 (Ill.

App. Ct. 1996); Levan v. Richter, 504 N.E.2d 1373, 1378 (Ill. App.

Ct. 1987).

We acknowledge that, under Illinois law, Hancock's

recovery should be based on its net lost profits, that is, the

lost profits attributable to Abbott's underspending less Hancock's

avoided costs. See Sterling Freight, 674 N.E.2d at 951. Section

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3.3(b) does not make an explicit reference to avoided costs,12 but

the absence of such a reference is not problematic: since there is

no sum certain representing Hancock's gross lost profits,

Hancock's avoided costs cannot be subtracted from its gross lost

profits (an unknowable figure) in a literal sense. Rather, in

keeping with section 3.3(b)'s general principle of

proportionality, the Agreement reasonably anticipates that the

increased lost profits caused by an earlier breach will offset the

greater avoided costs.

Abbott posits that a breach early in the Program Term

should engender a smaller, not a larger, liquidated damages award

because Hancock has avoided more costs. Yet Abbott conveniently

overlooks the corresponding fact that the gross lost profits will

almost certainly be higher for an earlier breach. Thus, the

increased avoided costs are deducted from a larger gross profits

number, resulting in higher damages.

12 Section 3.3(b)'s silence regarding avoided costs does not
necessarily mean that avoided costs are not factored into section
3.3(b)'s formula. Section 3.2 states that if Abbott "fail[s] to
fund the Research Program in accordance with this [s]ection,"
Hancock's "sole and exclusive remedies" are "set forth in
[s]ections 3.3 and 3.4." Inasmuch as the parties provided for
both liquidated damages and the discharge of Hancock's future
payment obligations, we may safely assume that they considered
avoided costs in crafting section 3.3(b). Of course, we must still
ask — as we have done supra — whether their estimate of damages in
section 3.3(b) is reasonable.

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 As a counterpoint, consider a situation in which Abbott

breaches late in the Program Term. Hancock may have less (or even

no) avoided costs, but its lost profits will also be less. It

follows that liquidated damages in such a case should be less even

though Hancock's avoided costs are less.

There is an interrelated reason why it is logical that

the liquidated damages would be greater when Hancock's avoided

costs are greater. But for Abbott's breach (which triggered

section 3.4), Hancock would have contributed more funds to the

development of the Program Compounds. These additional funds would

have spurred the development of the Program Compounds and likely

would have increased their profitability. So, when Abbott breaches

before Hancock has made all four of its Program Payments, Abbott

doubly suppresses future profits: first, by underfunding its own

obligations, and second, by shutting off the spigot so that

additional funds from Hancock dry up.

The formula set out in section 3.3(b) may be an

unorthodox way of accounting for avoided costs, but it is tailored

to suit the idiosyncratic nature of the parties' relationship.

Normally, avoided costs are a one-way ratchet. Take, for instance,

a typical case. X, who has a factory in Massachusetts, enters

into a contract with Y to manufacture and deliver widgets F.O.B.

at Y's warehouse in Illinois. After the widgets are made but

before they are shipped, Y notifies X that it will not honor the

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contract. When X sues for damages, the costs of transportation

are avoided costs, that is, they are costs that X will not have to

incur and, thus, they count, dollar for dollar, against what would

otherwise have been X's damages.

Here, however, Hancock's lessened contributions are a

different species of avoided costs: they are a two-way ratchet.

While it is true that Hancock's costs are diminished by the fact

that it is excused from making its third and fourth Program

Payments, the diminished funding that results from that non-

payment also diminishes Hancock's anticipated profits. After all,

it is a reasonable assumption that the more money that is made

available for the development of the Program Compounds, the greater

the anticipated profits will be. Given the deference that we owe

the parties' negotiated formula for estimating damages that are

highly uncertain, see XCO Int'l, 369 F.3d at 1001-02, and the

unique nature of the avoided costs at issue here, we do not think

that we are at liberty to substitute our judgment for that of the

contracting parties.

To sum up, the lost profits attributable to Abbott's

underspending in the wildly speculative business of developing

pharmaceutical drugs were uncertain and defied meaningful

calculation at the time of contracting. Recognizing this

difficulty and intending to address it, Abbott and Hancock agreed

to the formula contained in section 3.3(b) to provide a reasonable

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estimate of damages in the event of a breach by Abbott of its

spending obligation. We are confident that, on balance, section

3.3(b)'s formulaic estimate of those actual damages falls

comfortably within the universe of reasonable estimates. See

Inland Bank, 927 N.E.2d at 783. Abbott has not carried its burden

of proving that section 3.3(b) is a penalty rather than a valid

and enforceable liquidated damages provision, see XCO Int'l, 369

F.3d at 1003, and it must pay Hancock one-third of the Aggregate

Carryover Amount as liquidated damages. According to the district

court's calculations, which we see no need to revisit, that amount

is $33,033,333.33.

E. Rescission.

We need not linger long over Hancock's contention that

the district court erred in striking its prayer for rescission.

The doctrine of election of remedies prevents a party from seeking

inconsistent remedies.

Applying this doctrine leads inexorably to the

conclusion that a party may not both rescind a contract and recover

damages for a breach of that contract. See Harris v. Manor

Healthcare Corp., 489 N.E.2d 1374, 1381 (Ill. 1986). Those

remedies are flatly inconsistent with each other: rescission is in

essence a disavowal of the contract whereas recovery for a breach

is in essence an affirmance of the contract. See Newton v. Aitken,

633 N.E.2d 213, 216 (Ill. App. Ct. 1994). To both rescind an

- 52 -
agreement and recover damages for a breach of that agreement would

therefore be "inappropriate." Id. at 217. As a result, "[t]he

election of either remedy is an abandonment of the other." Id.

Here, Hancock has recovered damages under section 3.3(b)

for Abbott's breach of section 3.2. Enforcing section 3.3(b)

implies an affirmance of the Agreement and, thus, is inconsistent

with any right to rescission.13 Given this inescapable logic, we

hold that Hancock may not now seek rescission of the Agreement.

See Harris, 489 N.E.2d at 1381. Consequently, the district court

did not err in striking Hancock's prayer for rescission.

F. Prejudgment Interest.

In a diversity action, state law controls a prevailing

party's entitlement to prejudgment interest. See Comm'l Union

Ins. Co. v. Walbrook Ins. Co., 41 F.3d 764, 774 (1st Cir. 1994).

Conversely, federal law governs a party's entitlement to

postjudgment interest. See Vázquez-Filippetti v. Cooperativa de

Seguros Múltiples de P.R., 723 F.3d 24, 28 (1st Cir. 2013); see

also 28 U.S.C. § 1961 (providing for postjudgment interest on civil

judgments in federal courts).

13 The district court held that Hancock's pursuit of a
declaratory judgment in Hancock I and Hancock II was inconsistent
with Hancock's prayer for rescission. See Hancock III, 183 F.
Supp. 3d at 302-03. That may be so, but we have no need to pursue
the point.

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 Under Illinois law, "[p]rejudgment interest is proper

when it is authorized by a statute, authorized by agreement of the

parties, or warranted by equitable considerations." In re Marriage

of O'Malley ex rel. Godfrey, 64 N.E.3d 729, 746 (Ill. App. Ct.

2016). Here, Hancock is entitled to prejudgment interest both by

statute, see 815 Ill. Comp. Stat. 205/2, and by the terms of the

Agreement, specifically section 9.3. As a practical matter, the

only difference between the prejudgment interest contemplated by

the Illinois statute and that available under the Agreement is the

rate. The statutory rate is 5%. See id. The rate under the

Agreement is the lesser of "the prime rate of interest plus two

hundred (200) basis points" or "the highest rate permitted by

applicable law."

When a prevailing party is entitled to prejudgment

interest both under a statute and under a contractual provision,

the prevailing party may recover prejudgment interest at the higher

available rate. See Mich. Ave. Nat'l Bank v. Evans, Inc., 531

N.E.2d 872, 881 (Ill. App. Ct. 1988). On remand, the district

court should calculate prejudgment interest either pursuant to the

statute or pursuant to the Agreement (as Hancock may elect).

With respect to duration, "the beginning date for the

accrual of postjudgment interest marks the ending date for the

accrual of prejudgment interest." Old Second Nat'l Bank v. Ind.

Ins. Co., 29 N.E.3d 1168, 1180 (Ill. App. Ct. 2015). To determine

- 54 -
that date, the weight of authority in diversity cases holds that

federal law establishes when postjudgment interest begins to

accrue and, thus, establishes when prejudgment interest ceases to

accrue. See Art Midwest, Inc. v. Clapper, 805 F.3d 611, 615 (5th

Cir. 2015); Coal Res., Inc. v. Gulf & W. Indus., Inc., 954 F.2d

1263, 1274 (6th Cir. 1992); Happy Chef Sys., Inc. v. John Hancock

Mut. Life Ins. Co., 933 F.2d 1433, 1437-38 (8th Cir. 1991);

Travelers Ins. Co. v. Transp. Ins. Co., 846 F.2d 1048, 1053-54

(7th Cir. 1988); Northrop Corp. v. Triad Int'l Mktg. S.A., 842

F.2d 1154, 1156-57 (9th Cir. 1988) (per curiam); cf. Fratus v.

Republic W. Ins. Co., 147 F.3d 25, 29-30 (1st Cir. 1998) (applying

Federal Rules of Civil Procedure and 28 U.S.C. § 1961 to determine

date that postjudgment interest would begin to accrue in diversity

suit). But cf. Tobin v. Liberty Mut. Ins. Co., 553 F.3d 121, 146-

47 (1st Cir. 2009) (suggesting different rule in non-diversity

case).

Under federal law, "where a first judgment lacks an

evidentiary or legal basis, post-judgment interest accrues from

the date of the second judgment." Cordero v. De Jesus-Mendez, 922

F.2d 11, 16 (1st Cir. 1990). Because the district court's decision

interpreting section 3.3(b) is entirely reversed, that portion of

its judgment perforce lacked a legal basis. On remand, therefore,

the district court should calculate prejudgment interest on this

award beginning from the date that it was due under the Agreement

- 55 -
(thirty days after the end of 2005) and continuing until the date

that the district court enters its amended judgment. Postjudgment

interest will accrue from that date forward. See 28 U.S.C. § 1961;

Kaiser Alum. & Chem. Corp. v. Bonjorno, 494 U.S. 827, 836 (1990).

The portion of the district court's judgment that

awarded Hancock damages for Abbott's breach of the Agreement's

audit provision in the amount of $198,731 was not appealed and

remains in effect. If that portion of the judgment remains

unsatisfied, it must be incorporated in the amended judgment,

together with prejudgment interest to the date of the original

judgment (as previously calculated by the district court).

Postjudgment interest shall continue to accrue on that portion of

the judgment from that date forward.

III. CONCLUSION

Refined to bare essence, this is a case about keeping

promises. Hancock and Abbott made promises to each other. Abbott

nonetheless failed to honor several promises, including one

important promise in particular. The parties had provided a

damages remedy for just such an eventuality, and that remedy

produced a rational estimate of Hancock's actual damages which, at

the time of contracting, were highly uncertain and impossible to

calculate. The remedy is, therefore, a valid liquidated damages

clause, and Hancock is entitled to enforce it according to its

tenor.

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 We need go no further. For the reasons elucidated above,

we reverse the judgment of the district court with respect to

section 3.3(b) of the Agreement, affirm its dismissal of Hancock's

prayer for rescission, and remand for further proceedings

consistent with this opinion. Costs shall be taxed in favor of

Hancock.

So Ordered.

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