Opinion
No. C6-02-917.
Filed May 6, 2003.
Appeal from the District Court, Ramsey County, File No. CX00010406.
Michael D. O'Neill, O'Neill, Grills O'Neill, P.L.L.P., (for respondent)
Gregory W. Deckert, Vest Deckert, P.A., (for appellant)
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2002).
UNPUBLISHED OPINION
This is a misrepresentation and breach-of-contract action arising in connection with the sale of appellant's dental practice to respondent. On appeal from an order denying his motion for a new trial or judgment notwithstanding the jury's verdict (JNOV), appellant challenges the jury's finding that he violated a noncompete agreement and its award of lost profits and misrepresentation damages. We affirm the jury's finding that appellant breached the noncompete agreement, but we reverse the jury's award of lost profits and misrepresentation damages.
FACTS
In May 2000, respondent Deborah Fung offered to purchase appellant Richard Riemenschneider's dental practice for $150,000. In September 2000, the parties signed an agreement for the purchase of the practice's assets and goodwill. The parties also signed a noncompete agreement, which was incorporated into the purchase agreement by reference. The noncompete agreement prohibited Riemenschneider "directly or indirectly, [from] engag[ing] in a competing dental practice in any manner whatsoever, within [a] five (5) mile radius of the Dental Practice," for a six-year period. The agreement defined a "competing dental practice" as one that "provide[s] dental services of any kind to patients." In the event of breach, the noncompete agreement entitled Fung to an accounting of profits.
In addition to the purchase and noncompete agreements, the parties signed a consulting agreement and an independent-contractor agreement. Under the consulting agreement, Riemenschneider agreed to provide consulting services to Fung for 30 months at a rate of $3,500 per month. The consulting agreement was, in effect, a financing arrangement to help Fung pay for the practice.
Under the independent-contractor agreement, Riemenschneider agreed to assist Fung in the care and treatment of patients in exchange for 35% of his adjusted gross production each month. The agreement was intended to provide Riemenschneider with part-time income while he transitioned out of the full-time practice of dentistry. Riemenschneider estimated that he would generate $44,800 in services per year.
Fung and Riemenschneider's professional relationship began to deteriorate almost immediately after they started working together. In early October, after continuous disagreements with Riemenschneider, Fung canceled the independent-contractor agreement and changed the locks. Shortly after, she canceled a contract with the Indian Health Board to meet the increased demands of her practice resulting from the cancellation of the independent-contractor agreement. Fung estimated losing $9,900 as a result of the cancellation.
In late October, Riemenschneider received a letter from Fung's lawyer, indicating that he was not to return to the office. At the same time, Fung stopped paying Riemenschneider his consulting fee.
In January 2001, Riemenschneider sent 121 former patients a billing statement on the dental practice's stationery in an attempt to collect his accounts receivable. The statement indicated that Riemenschneider would be opening a new office but did not say where:
Doc will resume practice in March for three + years at a new location. Letter to follow.
Please mail your payment in the enclosed envelope. Do NOT bring to the office.
If you have any questions, please send a note. Thank you.
In March and April, Riemenschneider sent additional billing statements to 103 and 98 former patients, respectively. The March and April statements listed Fung's business address but did not refer to Riemenschneider's new practice. Shortly after, Riemenschneider sent the so-called "Dear Friends" letter to "a limited number of patients such as relatives, friends, long time patients, fearful ones, and anyone expressing an interest to continue treatment [with] me." The letter stated that Riemenschneider would be practicing at a new location on Fridays, and it provided the address and telephone number of the new practice.
In December 2000, Fung brought a fraud, misrepresentation, and breach-of-contract action against Riemenschneider. Riemenschneider counterclaimed for defamation and breach of the consulting agreement. By special verdict, the jury found Riemenschneider liable for fraud, misrepresentation, and breach of contract. The jury awarded Fung $24,264 for fraud and misrepresentation, $59,020 for breach of the purchase and independent-contractor agreements, $43, 941 for lost profits incurred through January 2001 as a result of the breach of the noncompete agreement, and $18,500 for future lost profits. The jury also found Fung liable for defamation and breach of the consulting agreement and awarded Riemenschneider $105,000, the balance remaining on the purchase agreement.
The court adopted the jury's findings and denied Riemenschneider's post-trial motion. This appeal followed.
DECISION
Judgment notwithstanding the jury's verdict is proper when the verdict has "no reasonable support in fact or is contrary to law." Frykman v. Univ. of Minn. — Duluth, 611 N.W.2d 379, 380-81 (Minn.App. 2000). This court reviews the denial of a motion for judgment notwithstanding the verdict de novo, but will set aside answers to special-verdict questions only if the answers cannot be reconciled with the evidence on any theory. Id. at 380; Hanks v. Hubbard Broad,. Inc., 493 N.W.2d 302, 309 (Minn.App. 1992), review denied (Minn. Feb. 12, 1993). We view the evidence in the light most favorable to the verdict, and will affirm if we find sufficient competent evidence reasonably trending to support the jury's findings. Id.; Krengel v. Midwest Automatic Photo, Inc., 295 Minn. 200, 204, 203 N.W.2d 841, 844 (1973).
I.
Riemenschneider first argues that because he did not provide dental services within a five-mile radius, the jury's finding that he breached the noncompete agreement cannot be reconciled with the evidence. Fung concedes that Riemenschneider did not provide dental services within a five-mile radius, but she argues that Riemenschneider violated the noncompete covenant by soliciting former patients.
Minnesota law has traditionally protected buyers who pay for the goodwill of a going concern. See, e.g., Haynes v. Monson, 301 Minn. 327, 330, 224 N.W.2d 482, 483 (1974); Gibbons v. Hansch, 185 Minn. 290, 292-93, 240 N.W. 901, 902 (1932). To that end, Minnesota law imposes on sellers of a business and its accompanying goodwill an implied duty not to solicit former customers privately. Gibbons, 185 Minn. at 292-93, 240 N.W. at 902. The implied duty protects the buyers' investment in the goodwill and allows them to continue the business for profit. See Haynes, 301 Minn. at 330, 224 N.W.2d at 483. In Haynes, a noncompete covenant prohibited the sellers of a bookkeeping and tax practice from engaging in a competing business within 50 miles of the city of Austin. Although the covenant did not expressly prohibit solicitation, the supreme court construed the covenant to preclude continued contacts with former clients within the specified geographical area. The court reasoned that
"[t]o allow one to sell his business, with its accompanying customer lists and files, and then allow him to compete for the patronage of these former customers would be contrary to the covenant, and would frustrate the intent of the parties."
Unlike the duty not to solicit former customers privately, the duty to refrain from engaging in a competing business and from publicly soliciting customers arises only out of an express agreement not to compete. Gibbons , 185 Minn. at 292, 240 N.W.2d at 902 (stating that absent noncompete agreement vendor may engage in competing business and advertise for customers) .
In this case, the purchase agreement expressly provided for the sale of the dental practice and its accompanying goodwill. Accordingly, Riemenschneider had an implied duty not to solicit former patients privately, even though the noncompete covenant did not expressly prohibit solicitation. The jury could reasonably have concluded that Riemenschneider violated the implied duty not to solicit by sending the January billing
statement and the "Dear Friends" letter to former patients, in an attempt to regain the goodwill he sold. To construe the covenant otherwise, as Riemenschneider urges us to do, would defeat the purpose for its inception and frustrate the parties' intent.
Because the jury's finding that Riemenschneider violated the noncompete agreement can be reconciled with the evidence on the theory that he breached the implied duty not to solicit, it must be sustained.
II.
Riemenschneider next challenges the jury's lost-profits award, claiming that it is both unsupported by the evidence and speculative. We agree.
Damages for lost profits are recoverable only when the loss is a natural and probable consequence of the breach and the amount of loss is ascertainable to a reasonable degree of certainty. Faust v. Parrott, 270 N.W.2d 117, 121 (Minn. 1978); N. States Power Co. v. Lyon Food Prods., Inc., 304 Minn. 196, 203, 229 N.W.2d 521, 525 (1975). Although the law does not require mathematical certainty in the proof and calculation of lost profits, it requires evidence of definite profits grounded upon a reasonable factual basis. See Cardinal Consulting Co. v. Circo Resorts, Inc., 297 N.W.2d 260, 267 (Minn. 1980); Leoni v. Bemis Co., Inc., 255 N.W.2d 824, 826 (Minn. 1977). Damages that are remote, speculative, or conjectural are not recoverable as a matter of law. Busch v. Busch Constr, Inc., 262 N.W.2d 377, 399 (Minn. 1977).
In cases involving an established business, lost profits may be proved by comparing plaintiff's revenue before and after the breach. See, e.g., Goebel v. Hough, 26 Minn. 252, 256-57, 2 N.W.2d 847, 849 (1879) (stating that when operations of established business are interrupted, proper measure of damages is determined by diminution in value caused by interruption); Lewis v. Mobil Oil Corp., 438 F.2d 500, 511 (8th Cir. 1971) (stating that "[p]ast profits of an established business may be utilized to prove loss of profits as an element of damages").
In cases involving a new business, courts may also rely on past performance in estimating lost-profits damages. Spinett, Inc. v. Peoples Natural Gas Co., 385 N.W.2d 834, 839 (Minn.App. 1986) (stating that lost profits may be estimated on basis of new company's past performance and future success); see also Charles T. McCormick, Handbook on the Law of Damages 107-08 (1935) (suggesting that new enterprise's past record of profits provides adequate basis for evaluating lost profits where record shows strong chance of success). Although proving lost profits for a new business is inherently more difficult than proving lost profits for an established business, the difficulty of proof "will not preclude recovery as long as there is proof of a reasonable basis upon which to approximate the amount." Leoni, 255 N.W.2d at 826 (relying on proof of national profits in determining amount of lost profits in California); see also Unique Sys. Inc. v. Zots Int'l, Inc., 622 F.2d 373, 378-79 (8th Cir. 1980) (relying on proof that parties contemplated a fixed profit margin for plaintiff); Cardinal, 297 N.W.2d at 267 (relying on plaintiffs' skill and expertise and proven existence of a market for plaintiffs' business). The question for new businesses is whether damages are made reasonably certain by proof of facts that enable a rational estimate of their amount. See Leoni, 255 N.W.2d at 826; see also Robert L. Dunn, Recovery of Damages for Lost Profits 365 (5th ed. 1998) (stating that whether new business may recover lost profits raises evidentiary question regarding whether history of business is adequate to project future lost profits).
Here, the jury awarded Fung $43, 941 for net lost profits incurred through January 2002 as a result of the breach of the noncompete agreement and $18,500 for future lost profits. In estimating lost profits, Gary Stamper, Fung's business manager, used a combination of the "before-and-after" and the "yardstick" methods for estimating lost profits. The "before-and-after" method compares a plaintiff's profit record before the violation with its record after it. Dunn, supra, at 732. The "yardstick" method relies on studies of the profits of business operations that are closely related to plaintiff's. Id.
Stamper based his "before-and-after" calculations on the number of patients Fung lost in the first year of practice. Stamper estimated a loss of 440 patients by taking into account the number of patients Fung started out with, the number of patients she had at the end of the first year, and a 20% attrition rate. Stamper then calculated the yearly average production rate per patient using the industry average of $300 to $439. On that basis, Stamper estimated lost gross profits of $132,00 to $193,000. To arrive at a net-profits figure, Stamper factored in a 90% collection rate and a 62% overhead rate. Stamper relied on Riemenschneider's average overhead and on the industry standard, which was approximately 62%. Stamper's net-profits estimate was $36,960 to $66, 061.
Although experts frequently use the "before-and-after" approach in estimating lost profits in business-reduction cases, in this case estimates based on the "before-and-after" approach are speculative for two reasons. First, Stamper failed to take into account that factors other than Riemenschneider's conduct may have contributed to the 440 patient loss. The practice of dentistry is personal, and Riemenschneider and Fung had drastically different approaches to dentistry. In addition to different approaches, Fung and Riemenschneider had entirely different schedules and personal demands. Fung was raising a young family, had a child ten months after buying the practice, and worked only three days per week. Fung also implemented numerous changes that altered the nature of the practice. Among other things, she changed Riemenschneider's rates and the manner in which patients scheduled treatment. She also eliminated medical-assistance claims and senior discounts and took more x-rays than Riemenschneider did. Factors other than Riemenschneider's conduct, therefore, could have contributed to the loss of patients during Fung's first year in practice and were not taken into account. Admittedly, Stamper took into account a 20% attrition rate in estimating lost profits. But the attrition rate factored only the loss that naturally occurs when a business changes hands.
Second, Stamper's reliance on the industry's $300 to $400 average production rate per patient was unreasonable. Riemenschneider averaged only $200 per patient, and the record contains no evidence that Fung's yearly production rate would have been closer to the industry average than to Riemenschneider's. Any projections based on the industry average are thus speculative. Moreover, because Fung lacked an adequate earnings record, the jury had no alternative basis on which to estimate Fung's yearly production rate. Lost-profits estimates based on the "before-and-after" method are, therefore, conjectural and not recoverable as a matter of law.
The same is true for estimates based on the "yardstick" method. As mentioned previously, the "yardstick" method takes into account the profits of business operations closely comparable to plaintiff's. Dunn, supra, at 732. A closely comparable business in this case would have been a business that had just changed hands and was operating on a part-time schedule. The statistics Fung's accountant provided, however, do not reflect whether any of the dental practices his firm surveyed was closely comparable to Fung's. Under the circumstances of this case, therefore, estimated lost profits based on the "yardstick" method are also speculative.
Because the jury had no reasonable basis upon which to estimate lost profits reliably, its lost-profits award must be vacated.
III.
Riemenschneider next argues that the jury's misrepresentation award must be vacated because (1) the district court did not properly instruct the jury on the measure of damages for misrepresentation and (2) the award is duplicative. We conclude that the jury instruction was proper but that the award is not supported by the evidence.
District courts are allowed considerable latitude in selecting the language in jury instructions. Acholm v. Wilt, 394 N.W.2d 488, 490 (Minn. 1986). We will therefore not reverse a district court's decision unless the instructions constitute an abuse of discretion. See id. Damages are recoverable in misrepresentation actions if, among other things, a plaintiff justifiably relies on the defendant's misrepresentations to his or her detriment. Davis v. Re-Trac Mfg. Corp., 276 Minn. 116, 117, 149 N.W.2d 37, 38-39 (1967). Misrepresentation damages are measured by the plaintiff's out-of-pocket loss, along with losses naturally and proximately caused by the misrepresentation. Lewis v. Citizens Agency of Madelia, Inc., 306 Minn. 194, 199, 235 N.W.2d 831, 835 (1975); Strouth v. Wilkison, 302 Minn. 297, 300, 224 N.W.2d 511, 514 (1974). A plaintiff's out-of-pocket loss is generally measured by the difference between the value of the property received and the price paid. Johnson Bldg. Co. v. River Bluff Dev. Co., 374 N.W.2d 187, 195 (Minn.App. 1985), review denied (Minn. Nov. 18, 1985). The out-of-pocket rule differs from the benefit-of-the-bargain rule in that plaintiff can recover only what he has lost, not the benefit of what he was promised. B.F. Goodrich Co. v. Mesabi Tire Co., 430 N.W.2d 180, 182 (Minn. 1988).
The court instructed the jury that
"[d]amages for fraud or misrepresentation are limited to the difference between the actual value of the property received and the price paid for it and any other damages that were directly caused by relying on the fraud or misrepresentation."
The jury instruction was proper.
But because Fung did not prove separate damages for misrepresentation, with one exception, the award is improper. A reviewing court may set a damage award aside only if the award is manifestly contrary to the evidence, viewed in the light most favorable to the verdict. Imperial Devs. Inc. v. Seabord Sur. Co., 518 N.W.2d 623, 626 (Minn.App. 1994), review denied (Minn. Aug. 24, 1994). Well-settled Minnesota law allows a plaintiff to recover under both a tort and a contract theory, provided the plaintiff proves separate damages for each theory. Brooks v. Doherty, Rumble Butler, 481 N.W.2d 120, 128 (Minn.App. 1992) (holding that attorney could recover damages for both fraudulent misrepresentation and breach of contract), review denied (Minn. Apr. 29, 1992); cf. Wirig v. Kinney Shoe Corp., 461 N.W.2d 374, 379 (Minn. 1990) (holding that double recovery for same harm is prohibited). Fung did not meet her burden of proving misrepresentation damages.
The evidence shows that Riemenschneider misrepresented that he was a fee-for-service provider, that he used a single-fee schedule, and that he was not a member of discount-insurance plans. Fung relied on these misrepresentations in valuing the practice before she signed the purchase agreement. But because she had complete access to the practice's business records before she signed the purchase agreement, Fung's reliance on Riemenschneider's representations was unreasonable. See Nicollet Restoration, Inc. v. City of St. Paul, 533 N.W.2d 845, 848 (Minn. 1995) (holding that developer could not recover against city in promissory-estoppel or fraud action because reliance on city officials' representations was unreasonable).
Fung also claims that she incurred out-of-pocket expenses as a result of Riemenschneider's misrepresentations, including $19,919.42 for a new operatory, $10,604.38 for new equipment, and $2,430 for new software. The evidence supports a finding that Fung incurred the cost of new software as a result of Riemenschneider's misrepresentation that he had a multi-user agreement for the software. But the evidence does not support a finding that Fung incurred the cost of the operatory or the cost of new equipment and furniture in reliance on Riemenschneider's misrepresentations. Fung wanted a hygienist and purchased the operatory on her own accord for that purpose. That Fung did not fully benefit from her investment because Riemenschneider misrepresented the number of patients he had does not make the operatory an out-of-pocket loss naturally arising from the misrepresentation. See B.F. Goodrich Co., 430 N.W.2d at 182 (stating misrepresentation plaintiffs may recover only out-of-pocket losses, not benefit of what they were promised). Fung still has the value of the operatory and continues to use it to generate income.
Fung is similarly not entitled to recover the cost of new equipment and furniture on a misrepresentation theory. Fung had the opportunity to examine both the furniture and the equipment before she signed the purchase agreement. Any reliance on Riemenschneider's representation was therefore unreasonable. In any event, Riemenschneider represented the condition of the equipment and the furniture in the purchase agreement. Accordingly, losses incurred in connection with the equipment and the furniture were breach-of-contract rather than misrepresentation losses.
We thus conclude that, except for the $2,430 spent for new software, Fung did not satisfy her burden of proving misrepresentation damages.
IV.
Riemenschneider next argues that the jury's award for loss of independent-contractor production is inconsistent with evidence that Fung, rather than Riemenschneider, breached the independent-contractor agreement. But the jury specifically found that Fung did not breach the agreement, and the record contains sufficient competent evidence reasonably tending to support the jury's finding.
Riemenschneider also claims that the award should be reduced because the jury awarded more for breach of the independent-contractor agreement than Fung requested. According to Riemenschneider, Fung claimed damages of $44,800, and the jury awarded her $59,020. But the jury awarded Fung $59,020 for breach of both the purchase and the independent-contractor agreements. It is impossible to allocate how much the jury awarded for each, and there is no basis to conclude that it awarded more for breach of the independent-contractor agreement than Fung requested. The award is thus proper.
V.
Last, Riemenschneider argues that the damages Fung sought for losses resulting from her decision to cancel her contract with the Indian Health Board should not have been submitted to the jury. Specifically, Riemenschneider argues that the record contains no evidence that Fung's alleged loss resulted from Riemenschneider's conduct. We disagree. Fung and Stamper testified that Fung had to terminate her association with the Indian Health Board as a result of Riemenschneider's breach of the independent-contractor agreement. The jury found that Riemenschneider breached the independent-contractor agreement and could have reasonably concluded, based on Fung's and Stamper's testimony, that the breach required Fung to end her association with the Indian Health Board to devote her full attention to her practice.