Fiberlok, Inc. v. LMS Enterprises, Inc.

United States Court of Appeals,

Fifth Circuit.

No. 91–4781.

FIBERLOK, INC., Plaintiff, Counter–Defendant–Appellant,

v.

LMS ENTERPRISES, INC., Defendant, Counter–Claimant–Appellee.

Nov. 10, 1992.

Appeal from the United States District Court for the Eastern District of Texas.

Before JONES and WIENER, Circuit Judges, and LITTLE, District Judge.**

LITTLE, District Jud:

Fiberlok, Inc., the plaintiff-appellant, is the licensor of bonded fiber cushioning processes and

products. Fiberlok entered into two agreements with LMS Enterprises, Inc., the defendant-appellee.

The first of these agreements was a supply contract in which LMS agreed to supply Fiberlok with

resin. In addition there was a milling agreement between the parties under which LMS was to mill

resin for Fiberlok's licensees. In conjunction with these agreements, Fiberlok advanced funds and

loaned equipment to LMS.

On 9 August 1988, Fiberlok commenced this action seeking the return of equipment held by

LMS and damages for conversion of resin, resin overcharges and negligent destruction of equipment.

LMS counterclaimed stating causes of actions for trade infringement, fraudulent inducement, and

breach of the supply contract. The district court denied Fiberlok's demands and ruled in favor of

LMS on its counterclaims. The district court reasoned that Fiberlok fraudulently induced LMS to

enter into the contract and that Fiberlok made several material breaches of the contract. The district

court ruled that LMS was entitled to recover slightly over $460,000 for lost profits over the contract

period, subject to an offset of slightly over $66,000. Accordingly, the district court rendered

judgment for LMS in the amount of $406,727, together with pre-judgment and post-judgment

interest. Fiberlok now brings this appeal. Fiberlok does not contest the district court's findings on

*
District Judge of the Western District of Louisiana, sitting by designation.
liability. Rather, this appeal concerns the district court's determination of quantum bound principally

to the issue of lost profits. We affirm the judgment of the district court.

FACTS

Because the issues on appeal are related to the calculation of damages only, the facts in this

case are for the most part undisputed, but painfully complicated. Therefore, this court adopts the

district court's findings of fact as they relate to liability, and only those findings of fact pertinent to

quantum, the issue of this appeal, are discussed.

Fiberlok, Inc. ("Fiberlok"), is a Tennessee corporation engaged in the business of

fiberbonding. It maintains its principal office and place o f business in Memphis, Tennessee and is

authorized to do business in the state of Texas. George Buck is the chairman and chief executive

officer of Fiberlok.

Fiberlok owns patents on a process for making nonwoven pads, batts and other structures that

employ certain thermoplastic resins that are distributed in the fibers that make up the structure. The

fibers are subsequently heated, caused to melt, and then refrozen or cooled so that the structure holds

its desired final configuration (the "Fiberlok process"). The Fiberlok process is used to manufacture

a variety of textile based products such as the inside of a mattress or the cushion portion of a chair

or car seat. These various kinds of cushioning are referred to as cushion batts, pads, or mats.

Manufacturers that produce structures using the Fiberlok process compete against manufacturers that

produce nonwoven pads and batts by other processes and also against manufacturers who make

alternatives such as foam rubber. Therefore, Fiberlok has an interest in assuring the availability of

thermoplastic resins at prices that make the structures produced with the Fiberlok process an

economical alternative to other forms of processing batts and pads.

LMS Enterprises, Inc. ("LMS"), is a Texas corporation, engaged in the business of

manufacturing drilling fluid and dry powdered resins for polyvinyl chloride (PVC) pipe and

fiberbonding applications. LMS maintained its principal office and place of business in Longview,

Texas. Hans Krier, Heinz Krier and Egon Dangel were the principals of LMS.

In November of 1985, LMS and Fiberlok began discussing the formation of a resin supply
contract. A draft of the contract provided that LMS's total output of micronized resin under the

FLEX–LOCK designation would be so ld to Fiberlok. The draft further stated that "Fiberlok

estimate[d] that annual resin use by its current licensees [would] be not less than 3,000,000 pounds

after introduction and acceptance in 1986 and that resin use by current and new customers and (sic)

[might] exceed 6,000,000 pounds in 1987 depending on satisfactory price." In other words,

Fiberlok's annual resin needs to satisfy its contractual obligations were 3,000,000 pounds. If business

improved, the need could double.

In late 1985, Dow Chemical Company (Dow), LMS's supplier of SARAN, Dow's trade name

for its resin blends, began to reduce LMS's supply. By the end of February 1986, LMS could no

longer purchase desirable resin from Dow. Fiberlok was informed of the loss of supply. LMS

searched for another source of supply. This absence of a reliable source of resin caused LMS and

Fiberlok to suspend their contract discussions.

Both LMS and Fiberlok experimented with resins that could possibly serve as alternatives to

Dow's product, and exchanged or discussed the results with each other. In addition, LMS

communicated with a variety of brokers and suppliers of resins in hopes of finding a suitable resin for

fiberbonding. LMS called Joyce Torregrossa, a broker, who operated Surplus Chemicals Marketing,

Inc. ("Surplus Chemicals"). Dangel and Krier, employees of LMS, had been buying off-grade PVC

from Torregrossa since early 1981. Continuing its search, LMS obtained a sample of VSSS/VSSP,

a solution vinyl resin from the producer, Union Carbide Corporation ("Union Carbide" or "UCC").

LMS tested and approved use of the material as it was relatively easy to grind and melt.

In July of 1986, Fiberlok concurred with LMS as to the utility of the VSSS/VSSP resin. The

parties agreed to market the newly discovered product as Flexlok 052. With a new source of resin

located, LMS and Fiberlok decided to renew their contract negotiations. A binding contract was

confected. The district court found that the contract required Fiberlok to purchase at least 3,000,000

pounds of resin per year in twelve monthly installments of 250,000 pounds, and that under the terms

of the contract, LMS would be Fiberlok's exclusive supplier of resin.

Post contract, LMS suspicioned that Fiberlok was not purchasing resin amounts as promised.
In November 1986, LMS officials complained to Buck that Fiberlok was violating the contract by not

dealing with LMS as Fiberlok's exclusive supplier of resin. In a spirit of cohesiveness, the parties

entered into a milling agreement in which LMS promised to be Fiberlok's exclusive miller. Milling

is a process of mixing and blending resins and grinding the mixture into a fine powder referred to as

micronized resin. The parties agreed that LMS would be paid $0.125 per pound for milling Flexlok.

Buck intended to have LMS mill the resin that Fiberlok had purchased from an outside supplier.

Following this agreement, in early December 1986, Buck purchased approximately 210,000 pounds

of resin from Heller & Co. ("Heller"). Heller is a resin broker, not a manufacturer of resin. The

Heller resin, referred to as MC20 and MC29, was delivered to LMS for milling.

Until December of 1986 LMS had been purchasing the Union Carbide produced resin from

Surplus Chemicals, a broker. In December, LMS began having cash flow problems. Fiberlok and

Surplus Chemicals, through their respective agents Buck and Torregrossa, began communicating

directly about their material. On 9 December 1986 LMS and Surplus Chemicals executed an

agreement whereby Surplus Chemical agreed to give LMS first right of refusal for VSSS/VSSP

off-grade resin for the next two years. However, LMS did not have cash available to purchase the

resin Surplus Chemicals was offering for sale. Therefore, on 19 December 1986, LMS executed a

release of Surplus Chemicals so that Fiberlok could purchase the resin directly from Surplus

Chemicals. In addition, in March of 1987 Fiberlok leased equipment to LMS. The milling agreement

was also amended after LMS said it could not afford to mill at the original agreed upon price of

$0.125 per pound. The parties agreed to revise the amount to $0.21 per pound.

In July of 1987, Fiberlok again purchased resin from Heller and shipped it to LMS for milling.

The 200,000 pounds Fiberlok purchased from Heller, Heller had acquired from Union Carbide. The

following month LMS purchased 38,000 pounds of resin from a Union Carbide plant in West Virginia

as well as a load of resin from Keysor, a California manufacturer of PVC/PVA vinyls. LMS

purchased a total of five resin loads from Keysor from August through November 1987.

It was during the summer of 1987 that the relationship between Fiberlok and LMS began to

deteriorate. Fiberlok sent LMS a letter demanding a formal cancellation of the supply contract.
Fiberlok reasoned that the contract had not worked "after January of this year because LMS was not

able to purchase and supply the resin we need." This letter did not make reference to the quality of

the resin milled. Compounding the problem, Fiberlok began deducting four cents per pound from the

twenty-one cents per pound it was paying LMS for milling in order to recover its prepayments to

LMS.

In February 1988, Fiberlok discussed with Heller the possibility of purchasing more resin.

Large quantities of this material were eventually purchased and shipped to Wedco Technology, a

company to which Fiberlok had sent a sample in March of 1987 for test grinding.1 In March of 1988,

Fiberlok informed LMS that Fiberlok was receiving invoices for milling that had not occurred.

Fiberlok also reported that it would have its resin milled in Memphis.

On 9 August 1988, Fiberlok commenced this civil action in the United States District Court

for the Eastern District of Texas seeking, among other things, the return of equipment wrongfully

held by LMS, damages for conversion of resin, resin overcharges and negligent destruction of

equipment. LMS counterclaimed for trade secret infringement, fraudulent inducement, and breach

of the supply purchase contract. As we previously reported, the district court found for LMS on the

fraudulent inducement and breach of contract claims, awarded LMS lost profits of $460,000 and

found that Fiberlok was deserving of slightly over $66,000 on its claims. Judgment of $406,727 plus

pre- and post-judgment interest was granted. The issue on appeal is not whether Fiberlok is guilty

of fraudulent inducement and breach of contract but whether the district court properly calculated

lost profits.

STANDARD OF REVIEW

The district court's findings of fact are reviewed under the clearly erroneous standard.

Howerton v. Designer Homes By Georges, Inc., 950 F.2d 281, 283 (5th Cir.1992). Conclusions of

law are reviewed de novo. Id.

1
Wedco is located in New Jersey. Fiberlok was trying to find a company on the east coast that
could grind resin and distribute it to a Fiberlok licensee in the east. Therefore, Fiberlok sent
samples of resin for test grinding to several companies in the region. Wedco was able to grind the
resin to a powdered form that met Fiberlok's specifications.
 LOST PROFITS

Appellant argues that LMS's profits are unrecoverable as speculative because LMS was an

unestablished business. The district court correctly noted, applying applicable Texas substantive law,

that damages will not be awarded for lost profits that are merely speculative in nature. Proof of

anticipated profits cannot be bottomed upon uncertain and changing conditions. Copenhaver v.

Berryman, 602 S.W.2d 540, 544 (Tex.Civ.App.1980, writ ref. n.r.e.). Such a result would be

speculative indeed. But, it is not necessary that recovery for future profits should be established by

exact calculation, as it is enough to have data from which these pro fits may be ascertained with a

reasonable degree of certainty and exactness. Id.

Appellant correctly posits that prospective profits are not recoverable for a newly established

business or for a business that has operated at a loss. The former has no track record, and the latter

is an established loser. We have no quarrel with those conclusions. See e.g., McBrayer v. Teckla,

Inc., 496 F.2d 122, 127 (5th Cir.1974). However, LMS was neither an unestablished business at the

time the contract was confected nor when it was breached. LMS had been in the business of

manufacturing micronized resins for use in fiberbonding for more than a year prior to contract

execution, and LMS's financial statements indicate that year was a profitable one.

In addition, after the parties contracted, LMS's sole raison d'etre was to perform its contract

with Fiberlok. The general rule that lost profits are not recoverable for a new and unestablished

business does not apply to a business established on the basis of a contract sufficiently specific in

nature as to allow credible prediction of the amount of lost profits, particularly if factual data is

available to furnish a sound basis for computing probable loss. See e.g., Pace Corp. v. Jackson, 155

Tex. 179, 284 S.W.2d 340, 348 (1955), First Title Co. v. Garrett, 802 S.W.2d 254, 260–61

(Tex.App.—Waco 1990, no writ ). The contract between LMS and Fiberlok was sufficiently specific

in terms of subject matter, price and quantity to allow calculation of lost profits with reasonable

certainty.

CALCULATION OF NET PROFITS WITH REASONABLE CERTAINTY

Appellant's second argument also stems from the contention that the profits sought by LMS
depend on uncertain conditions, and therefore LMS is not entitled to recovery. In support of this

argument, Fiberlok asserts that LMS never presented probative evidence that, but for Fiberlok's

actions, it could have, through the business contacts available to it, procured any resins that were not

in fact purchased by either LMS or Fiberlok.

In awarding damages, the district court found, based on prior purchases, that LMS could

procure 262,000 pounds of resin per month to satisfy the contractual requirements of LMS by

purchasing 80,000 pounds of UCC resin from Surplus Chemicals, 44,000 pounds from Keysor, and

138,5002 pounds from Heller & Company for the years remaining in the contract. The price per

pound of this resin was estimated based on prior purchases. Appellant asserts that the district court

erred in finding that LMS could procure these quantities of resin.

The district court found that LMS could have purchased resin in the market place to fulfill the

contract purchase requirements of Fiberlok. When making its factual analysis, the district court

reviewed the purchasing history of LMS and other evidence presented by resin sellers. The fault with

the district court's opinion, according to Fiberlok, centers on the quantity of resin available in the

market place. The nub of the appellant's distress is best described in a simple example. If, on a

historical basis, LMS purchased 50,000 pounds per month from Heller, 80,000 pounds per month

from Surplus Chemicals, and 20,000 pounds per month from Keysor, one could conclude that LMS

could purchase 150,000 pounds of resin per month in the market place. But Heller and Surplus

Chemicals are not producers, they are merely brokers, and Heller's inventory was purchased from

Union Carbide as was Surplus Chemicals'. Union Carbide has the ability to produce only 80,000

pounds per month. Thus the market is capable of producing only 100,000 pounds of resin per month.

Appellant argues that the district court erred when it calculated the amount of resin available

to LMS by purchase from suppliers of resin. For example, the district court's assumption that Heller

2
The district court's Conclusions of Law Relating to Damages actually states that LMS could
procure 1,662,000 pounds of resin per month from Heller. This number clearly exceeds the
monthly amount required under the supply contract. The district court appears to have
inadvertently included the annual amount, as 1,662,000 is exactly twelve times the amount
needed, along with the Surplus Chemicals and Keysor resin, to make up the 262,000 pounds of
resin that LMS must procure each month under the district court's analysis.
& Company could procure 138,500 pounds per month is based on purchases made by Heller in 1987.

Appellant contends that the purchases made by Heller were from Union Carbide, and therefore the

district court double counted the amount of available UCC produced resin. In addition, appellant

argues that Heller could not have procured resin from any other source but UCC because the supply

of acceptable resin is limited. Appellant further argues that the Keysor supply of 44,000 pounds of

resin is in error. Appellant claims that the Keysor supply was of a substandard quality and that it had

to reject two of the five resin loads that LMS bought from Keysor. Also, appellant argues there is

no evidence that Keysor resin would ever again become available or would be a dependable source

of suitable resin.

At this point, we feel it is necessary to observe that neither the appellant nor appellee

produced expert testimony at trial regarding lost profits. This left the determination of lost profits

to the district judge. The district court employed a common method of estimating lost profits; it

estimated lost profits based on prior years' data with minor adjustments to account for annual

increases in costs. The district court provides a competent and detailed description of the

methodology in its Conclusions of Law Relating to Damages. The method, which we adopt, has not

been contested on appeal, only the components of the method dealing with LMS's inventory costs.

In its estimation of lost profits, the district court looked to LMS's and Fiberlok's3 prior resin

purchases to determine future purchases and purchase prices. LMS's and Fiberlok's prior purchases

from Surplus Chemicals and Heller were used only to provide a basis for the type of suppliers that

would provide the various amounts of resin and the purchase prices. There is no evidence in the

record that clearly supports the appellant's contention that there was not enough resin available in the

market as a whole to provide LMS with 3,000,000 pounds of resin per year. The district court does

not purport to assume that Surplus Chemicals, Heller and Keysor would supply LMS with resin from

3
The district court found it necessary to look to both LMS's and Fiberlok's prior purchases
because Fiberlok purchased some resin directly, rather than through LMS who was to be
Fiberlok's exclusive supplier of resin under the terms of the supply contract. For example, on
three occasions Fiberlok purchased directly from Heller, and Fiberlok also purchased directly from
Surplus Chemicals when LMS began to have cash flow problems related to Fiberlok's breach of
the supply contract.
the same sources, rather the district court merely used past purchases as a means of estimating future

purchases and future purchase prices.

The appellant's core argument is that Heller could not obtain resin from UCC if Surplus

Chemicals was selling all of UCC's resin supply to LMS. While this is true, there is nothing in the

record that supports the appellant's argument that Heller could not obtain resin from other sources.

Heller is a resin broker and as such is not limited to one source of resin. Fiberlok obtained resin from

Heller in at least two other transactions, and there is no indication in the record, nor does appellant

argue, that these Heller purchases were of UCC origin. Although the record indicates that the resin

market can at times be limited in supply, there is enough evidence to support the di strict court's

conclusion that supply would not be an issue in the calculation of lost profits. Therefore, we cannot

say that the district court's supply findings are clearly erroneous.

As for the quality of the Keysor supply of resin, the record evidence indicates that Fiberlok

only rejected the Keysor resin after LMS sought to prevent Fiberlok from purchasing from Keysor

directly. Again, it appears that the district court was only using the suppliers and their prior sales of

resin to LMS and Fiberlok as a means of estimating future sales to LMS. The district court only used

the three mentioned suppliers as a means of estimating LMS's future purchases; it did not indicate

that these were the only suppliers in the market or that LMS must have purchased its resin from these

suppliers. As noted above, it is not necessary that profits should be susceptible of exact calculation,

but it is sufficient that there be data from which they may be ascertained with a reasonable degree of

certainty and exactness. Copenhaver v. Berryman, 602 S.W.2d 540, 544 (Tex.Civ.App.1980, writ

ref. n.r.e.).

MEASURE OF DAMAGES

Fiberlok challenges the district court's application of § 2.708, alleging that the court erred

in applying subsection (b) of the statute rather than subsection (a). Section 2.708 of the Tex.Bus. &

Comm.Code provides:

(a) ... the measure of damages for non-acceptance or repudiation by the buyer is the difference
between the market price at the time and place for tender and the unpaid contract price
together with any incidental damages provided in this chapter (Section 2.710), but less
expenses saved in consequence of the buyer's breach.
 (b) If the measure of damages provided in Subsection (a) is inadequate to put the seller in as
good a position as performance would have done then the measure of damages is the profit
(including reasonable overhead) which the seller would have made from full performance by
the buyer, together with any incidental damages provided in this chapter (Section 2.710), due
allowance for costs reasonably incurred and due credit for payments or proceeds of resale.

Under subsection (a), LMS is required to mitigate its damages. Fiberlok alleges that LMS

should have continued to purchase resin and sell it to other distributors. LMS never attempted to

mitigate its damages in this manner. The district court found, however, that Fiberlok's failure to

perform under the contract was a direct cause of the closing of LMS's business and therefore excused

LMS from the duty to mitigate. Appellant asserts that LMS did not mitigate because it did not have

the ability to operate its own plant since it had never acquired sufficient working capital. The district

court's selection of applicable law is particularly informative. As the district court notes, subsection

(a) is applicable in most situations, but courts have applied § 2.708(b) in situations when a

seller/manufacturer ceases production after the buyer's breach. Stewart & Stevenson Services Inc.

v. Enserve, Inc., 719 S.W.2d 337, 343 (Tex.App.—Houston [14th Dist.] 1986 writ. ref'd n.r.e.)

(citing Scullin Steel Co. v. Paccar, Inc., 708 S.W.2d 756 (Mo.Ct.App.1986); Autonumerics, Inc.

v. Bayer Industries, Inc., 144 Ariz. 181, 696 P.2d 1330, 1340 (Ct.App.1984); Bead Chain

Manufacturing Co. v. Saxton Products, Inc., 183 Conn. 266, 439 A.2d 314, 320 (1981)). Scullin

Steel is especially applicable as that case held that lost profits would be awarded under § 2.708(b)

because the defendant's "breach was a direct cause of the [plant] closing." Scullin Steel 708 S.W.2d

at 763. This conforms to the language of the statute. In addition, as the district court points out, this

position is consistent with the discussion of section § 2.708(b) in Nobs Chemical, U.S.A., Inc. v.

Koppers Co., Inc., 616 F.2d 212, 215 (5th Cir.1980) (Citing to the following language in American

Metal Climax, Inc. v. Essex International, Inc., 16 U.C.C.Rep. 101, 115 (S.D.N.Y.1974):

"[C]ompensatory damages as provided in the contract-market formula of § 2708(1) [§ 2.708(a) ] are

realistic only where the seller continues to be in a position to sell the product to other customers in

the market."). If the seller is unable to mitigate because of the buyer's breach, applying subsection

(a) would provide inadequate damages because it would be unfair to penalize the seller for failure to

mitigate when the inability to mitigate was due to the fault of the buyer. In such situations, subsection
(b) would be the proper measure of damages.

At issue in this case is who was responsible for LMS's inability to mitigate. If LMS was

unable to mitigate its damages because it was under capitalized, then subsection (a) would apply.

However, if, as the district court held, Fiberlok's failure to perform under the contract prevented LMS

from performing, then LMS is excused from its duty to mitigate. This is a finding of fact and subject

to the clearly erroneous standard of review.

The district court found that Fiberlok's failure to comply with the terms of the contract

prevented LMS from paying for its overhead expenses and for its purchases of resin. Therefore, the

district court held, because Fiberlok was the cause of LMS's inability to perform under the contract,

§ 2.708(b) was applicable. This finding of fact is supported by the record as Fiberlok's failure to

purchase resin in acco rdance with the contract caused LMS to experience a cash short fall.

Therefore, the district court's finding, that it was Fiberlok which was responsible for LMS's inability

to mitigate damages and not LMS's under capitalization, was not clearly erroneous. Because LMS

was unable to mitigate damages due to Fiberlok's breach, we uphold the application of Tex.Bus. &

Comm.Code § 2.708(b) in this situation.

CONCLUSION

We hold that the district court did not err in finding that LMS was an established business,

and also hold that lost profits were a proper measure of recovery. The district court's calculation of

lost profits was not speculative as the data from which the lost profits were ascertained allowed for

calculation with a reasonable degree of certainty and exactness. In addition, the district court

properly applied Tex.Bus. & Comm.Code § 2.708(b) in this situation as it was Fiberlok's breach that

caused LMS's inability to mitigate damages.

AFFIRMED.