IN THE SUPREME COURT, STATE OF FLORIDA

IN THE SUPREME COURT, STATE OF FLORIDA ASSOCIATED UNIFORM RENTAL & LINEN SUPPLY, INC., Petitioner, Case No. SC09-134 3DCA Case No.: 3D05-2130 v. RKR MOTORS, INC., Respondent. On Discretionary Review From a Decision of the Third District Court of Appeal PETITIONER S BRIEF ON JURISDICTION MAILING ADDRESS: JACK J. AIELLO GUNSTER, YOAKLEY & STEWART, P.A. 777 S. Flagler Drive, Suite 500 East West Palm Beach, FL 33401 Tel.: 561-650-0716 Fax: 561-655-5677 E-mail: jaiello@gunster.com Attorneys for Petitioner

TABLE OF CONTENTS Page STATEMENT OF THE CASE AND THE FACTS...1 SUMMARY OF ARGUMENT...3 JURISDICTIONAL STATEMENT...4 ARGUMENT...4 I. THE DECISION OF THE THIRD DISTRICT COURT OF APPEAL IN THIS CASE IS IN DIRECT CONFLICT WITH THE DECISION OF THE FOURTH DISTRICT COURT OF APPEAL IN KNIGHT ENERGY SERVICES, INC. V. CR INTERNATIONAL ENTERPRISES AND/OR THE DECISION OF THIS COURT IN MURRAY V. DEPARTMENT OF TRANSPORTATION...4 A. The Trial Court Correctly Decided This Case Under Knight Energy Services...4 B. The Third DCA s Analysis and the Case Law Upon Which it Relied Confuses Lost Profits With Average Profits...5 C. The Murray Case...7 II. III. OTHER AUTHORITIES ALSO SUPPORT THIS COURT EXERCISING ITS DISCRETION TO TAKE JURISDICTION...8 IMPORTANCE OF THIS ISSUE FOR FUTURE LITIGATION...8 IV. CONCLUSION...10 CERTIFICATE OF SERVICE CERTIFICATE OF COMPLIANCE -i-

TABLE OF AUTHORITIES STATE CASES Boca Developers, Inc. v. Fine Decorators, Inc., 862 So. 2d 803 (Fla. 4th DCA 2003)... 5, 6 Indian River Colony Club, Inc. v. Schopke Construction & Engineering, Inc., 592 So. 2d 1185 (Fla. 5th DCA 1992)... 5, 6 Knight Energy Services, Inc. v. CR International Enterprises, 616 So. 2d 1079 (Fla. 4th DCA 1993)... 3, 4, 5, 6, 7, 8, 10 Murray v. Department of Transportation, 687 So. 2d 825 (Fla. 1997)... 3, 4, 7, 8, 10 Physicians Reference Laboratories, Inc. v. Daniel Seckinger, M.D. & Associates, P.A., 501 So. 2d 107 (Fla. 3DCA 1987)... 5, 6 MISCELLANEOUS Robert L. Dunn, Recovery of Damages for Lost Profits, 6.5 (2005)... 8 Fla. R. App. P. 9.030(a)(2)(A)(iv)... 4 Fla. Stat. 672.708 (2)... 8 ii

STATEMENT OF THE CASE AND THE FACTS RKR Motors and Associated Uniform entered into three contracts under which Associated Uniform would rent and launder uniforms for use by RKR Motors employees. (App. at 2) After RKR Motors terminated the contracts, Associated Uniform sued for breach of contract, among other claims. (Id.) The contract claim sought liquidated damages in the sum of $110,076.48 or compensatory damages and lost profits if liquidated damages were deemed unrecoverable. (App. at 2-3) RKR Motors answered and asserted that the liquidated damages clause was unreasonable, a penalty, and unconscionable on its face because the clause permits Associated Uniform to receive 75% of the total gross payments of the contracts, while providing no services. (App. at 3) Just before trial, RKR Motors admitted liability to breaching the contracts. (Id.) Thus, the only remaining issues to be determined were the amount and type of damages to be awarded Associated Uniform. (Id.) At the bench trial, the parties disagreed on the amount of lost profits. Associated Uniform s expert calculated lost profits at $82,444, while RKR Motors expert calculated the lost profits at $10,437. (App. at 4) The difference between the two lost profits calculations was that RKR Motors expert subtracted from the projected revenue not only the expenses that Associated Uniform would save as a result of not having to fulfill the 1

contracts, but also a prorated share of Associated Uniform s fixed expenses, such as administrative expenses. (App. at 4) The trial court agreed with Associated Uniform s expert, because his valuation made Associated Uniform whole by only taking into account the amount of extra expense that Associated Uniform would incur to service RKR Motors contracts. (App. at 5) Based upon that, the trial court found that Associated Uniform suffered $82,444 in actual profits and awarded that amount, declining to award the liquidated damages amount. As the trial court stated: (Id.) Plaintiff is in the business of renting uniforms and providing service on those uniforms, regardless of obtaining the Defendant s account. As such, the costs that were expended for overhead would have been expended regardless, as Plaintiff was not seeking to expand their operations, nor was the payment to provide for the expansion of operations by hiring more employees and expanding production facilities. Further, Plaintiff did not expect to put an undue burden on their operations since their overhead, salaries, rent and a number of other costs was something that Plaintiff knew it already had. Since the overhead is already on-going and the salaries are already being paid, the only extra overhead to incur in order to service the Defendant s account is contained within the valuation provided by Plaintiff s expert, which is the amount Plaintiff needs to expend over and above what Plaintiff was already expending in order to service Defendant s account. RKR Motors appealed, challenging the amount of lost profits awarded because it did not average all overhead expenses of the business and allocate them 2

proportionately to these contracts. (App. at 6, 7) Associated Uniform crossappealed because the trial court did not award liquidated damages, even though it found that the liquidated damages amount was not disproportionate to Associated Uniform s actual lost profits. (App. at 6) SUMMARY OF ARGUMENT The error committed by the Third DCA in this case was applying a lost profits model that does not actually award lost profits. Instead, it awards what would constitute average profits across all contracts within the company. That damage model does not give the non-breaching party the benefit of its bargain or indemnify it for the harm actually caused. In Knight Energy Services, the Fourth DCA applied the correct damages model, not deducting from the contract revenue any amount of fixed costs that would not be saved by not having to perform the contract. The present decision of the Third DCA expressly and directly conflicts with the decision in Knight Energy Services. In addition, the present decision conflicts with the decision of this Court in Murray v. Department of Transportation, in which this Court approved an eminent domain damages calculation that does not include a deduction for those fixed costs that would not be saved by the loss of a portion of the entity s business operation. 3

JURISDICTIONAL STATEMENT The Florida Supreme Court has discretionary jurisdiction to review a decision of a district court of appeal that expressly and directly conflicts with a decision of another district court of appeal or of the Supreme Court on the same question of law. Fla. R. App. P. 9.030(a)(2)(A)(iv). ARGUMENT I. THE DECISION OF THE THIRD DISTRICT COURT OF APPEAL IN THIS CASE IS IN DIRECT CONFLICT WITH THE DECISION OF THE FOURTH DISTRICT COURT OF APPEAL IN KNIGHT ENERGY SERVICES, INC. V. CR INTERNATIONAL ENTERPRISES AND/OR THE DECISION OF THIS COURT IN MURRAY V. DEPARTMENT OF TRANSPORTATION A. The Trial Court Correctly Decided This Case Under Knight Energy Services In Knight Energy Services, the Fourth DCA affirmed the trial court s award of lost profits, concluding that the non-breaching party seeking lost profits is entitled to the contract price less a deduction for just those costs and expenses that were necessary to fully perform. Knight Energy Services, Inc. v. CR International Enterprises, 616 So. 2d 1079, 1080 (Fla. 4th DCA 1993). In the case, there was clear testimony that there were no deductible costs or expenses necessary to fully perform the contract, which justified the award of the full contract price. (Id.) In the present case, the trial court found, based upon the evidence, that the extra overhead items included in RKR Motors expert s lost profits calculation were items that Associated Uniform would have to incur whether or not it performed the 4

contracts with RKR Motors. (App. at 5) Thus, performing the RKR contracts would not cause these extra overhead expenses to be incurred, and such expenses would not be saved by not having to perform the contracts. (Id.) The trial court recognized that in order to truly compensate Associated Uniform for the lost profits it would have actually earned had the contracts been performed, the procedure set forth in Knight Energy Services must be followed. (Id.) B. The Third DCA s Analysis and the Case Law Upon Which it Relied Confuses Lost Profits With Average Profits The Knight Energy Services decision was or should have been good guidance for the Third DCA in its decision. Instead, the Third DCA followed an earlier decision from the Third DCA, a decision from the Fifth DCA, and another decision from the Fourth DCA in reversing the trial court and adopting the damages methodology of RKR Motors expert. (App. at 8-10) See Physicians Reference Lab, Inc. v. Daniel Seckinger, M.D. & Assocs., P.A., 501 So. 2d 107 (Fla. 3DCA 1987); Indian River Colony Club, Inc. v. Schopke Constr. & Eng g, Inc., 592 So. 2d 1185 (Fla. 5th DCA 1992); and Boca Developers, Inc. v. Fine Decorators, Inc., 862 So. 2d 803 (Fla. 4th DCA 2003). In Boca, the Fourth DCA concluded that fixed expenses had to be allocated across the board to all the contracts performed by the non-breaching party (apparently, as if all of the company s contracts had been breached at once) and, thus, deducted from any calculation of lost profits. (Id.) The Boca decision did not overrule the Knight 5

Energy Services decision but, rather, distinguished Knight Energy Services because of the clear testimony in the latter case that overhead expenses were not necessary to fully perform the contract. See Boca, 862 So. 2d at 805. statement: Perhaps the main flaw in the Third DCA s analysis is the following The holdings in Boca, Indian River, and Physicians Reference make perfect sense. Requiring a deduction of a share of fixed costs related to the performance of a contract allows for a true measurement of the amount the non-breaching party would have earned on the contract had there been no breach, which is the proper measure of damages. (App. at 10) (emphasis added) To the contrary, deducting a share of fixed costs to determine lost profit only makes sense if all of the company s contracts were breached at once. In that case, all of the fixed costs would then have been saved, and allocating that savings across the contracts would make sense. When a single or a few contracts are breached, as here, but the company continues substantially all of its other business such that many items of overhead are unaffected and must still be paid (e.g. rent and employees), deducting a share of such fixed expenses from the damages award punishes the plaintiff by making the plaintiff, in effect, pay those expenses twice. Determining the actual lost profits on a breached contract requires a calculation of the marginal revenues less the marginal expenses, not a determination of the average profits on all contracts within the company. 6

Therefore, for purposes of the Supreme Court s discretionary jurisdiction, the Third DCA s opinion in this case expressly and directly conflicts with the Fourth DCA s Knight Energy Services decision and satisfies the technical criteria of the Florida Rules of Appellate Procedure that permit this Court to take jurisdiction of the case. C. The Murray Case In Murray v. Department of Transportation, this Court was called upon to interpret one of Florida s eminent domain statutes relating to the calculation of business damages. See Murray v. Department of Transportation, 687 So. 2d 825 (Fla. 1997). The statute permitted two alternative calculations. This Court concluded that the trial court had discretion to permit the alternative calculation that would not include a deduction for those fixed costs that would remain the same even after the business operation lost some of its parking spaces through eminent domain. While Murray was interpreting a specific statute relating to eminent domain, the logic of the methodology set forth by the legislature and interpreted by this Court is the same as the argument made by Associated Uniform here. And while this Court did not mandate the use of that alternative calculation method in eminent domain cases, it determined that the trial court had discretion to use it. Id. at 826. Based upon the logic of Murray, the trial court here should at least have been afforded discretion by the Third DCA to use the calculation 7

method that it employed, consistent with the Knight Energy Services case. Although the Murray decision relates to Florida s eminent domain statutes, the determination of what expenses should be included in the analysis of lost profits in a business loss case is conceptually the same. Therefore, as an alternative argument on conflict jurisdiction, the Third DCA s decision expressly and directly conflicts with the decision of this Court in Murray. II. OTHER AUTHORITIES ALSO SUPPORT THIS COURT EXERCISING ITS DISCRETION TO TAKE JURISDICTION Looking ahead to other materials that this Court would be able to consider if it accepts jurisdiction, Florida s Uniform Commercial Code also has a section addressing lost profits. In 672.708(2), where a contract dispute involves a sale agreement, it is not appropriate to deduct overhead (or, as framed in the statute, one is entitled to recover overhead) in calculating lost profits. Also, Florida is in the minority on the issue raised in this case, and the overwhelming majority of other states do not require the deduction of fixed costs/overhead from the contract price to determine lost profits but, instead, require the deduction of only those costs that will be saved by not having to perform. See Robert L. Dunn, Recovery of Damages for Lost Profits, 6.5 at 483-485 (2005). III. IMPORTANCE OF THIS ISSUE FOR FUTURE LITIGATION The issue raised here, the proper calculation of lost profits, is one that will recur over and over in Florida, not only in contracts cases but in any case where the 8

actions of a wrongdoer cause a compensable loss of profits. As noted above, by requiring an allocation to the breached contract of even those fixed costs that would not be saved by not having to perform after the breach, the court is really awarding average profits, not lost profits. That conceptual measure does not indemnify the plaintiff and does not grant the plaintiff the benefit of its bargain. In fact, absurd results may flow from the rule applied by the Third DCA in this case. For example, if a company has in recent history broken even in its business, the Third DCA s rule of law suggests that its customers may breach the contract and be liable for no damages. Ironically, awarding no damages would then put the company into a loss position for that year because it saved only the limited expenses directly necessary to have performed that contract but lost all of the revenue from that contract. Therefore, even more absurd, the next customer that breaches might argue that after allocating fixed costs from this company that is now losing money, the company actually owes to the breaching customer the average net loss avoided. The fiction that the Third DCA analysis employs is that when a contract is breached, regardless of the evidence, a prorated amount of fixed costs are saved. Considering just one item, rent, for example, it is plain to see that that would not be true. Instead, the Third DCA s methodology requires the non-breaching party to pay those fixed costs twice: the first time because they were due and going to be 9

paid regardless of whether it performed a contract and the second time, by deducting a prorated amount from the otherwise awardable lost profits. In this case, when the Third DCA reduced the damages award by $72,000 for a prorated share of the company s expenses that Associated Uniform would have incurred notwithstanding the breach, it charged Associated Uniform for expenses that it had already paid once. The mathematical effect was to charge double the prorated amount of fixed costs, or $144,000, with respect to this contract. Because that approach is logically incorrect, fails to award the benefit of the bargain, conflicts with the Knight Energy Services case from the Fourth DCA and the Murray decision from this Court, is incongruous with the rule of law applied in the overwhelming majority of jurisdictions around the country, and is an issue that will arise again and again in Florida jurisprudence, this Court should exercise its discretion to take jurisdiction of this case and to determine the issue raised on the merits. IV. CONCLUSION This Court has discretionary jurisdiction to review the decision of the Third DCA below, and the Court should exercise that jurisdiction to consider the merits of Petitioner s argument. 10

CERTIFICATE OF SERVICE I HEREBY CERTIFY that a true and correct copy of the foregoing has been furnished by U.S. Mail to Richard A. Goetz, Esquire, Hodgson Russ, LLP, 1801 N. Military Trail, Suite 200, Boca Raton, FL 33431, this day of January, 2009. GUNSTER, YOAKLEY & STEWART, P.A. Attorneys for Plaintiff/Petitioner 777 South Flagler Drive, Suite 500 East West Palm Beach, FL 33401 Tel.: (561) 650-0716; Facsimile: (561) 655-5677 By: JACK J. AIELLO Florida Bar No. 440566 CERTIFICATE OF COMPLIANCE I HEREBY CERTIFY that this brief complies with the type size and style requirements and has been prepared in Times New Roman, 14 Point Font. JACK J. AIELLO Florida Bar No. 440566