Jiang et al v. Hannon Group Ltd et al
Filing
87
ORDER signed by Judge J P Stadtmueller on 12/10/15 that Plaintiffs, Yan Fang Jiang and Reedigroup LTD, recover from Defendants, Hannon Group LTD and Todd J. Hannon, jointly and severally, damages in the aggregate totaling $3,047,796.51, together with such costs as may be awarded and taxed by the Clerk of Court. See Order. (cc: all counsel)(nm)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
YAN FANG JIANG and
REEDIGROUP LTD.,
Plaintiffs,
Case No. 154-CV-309-JPS
v.
HANNON GROUP LTD. and
TODD J. HANNON,
ORDER
Defendants.
This case arises out of a contractual dispute relating to the production
and sale of lunch bags. (See generally Docket #65). The plaintiffs alleged a
suite of claims flowing from that dispute, including: (1) breach of fiduciary
duty; (2) breach of contract; (3) breach of the implied duty of good faith; (4)
conversion; (5) violations of Wis. Stat. § 895.446; and (6) tortious inference.
(Docket #65). The defendants’ neglectful conduct during the course of the
litigation, however, prevented this case being decided on its merits; to date,
two default judgments1 have been entered against them for failing to abide
by Court deadlines, causing unnecessary delay, and disregarding applicable
Local and Federal Rules of Civil Procedure. (See Docket #40, #75). Most
recently, the Court granted the plaintiffs’ second motion for the entry of
default judgment (Docket #66) because the defendants failed to file a timely
response to the plaintiffs’ amended complaint (see Docket #75).
At this stage of the litigation, the Court is left with the sole
responsibility of determining an appropriate damage award to compensate
1
The Court, finding good cause to vacate entry of default and that the
defendants took quick action to correct their fault, granted a motion to vacate
default judgment on February 10, 2015. (Docket #56 at 6).
the plaintiffs’ losses. (See Docket #75 at 9). At bottom, the plaintiffs’ argument
is that they are entitled to two sources of monetary damages under the well
pleaded facts of the amended complaint: (1) the manufacturing costs of the
lunch bags; and (2) a 16% performance fee from the defendants’ sales of those
lunch bags. (See Docket #77 at 2). After accounting for various corrections
that were brought to light in the defendants’ opposition (Docket #79), the
plaintiffs claimed their total damage award to be $3,290,629.05. (See Docket
#81 at 16). The defendants vigorously dispute this figure, arguing that both
the methodology for calculating the plaintiffs’ damage award, and the values
that went into its formulation, are flawed. (See generally Docket #79).
The damages issue has been fully briefed by the parties, and is thus
ripe for adjudication.
1.
BACKGROUND2
The plaintiff, Yan Fang Jiang (“Jiang”), was in the business of
developing, manufacturing, and marketing handbags and related products.
(Docket #65 ¶ 10). In 2006, Jiang met Todd Hannon (“Hannon”), who was in
China on a business trip. (Docket #65 ¶ 10). The parties’ relationship began
in 2008 when Jiang and Hannon formed a partnership to manufacture and
sell lunchbags. (Docket #65 ¶¶ 14-15). Together they developed a brand of
insulated lunch bags known as “Sachi.” (Docket #26 ¶ 17).
Operationally, Hannon focused on sales and marketing in the United
States, while Jiang focused on design, sourcing materials, and manufacturing
in China. (Docket #65 ¶ 18). Specifically, Hannon and his company, Hannon
2
As the Court must accept all well-pleaded allegations relating to
liability as true, the facts are taken from the amended complaint. (Docket
#65); Wehrs v. Wells, 688 F.3d 886, 892 (7th Cir. 2012).
Page 2 of 23
Group, would solicit and collect orders in the United States. (Docket #65
¶ 25). Those orders would then be filled by Reedigroup, a Hong Kong
company set up jointly by the parties. (Docket #65 ¶ 25). Hannon Group
would then pay to Reedigroup all of Reedigroup’s manufacturing expenses,
plus an additional 16% of Hannon’s or Hannon Group’s sale price per bag,
multiplied by the number of bags shipped. (Docket #65 ¶ 25). This 16% fee,
otherwise known as the “performance fee,” was comprised of an 8% royalty
fee and an 8% management fee. (Docket #65 ¶ 25). Initially, Hannon and
Jiang were each 50% shareholders of Reedigroup; though in May of 2010
Jiang acquired Hannon’s shares and became the sole shareholder of
Reedigroup. (Docket #65 ¶¶ 23-24, 26).
Later, in November of 2010, Hannon and Jiang renegotiated the terms
of their relationship. (Docket #65 ¶ 28). The parties agreed that Reedigroup
would charge to Hannon Group: (1) its expenses of manufacturing, the
factory costs plus a percentage mark-up; and (2) continue to charge the same
16% performance fee. (Docket #65 ¶ 28). On December 17, 2010, Hannon
presented Jiang with a Supply and Manufacturing Agreement (“Supply
Agreement”). (Docket #65 ¶ 29). Jiang executed the Supply Agreement on
behalf of Reedigroup based on her belief and understanding that it reflected
the current agreement of the parties. (Docket #65 ¶ 30). Indeed,
notwithstanding the execution of that agreement, the parties continued to
operate all aspects of their business relationship as they had since November
of 2010, with Reedigroup charging to Hannon Group: (1) its manufacturing
costs, plus a percentage markup; and (2) the performance fee, comprised of
an 8% royalty fee and an 8% management fee. (Docket #65 ¶ 31).
Page 3 of 23
Business deteriorated in 2013. (Docket #65 ¶ 33). As a result, Jiang
began to discuss a large and growing balance owed by Hannon Group.
(Docket #65 ¶ 33). Since there was only one primary customer for the lunch
bags, the television shopping channel QVC, Inc. (“QVC”), Jiang offered to
facilitate other sales of the products in other geographic markets to increase
profits. (Docket #65 ¶ 33). In response, Hannon announced that he and
Hannon Group alone owned the Sachi brand, and he would market the
brand as he saw fit. (Docket #65 ¶ 34). The parties’ business dealings further
unraveled to the point where Hannon began to: (1) entice Reedigroup’s
employees to begin working for Hannon Group; (2) establish Hannon
Group’s own office in China; (3) tell other employees of Reedigroup that
Reedigroup was moving; and (4) place orders in the name of Hannon Group
directly with Reedigroup’s suppliers and manufacturers. (Docket #65 ¶ 37).
Additionally, in June of 2013, Hannon contacted one of the factories where
Reedigroup was manufacturing Sachi lunch bags, and had all products
shipped directly to Hannon Group. (Docket #65 ¶ 38). This series of events
caused significant damage to Reedigroup’s relationships with its suppliers
and manufacturers. (Docket #65 ¶ 37). Reedigroup filed the instant case on
March 21, 2014. (Docket #1).
2.
LEGAL STANDARD
As default judgment has been entered against the defendants (Docket
#75), the Court must accept all well-pled facts relating to liability as true.
Wehrs, 688 F.3d at 892. However, that does not relieve the plaintiffs of the
responsibility to prove up their damages under Rule 55(b)(2) of the Federal
Rules of Civil Procedure. Indeed, “even when a default judgment is
warranted based on a party’s failure to defend, the allegations in the
Page 4 of 23
complaint with respect to the amount of the damages are not deemed true,”
and the Court must conduct an inquiry to ascertain the amount of damages
with reasonable certainty. e360 Insight v. The Spamhaus Project, 500 F.3d 594,
602 (7th Cir. 2007) (quoting In re Catt, 368 F.3d 789, 793 (7th Cir. 2004)).
Judgment by default may not be entered without a hearing on damages
unless “the amount claimed is liquidated or capable of ascertainment from
definite figures contained in the documentary evidence or in detailed
affidavits.” Id. (quoting Dundee Cement Co. v. Howard Pipe & Concrete Prods.,
Inc., 722 F.2d 1319, 1323 (7th Cir. 1983)).
In Wisconsin,3 “[a]n award of damages for breach of contract should
compensate the injured party for losses necessarily flowing from the breach.”
Ma v. Cmty. Bank, 686 F.2d 459, 466 (7th Cir. 1982) (citing Repinski v.
Clintonville Federal Savings & Loan Assoc., 49 Wis.2d 53, 58, 181 N.W.2d 351
(1970)). Compensatory contract damages are designed to put the nonbreaching party in the same position had there been no breach and “must be
proved with reasonable certainty.” Id.
In recovery under tort, a plaintiff must prove that the defendant’s
breach directly and proximately caused his or her damages. Jones v. Secura
3
When sitting in diversity, the Court must apply the choice of law principles
of the forum state to determine what substantive law governs the proceedings.
Tanner v. Jupiter Realty Corp., 433 F.3d 913, 915 (7th Cir. 2006). In contract matters
such as this one, the Wisconsin Supreme Court utilizes a “grouping-of-contacts
approach,” as embodied in the Restatement (Second) of Conflicts, to determine the
proper law to apply. Sybron Transition Corp. v. Sec. Ins. Co. of Hartford, 107 F.3d 1250,
1255 (7th Cir. 1997) (citing Urhammer v. Olson, 39 Wis.2d 447, 159 N.W.2d 688
(1968)). In this case, the alleged agreement was negotiated and performed by a
Wisconsin resident (i.e., Hannon) and a Wisconsin Corporation (i.e., Hannon
Group). (See Docket #65). Thus, because the contract in dispute has the most
“significant relationship” with Wisconsin, Wisconsin law governs. See In re Jafari,
569 F.3d 644, 649 (7th Cir. 2009).
Page 5 of 23
Ins. Co., 2002 WI 11, ¶ 33, 249 Wis. 2d 623, 645, 638 N.W.2d 575, 586. “Tort
law is designed to provide full compensation for persons who are injured by
another's unreasonable conduct.” N. Air Servs., Inc. v. Link, 2012 WI App 27,
¶ 16, 339 Wis. 2d 489, 809 N.W.2d 900. Wisconsin courts permit claimants
recovering under the tort of breach of fiduciary duty to plead either
restitutionary or compensatory damages. Pro-Pac, Inc. v. WOW Logistics Co.,
721 F.3d 781, 77-78 (7th Cir. 2013).
3.
DAMAGES
The plaintiffs argue that under the terms of the parties’ agreement the
Court should look to the following equation in calculating a proper damage
award:
manufacturing costs + performance fee – payments collected – credits due
(see Docket #77 at 4; Docket #65 ¶¶ 25, 28).
Using this equation as a guide, the plaintiffs provide extensive
documentary evidence to prove up their damages. (Docket #76, Exs. 1-8).
First, to calculate the manufacturing costs of the lunch bags, the plaintiffs
provide all of the invoices sent from Reedigroup to Hannon Group reflecting
the bags’ manufacturing costs from 2010 until 2013. (See Docket #78, Exs. 1-3).
This figure originally totaled to $11,743,945.42. (Docket #76, Ex. 2). Second,
for the performance fee calculation, the plaintiffs relied on the fact that QVC
was the primary customer of the Sachi lunch bags. (Docket #77 at 2). Using
Hannon Group’s QVC purchase orders (Docket #78, Exs. 4-5), the plaintiffs’
original calculations showed that the defendants’ total income from QVC
purchases during the relevant time frame was $22,225,325.27. (Docket #76,
Ex. 5). Third, the plaintiffs provided bank records from the relevant time
frame to show all of the payments made by Hannon Group to Reedigroup
Page 6 of 23
over the course of the parties’ agreement. (Docket #76, Exs. 6-7). The total
amount of payments Hannon Group made to Reedigroup was $11,515,137.40.
(Docket #77 at 3). Finally, the only credit that the plaintiffs originally claimed
they owed to the defendants was in the amount of $311,289.98. (Docket #77
at 3).
In general, the defendants did not dispute the content of the
manufacturing invoices, QVC purchase orders, and bank records. (See
generally Docket #79). However, the defendants do point out: (1) two QVC
purchase orders that were reported in error (Docket #81 at 5); and (2) eight
QVC purchase orders that were never fulfilled. (Docket #81 at 6). The
plaintiffs conceded both of these errors and reduced their performance fee
accordingly. (Docket #81 at 16). In addition, the defendants argued that they
are entitled to certain credits based on payments made directly to the lunch
bag factories, instead of the plaintiffs. (Docket #79, Ex. 1 ¶ 21). Rather than
the $311,289.98 worth of merchandise that the plaintiffs originally calculated,
the plaintiffs admitted that the defendants were owed a credit of $358,088.54
for factory-purchased lunch bags. (Docket #81 at 14). Accounting for these
errors, then, the plaintiffs’ proposed damages calculation became:
$11,743,945.42 + $3,419,909.57 – $11,515,137.40 – $358,088.54
which is equal to $3,290,629.05 in damages.4 (Docket #81 at 16).
4
The plaintiffs’ reply brief somewhat restructures this equation, but for the
sake of consistency, the Court will continue to use the original format that the
plaintiffs proposed. (See Docket #81 at 16).
Page 7 of 23
The defendants put forth a litany of additional reasons as to why this
calculation is flawed.5 (See generally Docket #79). The defendants argue that:
a.
The nature of the parties’ relationship requires a three-part
“zone” approach to the damages calculation (Docket #79 at 2);
b.
The plaintiffs’ proposed manufacturing costs are flawed
because:
i.
ii.
c.
The total amount of Reedigroup’s invoices is incorrect
(Docket #79, Exs. 12, 16); and
The defendants are not liable for any “mark-up” on
factory costs (Docket #79 at 8);
The performance fee calculation is flawed because it:
i.
Relies on an incorrect total of QVC purchase orders
(Docket #79 at 4-5);
ii.
Fails to account for returned merchandise from QVC
(Docket #79 at 8); and
5
After the Court’s deadline to file an opposition, the defendants filed a
response to the plaintiffs’ reply titled, “Motion to Strike” and “Motion for
Evidentiary Hearing.” (Docket #84). Without having been authorized to file a
surreply, the defendants’ motion contains over fifteen pages of argument
responding to the plaintiffs’ reply. (Docket #84). Procedurally, the defendants argue
that the plaintiffs’ reply was untimely (Docket #84 at 1). It was not. See Civil L.R.
65(b)(2); Fed. R. Civ. P. 6(a)(1)(C); Fed. R. Civ. P. 6(d). Substantively, this filing
raises no new issues from that which were raised in the defendants’ original
response (see Docket #79) and contravenes the Court’s express Order regarding the
damages briefing schedule (see Docket #75 at 9-10). Notably, the plaintiffs have also
responded to the defendants’ latest motion. (Docket #86). However, as the parties
have raised no new arguments, the Court will address them as appropriate herein.
Page 8 of 23
iii.
d.
Does not deduct certain Hannon Group expenses6
(Docket #79 at 8);
Defendants are entitled to three credits:
i.
ii.
A $83,086.50 credit (Docket #79, Ex. 15);
iii.
e.
A $40,000.00 credit (Docket #79, Ex. 1 ¶ 7);
A $477,256.32 credit (Docket #79, Ex. 12); and
Hannon cannot be personally liable for the damage award
(Docket #79 at 11).
Each of these arguments will be discussed in turn.
3.1
General Methodology
The parties agree that the damages calculation must reflect their
contractual obligations to each other. However, the parties dispute what
those obligations were and, thus, how to approach the computation of
damages.
On the one hand, the plaintiffs argue that they are entitled to a 16%
performance fee on products sold and manufacturing costs accumulated
throughout the course of the parties’ relationship. (See generally docket #77).
Even though the parties signed a Supply Agreement in November of 2010,
the plaintiffs argue that the payment terms under the agreement were
6
The defendants also argue in their motion for a hearing that the
performance fee calculation proposed by the defendant is inconsistent with the
terms of the contract as alleged in the plaintiffs’ original complaint. (Docket #84 at
2-3). This argument is entirely without merit, as the amended complaint is now the
operative pleading in this matter. Duda v. Bd. of Educ. of Franklin Park Pub. Sch. Dist.
No. 84, 133 F.3d 1054, 1056-57 (7th Cir. 1998).
Page 9 of 23
generally consistent7 from 2009 until 2013. (See Docket #77 at 1; see also
Docket #65 ¶¶ 25-31).
The defendants, on the other hand, argue that two significant
developments—Jiang’s purchase of Hannon’s share in Reedigroup and the
execution of the Supply Agreement—defined three time periods, or “zones,”
in which the parties bore distinct obligations. (See Docket #79 at 2-3). The first
zone corresponded with the time period when Hannon and Jiang were 50%
shareholders of Reedigroup, roughly from 2009 until February of 2010.
(Docket #79 at 2). The second zone ran from February of 2010 until the parties
executed the Supply Agreement in December of 2010. (Docket #79 at 2). The
third zone lasted from the time the parties executed the Supply Agreement
until their relationship terminated in 2013. (Docket #79 at 2-3). The
defendants generally agree that the terms of the parties’ agreement during
zone 1 and zone 2 were defined by paragraph 25 of the amended complaint.
(Docket #79 at 2-3). However, unlike the plaintiffs, the defendants argue that
the damages calculation for zone 3 must be governed by the Supply
Agreement. (Docket #79 at 3).
The Court must look to the well pled allegations of the amended
complaint to determine the nature of the parties’ agreement. Yang v. Harbin,
37 F.3d 282, 286 (7th Cir. 1994) (“In the context of a default judgment, the
district court is obliged to accept as true all facts alleged by the plaintiff and
all reasonable inferences contained therein.”).
Doing so, it is clear that, as the plaintiffs allege, paragraph 25 of the
amended complaint accurately describes the parties’ relationship from at
7
The amended complaint indicates, however, that an additional mark-up fee
on factory costs was added to the parties’ agreement in November of 2010. (Docket
#65 ¶ 28). This point will be discussed at length below. (See infra Part 3.2).
Page 10 of 23
least 2009 until November of 2010. The parties do not dispute, and the Court
agrees, that the parties were liable under contract to each other according to
the terms outlined in paragraph 25 of the amended complaint during this
time period.8 (See Docket #77 at 2-3; Docket #79 at 23). Paragraph 25 states
that Hannon Group was required to “pay to Reedigroup all of Reedigroup’s
manufacturing expenses, plus an additional 16% of Hannon’s or Hannon
Group’s sale price per bag multiplied by the number of bags shipped, as
Jiang’s share of the profit.” (Docket #65 ¶ 25). In other words, the defendants
must pay all of Reedigroup’s manufacturing costs and the 16% performance
fee for sales that occurred from at least 2009 until November of 2010.
The parties’ contractual relationship did not change upon the signing
of the Supply Agreement. According to the amended complaint, in
November of 2010, the defendants “agreed that Reedigroup would charge
Hannon Group, for its expenses of manufacturing, the factory costs plus a
percentage mark-up, and in addition, continue to charge an 8% royalty fee
and 8% management fee as its share of the profits.” (Docket #65 ¶ 28). Thus,
the only term that changed as of November of 2010 was the addition of a
manufacturing cost “mark-up.” (Compare Docket #65 ¶ 25 with Docket #65
¶ 28). Thereafter, however, “Jiang executed the Supply and Manufacturing
Agreement on behalf of Reedigroup based on her belief and understanding
that it reflected the current agreement of the parties. Notwithstanding the
execution of the Supply and Manufacturing Agreement [on December 17,
8
As the allegations in the amended complaint do not square with the threepart zone methodology that the defendants propose, the Court will not rely on that
analytical framework for the purpose of this Order. (See Docket #65). Instead, the
Court will apply paragraphs 25-31 of the amended complaint (Docket #65 ¶¶ 2531), which outline the terms of the parties’ agreement, to calculate the appropriate
damages in this matter.
Page 11 of 23
2010], Jiang and Hannon continued to operate all aspects of their business
relationship as they had since November 2010.…” (Docket #65 ¶¶ 30-31).
These paragraphs indicate that the written terms of the Supply
Agreement did not alter the parties’ contractual obligations; rather, the
parties continued to operate with the understanding that the defendants
owed to the plaintiffs both manufacturing costs (plus a mark-up) and a 16%
performance fee. (See Docket #65 ¶¶ 28-31). The defendants, by virtue of their
default, have conceded their contractual liability under these facts. See Wehrs,
688 F.3d at 892; see also Olcott v. Delaware Flood Co., 327 F.3d 1115, 1125 (10th
Cir. 2003) (refusing to accept defendant’s position that the Court should
interpret the terms of the parties’ underlying contract because the
defendant’s default judgment foreclosed any merits-based arguments.)
The defendants’ position—that the Supply Agreement’s terms control
the computation of damages from December 17, 2010 until 2013—is a liability
argument. The defendants are, in essence, arguing that they were not bound
by the parties’ agreement as alleged in the amended complaint. (See Docket
#65 ¶¶ 25-31). Instead, the defendants argue they were bound under a
different agreement, namely, the Supply Agreement and/or a certain course
of performance, which changed the terms of the parties’ contract. (See Docket
#79 at 5-8). However, the defendants’ liability argument (i.e., we were bound
by “x” and not by “y”) was foreclosed by virtue of their failing to litigate this
case on the merits. Wehrs, 688 F.3d at 892; Olcott, 327 F.2d at 1125. Any
attempt by the defendants to characterize their argument differently is
simply a distraction from their endeavor to defend against the claims that
they failed to adequately support prior to default.
Page 12 of 23
In sum, the computation of damages is not controlled by the Supply
Agreement, but rather the agreement as reflected in the amended complaint.
(See Docket #65 ¶¶ 25-31). The amended complaint reveals that the only time
in which the parties’ obligations changed was in November of 2010, when the
parties’ agreed to an additional mark-up fee on factory costs. (Docket #65
¶¶ 25, 28, 30-31). Overall, the amended complaint establishes that the
damages in this case are derived from essentially two terms, exactly as the
plaintiffs argue: manufacturing costs and a performance fee. (See Docket #65
¶¶ 28-31).
3.2
Manufacturing Cost Calculation
The parties to do not dispute that at least a portion of the plaintiffs’
damage award must be derived from Reedigroup’s manufacturing costs. (See
Docket #77, #79). However, the precise amount of manufacturing costs owed
to the plaintiffs is in dispute.
First, the parties disagree as to the sum of Reedigroup’s
manufacturing invoices. (Docket #81 at 12-13). On the one hand, the plaintiffs
provide hundreds of pages, including a summary, of Reedigroup’s invoices
to the defendants. (Docket #76, Exs. 1-3). According to the plaintiffs, these
invoices reveal that the plaintiffs’ manufacturing costs totaled to
$11,743,945.42. (Docket #77 at 2). On the other hand, the defendants assert
that the plaintiffs’ manufacturing invoices only totaled to $7,903,828.94. (See
Docket #79, Exs. 12, 16). In support of this figure, the defendants cite to
“Exhibit 14” (Docket #79, Ex. 12) and “Reedigroup’s Invoices.” (Docket #79,
Ex. 16). But, neither Exhibit 14 nor the generic reference to Reedigroup’s
invoices establish how or why the defendants’ calculation is different from
the plaintiffs’.
Page 13 of 23
The defendants failure to support their position with proof, i.e.,
through disputed invoices, etc., leaves the Court with an incomplete picture
of the defendants’ position. Without a more precise reference or explanation
as to what invoices were relied upon and/or disputed in developing the
$7,930,167.94 figure, the Court simply cannot accept and adequately address
the defendants’ calculation.
The plaintiffs’ calculations and supporting invoices, in contrast, are
definite and supported by thorough documentary evidence. (Docket #76, Exs.
1-3); see Dundee Cement Co., 722 F.2d at 1323 (explaining that courts need not
conduct evidentiary hearings on damages in a default judgment case when
“the amount claimed is liquidated or capable of ascertainment from definite
figures contained in the documentary evidence or in detailed affidavits”).
Thus, the Court will accept the plaintiffs’ proposal that Reedigroup’s
manufacturing invoices to the defendants totaled to $11,743,945.42. (Docket
#77 at 2).
Second, the defendants argue that the plaintiffs’ invoices are flawed
because they contain unauthorized mark-ups. (Docket #79 at 4). Based on this
observation, the defendants deduct mark-up charges from the plaintiffs’
manufacturing invoices in order to determine their proposed manufacturing
costs figure. (Docket #79, Exs. 12, 16). The defendants claim that they were
able to calculate this mark-up amount by comparing: (1) purchase orders
from Reedigroup to Chinese manufacturers; with (2) the invoices from
Page 14 of 23
Reedigroup sent to the defendants.9 (Docket #79 at 4). This difference thereby
provided the defendants with an accurate sense of the “real” manufacturing
cost of the Sachi lunch bags. (Docket #79, Exs. 14, 16).
As a preliminary matter, the well pled allegations of the amended
complaint state that in November of 2010, the parties explicitly agreed that
the plaintiffs would collect “factory costs plus a percentage mark-up.”
(Docket #65 ¶ 28) (emphasis added). Thus, the defendants’ argument that
they are not liable for mark-ups after November of 2010 under the terms of
the Supply Agreement—which is inapplicable to begin with (see supra Part
3.1)—is plainly without merit. Any argument to the contrary is a liability
argument (i.e., we did not agree to pay “x” under the terms of our
agreement) which is inappropriate to litigate at this juncture. Wehrs, 688 F.3d
at 892; Olcott, 327 F.2d at 1125.
However, prior to November 2010, the amended complaint makes no
mention of mark-ups having been authorized under the parties’ agreement.
In fact, the amended complaint highlights the fact that the parties altered
their agreement in November of 2010 to include these mark-up fees. (Compare
Docket #65 ¶ 25 with Docket #65 ¶ 28). The plaintiffs do not address this
issue; they likewise do not contest the veracity of the defendants’ calculated
mark-up values or the purchase orders from Reedigroup to the Chinese
9
The defendants apparently obtained the purchase orders from Reedigroup
to Chinese manufacturers from Min Li, a former employee of Reedigroup. (Docket
#79 at 4-5; Docket #79, Ex. 2). Min Li’s affidavit attests to the veracity of the
defendants’ Exhibit 24, which contains over 77 pages of purchase orders from
Reedigroup written in a combination of both Chinese and English. (Docket #79, Ex.
24). Using these purchase orders, the defendants provide a spreadsheet that breaks
down the differences between Reedigroup’s invoices to the defendants and
Reedigroup’s invoices to Chinese manufacturers. (See Docket #79, Ex. 14).
Page 15 of 23
manufacturers. (See Docket #79, Ex. 14). Instead, the plaintiffs support their
position that all of the mark-ups were authorized by merely citing to
paragraph 28 of the complaint—which corresponds to the parties’ agreement
beginning in November of 2010—and arguing that the defendants’ position
is foreclosed by virtue of the default judgment. (Docket #81 at 10).
While the Court agrees that this issue touches on the parties’ liability
under the contract, there is no allegation in the complaint to support the
assertion that the plaintiffs were entitled to mark-ups on factory costs prior
to November 2011. (See Docket #65 ¶ 25). While the plaintiffs may rely on the
well pled allegations for the purpose of arguing liability, they cannot create
liability arguments from allegations of the amended complaint that are not
properly pled. See Wehrs, 688 F.3d at 892. As it is the plaintiff’s burden to
prove their damages to a reasonable certainty under Federal Rule of
Procedure 55, the Court cannot award mark-ups from April of 2010 until
November of 2010. (See Docket #79, Ex. 14).
Thus, under the allegations of the well pled amended complaint, the
plaintiffs are entitled to their costs of manufacturing from 2009 until 2013, as
demonstrated in the invoices that Reedigroup provided to the defendants.
(See Docket #76, Exs. 1-3). However, the amended complaint demonstrates
that the parties agreed to include mark-ups on manufacturing costs in
November of 2010, and thus the plaintiffs are only entitled to mark-ups on
manufacturing costs that were invoiced on or after that date. (Docket #65
¶¶ 25, 28). According to the defendants’ manufacturing invoices and
summary spreadsheets, the total value of those unauthorized mark-ups from
2009 until November of 2010 was $159,746.04. (See Docket #79, Exs. 14, 24).
The plaintiffs’ costs of manufacturing, therefore, total $11,743,945.42, less
Page 16 of 23
$159,746.04, which equals $11,584,199.38. (See Docket #76, Exs. 1-3; Docket
#79, Ex. 14).
3.3
Performance Fee Calculation
The 16% performance fee owed to the plaintiffs applied to the “sale
price per bag multiplied by the number of bags [that Hannon Group]
shipped.” (Docket #65 ¶ 25). Because QVC was the defendants’ primary
customer, the plaintiffs provided all the QVC purchase orders from the
relevant time frame in order to calculate the appropriate fee. (Docket #77 at
2-3; Docket #76, Exs. 4-5). In response, the defendants argue that: (1) the
plaintiffs’ spreadsheet of QVC purchase orders contained two numerical
flaws totaling $9,958.64 (Docket #79, Ex. 9 at 1); (2) twelve QVC purchase
orders totaling $1,183,257.80 were never fulfilled by the plaintiffs, and thus
may not be used to calculate the fee (Docket #79, Ex. 9 at 2); (3) returned
items from QVC were not subject to the performance fee (Docket #79 at 5);
and (4) various expenses in making QVC sales were deductible from the
performance fee (Docket #79 at 5).10
The plaintiffs have conceded the first two arguments. (See generally
Docket #81). First, as discussed above (see supra Part 3), the plaintiffs
conceded that two line items in their original QVC purchase order
spreadsheet were incorrect and, therefore, reduced the proposed QVC
purchase order total by $9,958.64. (Docket #81 at 5). Second, the plaintiffs also
conceded that Reedigroup did not fulfill eight QVC orders, which totaled
10
The defendants also assert in the context of their mark-up argument that,
alternatively, the plaintiffs waived the 16% performance fee by charging mark-ups
instead. (Docket #79 at 9). However, as discussed in Parts 3.1 and 3.2, the
defendants have forfeited their ability to argue the merits of the plaintiffs’ contract
claim as a result of their default judgment. (Docket #75); Wehrs, 688 F.3d at 892;
Olcott, 327 F.2d at 1125.
Page 17 of 23
$840,931.80 worth of merchandise (Docket #81 at 4-6), and thus have reduced
their purchase order and performance fee accordingly.11
With regard to the defendants’ final two arguments, the plaintiffs
assert that returned products and the defendants’ expenses were never
factored into the 16% performance fee under the contract; as a result, the
defendants’ deductions on those bases are unfounded. (See Docket #81 at 6,
12). The Court finds these arguments persuasive.
The well pled allegations of the plaintiffs’ amended complaint do not
indicate that the performance fee was subject to a reduction based on
returned merchandise and/or the defendants’ expenses. (See Docket #65).
Instead, the terms of the parties agreement is based on the “sale price per
bag” and “number of bags shipped.” (Docket #65 ¶ 25). Thus, the defendants
argument about the performance fee applying only to “net fees” is to no
avail. (See Docket #79 at 8). The defendants had two opportunities to litigate
their interpretation of the contract (i.e., we agreed to “x” and not “y”), but
those opportunities were twice waived when they failed to do so. (See Docket
#45, #75). At this stage of the litigation, the Court finds that the terms of the
parties’ agreement are unambiguous and do not reference the deductions
that defendants propose. (Docket #25 ¶¶ 25, 28). Thus, the Court will not
reduce the QVC purchase order total to account for returned lunch bags or
the defendants’ sales expenses.
In sum, the portion of the plaintiffs’ damages corresponding to the
performance fee is appropriately derived from the documentary evidence of
11
The plaintiffs provide proof of shipping (packing lists and bills of lading)
for the four other purchase orders that the defendants claimed Reedigroup did not
fulfill. (See Docket #81 at 6; see also Docket #82, Exs. 1-4). Thus, the Court finds that
these four purchase orders are subject to the 16% performance fee.
Page 18 of 23
QVC purchase orders. (See Docket #76, Exs., 4-5; Docket #82 ¶ 2). These
purchase orders indicate that QVC purchased $22,225,325.27 worth of
merchandise, less the $9,958.64 and $840,931.80 deductions that the plaintiffs
conceded. (Docket #76, Exs. 4-5; Docket #81 at 5-6). Thus, the QVC purchase
orders total to $21,374,434.83, and the 16% performance fee thereof equals
$3,419,909.57. (See also Docket #81 at 16) (same).
3.4
Credits Due12
The defendants argue that they are entitled to three credits in the
amounts of: (1) $40,000 (Docket #79, Ex. 1 ¶ 7); (2) $83,086.50 (Docket #79, Ex.
15); and (3) $477,256.32 (Docket #79, Ex. 12). The plaintiffs argue that none of
these credits are valid. (Docket #81).
First, the $40,000 credit that the defendants propose relates to a
payment that the defendants made to Jiang in June of 2009. (See Docket #79,
Ex. 1 ¶ 7). However, as the plaintiffs point out, Hannon admits that this
special payment was made to Jiang for her efforts in developing the Sashi
line of products. (Docket #79, Ex. 1 ¶ 7). Thus, the $40,000 had nothing to do
with the parties’ contractual performance, which is at issue here. As the
$40,000 payment did not flow from plaintiffs’ manufacturing costs or the
performance fee, it is inapplicable to the damage calculation in this case.
Second, the defendants claim that they received a “credit memo” from
the plaintiffs in the amount of $83,068.50, which must be applied against the
damages award. (Docket #79, Ex. 15). The plaintiffs do not dispute that they
12
The defendants do not contest the bank records and the summary
spreadsheet showing the payments that Hannon Group made to the plaintiffs
(Docket #76, Exs. 6-7). Because of this, the Court will not address in detail the figure
representing the total amount of payments that the defendants made to the
plaintiffs, which is $11,515,137.40. (Docket #77 at 3). The plaintiffs have provided
ample documentation and proof thereof. (See Docket #76, Exs. 6-7).
Page 19 of 23
sent this credit to the defendants because the defendants had overpaid
Reedigroup Invoice 02051010RG. (Docket #81 at 11). However, the plaintiffs
argue that this figure has already been taken into account by virtue of the
plaintiffs’ damages methodology. (Docket #81 at 11). In essence, the plaintiffs
argue that, under their approach, all of Reedigroup’s invoices were totaled
and all of the payments received from the defendants were totaled. (Docket
#81 at 11). The payments were then subtracted from the total invoice figure.
(Docket #81 at 11). Thus, the plaintiffs argue that the overpayment, in effect,
is accounted for because it was applied to other invoices. (Docket #81 at 11).
While the Court understands the plaintiffs’ logic, the proof supporting
that argument is not sufficient to satisfy the plaintiffs’ burden. The
plaintiffs’ argument essentially rests on the premise that the defendants
overpaid invoice number 02051010RG. However, the plaintiffs’ reply and
accompanying exhibits do not point the Court to invoice 02051010RG. The
plaintiffs likewise do not highlight the bank records showing that the
defendants had overpaid invoice 02051010RG in the amount of $83,068.50.
Without proper proof that the credit note was indeed an overpayment that
had, in turn, become embodied in the plaintiffs damages calculation, the
Court cannot simply assume the plaintiffs have accounted for the undisputed
credit. As it is the plaintiffs’ burden to do so under Federal Rules of Civil
Procedure 55, the Court will accordingly provide the defendants with a
credit in the amount of $83,086.50.
Lastly, the defendants argue that they are entitled to a $477,256.32
credit. (Docket #79, Ex. 12). However, the well pled allegations in the
amended complaint explicitly state that the defendants had improperly
claimed that amount during the course of the parties’ business relationship.
Page 20 of 23
(Docket #65 ¶ 32). The amended complaint states that “Jiang and Reedigroup
did not agree to any such deduction and there is no basis for it under the
parties’ agreement.” (Docket #65 ¶ 32). Thus, as the Court must accept that
“there is no basis” for the defendants’ claim to this sum, the defendants’
attempt to argue that they are not liable for the $477,256.32 is a dead letter.
Wehrs, 688 F.3d at 892
Thus, the only additional credit13 that the defendants will be entitled
to is the $83,086.50 amount embodied in the credit note that the plaintiffs
admit issuing to the defendants on July 30, 2010. (Docket #79, Ex. 15; Docket
#81 at 11).
3.5
Todd Hannon’s Liability
The defendants argue that Hannon cannot be individually liable for
the damage award because the contract giving rise to the plaintiffs’ breach
of contract claim was only entered into between Reedigroup and Hannon
Group. (Docket #79 at 11). The defendants’ argument obfuscates the nature
of the default judgment entered against them. (See Docket #75).
Hannon is jointly liable for the damage award issued in this matter as
the final default judgment in this case was entered against both Hannon
Group as a corporation and Hannon as an individual. (See Docket #75). The
Court’s entry of default judgment found that Hannon breached his fiduciary
duty for, among other things: (1) refusing to pay the plaintiffs for agreed
upon performance fees; (2) deducting the plaintiffs’ profits without
13
As discussed above, the plaintiffs also conceded that the defendants were
entitled to a larger credit—in the amount of $358,088.43—for merchandise that the
defendants purchased directly from factories. (See supra Part 3.0; Docket #81 at 1314). As this issue has been properly disposed of by the parties’, the Court will not
discuss it further here.
Page 21 of 23
authorization; (3) claiming that the plaintiffs had no interest in the Sachi
brand; and (4) exercising unilateral control over the Sachi brand.14 (Docket
#65 at 7). While the damage award in this case is primarily calculated on the
basis of the plaintiffs’ entitlement to compensatory damages under contract
law, Hannon is still liable for his breach of fiduciary duty, which may be
remedied by compensatory damages to the plaintiff. Pro-Pac, Inc., 721 F.3d
at 777-78. Thus the compensatory damage award calculated in this case will
be entered jointly against both defendants.
4.
CONCLUSION
In sum, the well pled allegations in the amended complaint indicate
that the plaintiffs’ damages must be derived from the equation:
manufacturing costs + performance fee - payments collected - credits due
(see supra Part 3). Using the above analyses and resultant calculations, the
damage award is therefore equal to:
$11,584,199.38 + $3,419,909.57 - $11,515,137.40 - $358,088.54 - $83,086.50,
which is $3,047,796.51. This $3,047,796.51 award is joint with respect to the
defendants.
Accordingly,
IT IS ORDERED that the plaintiffs, Yan Fang Jiang and Reedigroup
LTD, have and recover from the defendants, Hannon Group LTD and
Todd J. Hannon, jointly and severally, damages in the aggregate totaling
$3,047,796.51, together with such costs as may be awarded and taxed by the
Clerk of Court.
14
In addition, both Hannon Group and Todd Hannon were jointly and
severally liable for conversion, violations of Wis. Stat. § 895.446, and tortious
interference with a contract. (See generally Docket #65). However, the plaintiffs have
elected to waive damages on those claims. (Docket #77 at 4-5).
Page 22 of 23
The Clerk of Court is directed to enter judgment accordingly.
Dated at Milwaukee, Wisconsin, this 10th day of December, 2015.
BY THE COURT:
J.P. Stadtmueller
U.S. District Judge
Page 23 of 23
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