Damages in “Aggravated Breach” Cases

We have written before about the “aggravated breach of contract” theory under N.C. Gen. Stat. § 75-1.1. This theory can make a breach of contract a springboard to treble damages.

Most decisions on this theory leave a key question unanswered: When a plaintiff wins on an aggravated-breach theory, which damages get trebled—all of the plaintiff’s contract-related damages, or something less?

Last month, in GlaxoSmithKline v. Dendreon, the North Carolina Business Court offered a possible answer to this question. The court implied that in an aggravated-breach case under section 75-1.1, only damages unique to the 75-1.1 aspects of the case are subject to trebling.

The facts in Dendreon

Dendreon involved a contract between Dendreon and GlaxoSmithKline. Glaxo agreed to produce an antigen for Dendreon to use in manufacturing Provenge®, a treatment for prostate cancer.

Under the contract, Glaxo first had to develop and test a process to manufacture the antigen. This first phase of work was called the implementation phase. The contract also contemplated a second phase of work, called the manufacturing phase.

The contract called for the implementation phase to end on a fixed date. Dendreon, however, could extend that phase by paying a monthly extension fee.

The contract also called for Dendreon to give Glaxo a thirty-six-month rolling forecast of Dendreon’s expected purchases of the antigen. The contract treated the first eighteen months of each forecast as a “firm order” by Dendreon.

After extending the implementation phase once, Dendreon purported to terminate the contract. In its termination letter, Dendreon offered to pay Glaxo additional extension fees if Glaxo would agree to disregard the firm order that had resulted from Dendreon’s earlier forecasts.

Instead of agreeing to this termination, Glaxo sued Dendreon in North Carolina state court. The lawsuit made its way onto the docket of Chief Judge Gale.

Glaxo’s claims

Glaxo claimed that Dendreon breached the contract by failing to pay for its firm order and by failing to pay additional extension fees.

Glaxo also pursued a claim under section 75-1.1. To support that claim, Glaxo asserted that Dendreon’s breach of contract involved the following aggravating circumstances:

  • Dendreon tried to coerce Glaxo by making its offer to pay additional extension fees conditional on Glaxo waiving its right to payment for Dendreon’s earlier firm order.
  • Dendreon lied to Glaxo to conceal the damages that Dendreon would owe if it terminated the contract.
  • Dendreon gave Glaxo a false forecast of its product requirements at the same time that it was secretly planning to terminate the contract.

A breach of contract, but not a substantially aggravated one

The business court granted offensive summary judgment to Glaxo on its breach-of-contract claim based on the firm order. It granted defensive summary judgment on all other claims, including Glaxo’s claims under section 75-1.1.

The court decided that Glaxo could not show substantial aggravating circumstances, as its 75-1.1 claim required. For one thing, Dendreon’s allegedly false statements did not deceive Glaxo. In addition, because the circumstances did not yet require Dendreon to pay additional extension fees to Glaxo, Dendreon’s offer to accept those fees if Glaxo would ignore Dendreon’s earlier firm order was not coercive.

Glaxo’s failure to show non-duplicative damages

The business court also offered an alternative reason for rejecting Glaxo’s 75-1.1 claim. It wrote that Glaxo did not offer “proof of any damage proximately caused which is in addition to rather than duplicative of remedies afforded by the breach of contract claim.”

Does this mean that a plaintiff who pursues a 75-1.1 claim based on a “substantial aggravating circumstances” theory must show damages that are independent of its breach-of-contract damages?

Earlier decisions send mixed signals on this question.

In Gray v. North Carolina Insurance Underwriting Ass’n, the North Carolina Supreme Court wrote that section 75-16—the treble-damages statute—means that “damages proximately caused by a violation of N.C.G.S. § 75-1.1 shall be trebled, not that damages on every claim that happens to arise in a case involving a violation of N.C.G.S. § 75-1.1 shall be trebled.” The court implemented that rule by refusing to order the trebling of damages that a jury awarded based on a breach of contract.

Gray, however, has two features that limit its usefulness in aggravated-breach cases:

  • First, the plaintiffs in Gray did not actually win on an aggravated-breach theory. They won on a different 75-1.1 theory: unfair conduct in the settlement of an insurance claim. The supreme court underscored the absence of an aggravated-breach theory when it wrote that “the trial court could not have properly concluded that the breach of contract itself” violated section 75-1.1.
  • Second, Gray involved separate jury awards—in different amounts—for the breach of contract and for the unfair claim-settlement practices. These separate awards made it especially easy for the supreme court to isolate the uniquely contract-related award in Gray and to disqualify it for trebling.

The North Carolina Court of Appeals, in contrast, has shown a greater willingness to allow the trebling of breach-of-contract damages. In Garlock v. Henson and Johnson v. Colonial Life & Accident Insurance Co., the court allowed the trebling of breach-of-contract damages. In each case, the court explained that the breach of contract and the aggravating circumstances formed one “continuous transaction.”

Dendreon seems to qualify the analysis in Garlock and Johnson. Dendreon suggests that, in aggravated-breach cases, 75-1.1 damages must be tied to the features of the defendant’s conduct that uniquely violate section 75-1.1—features that, by longstanding rule, must go beyond a breach of contract alone.

The reasoning in Dendreon finds indirect support in the early decisions that created the “substantial aggravating circumstances” standard. Those cases arguably hold that the standard requires deceptive conduct. Deception is conduct very different from an ordinary breach of contract. Given that difference, it might make sense to limit 75-1.1 damages to those specifically caused by the uniquely deceptive features of a defendant’s acts.

One can reconcile this reasoning with Garlock and Johnson. When a record does not show any meaningful separation between a contract breach and a 75-1.1 violation, the contract damages are logically the only damages a court can treble. In Garlock and Johnson, the court of appeals used the phrase “continuous violation” to reflect this point. In Dendreon, in contrast, Glaxo’s 75-1.1 theories (as shown above) involved discrete misconduct, not a continuous violation.

Postscript

These issues deserve further development, but it seems unlikely that Dendreon will be the platform for it. Six days after the above decision, Dendreon filed for chapter 11 bankruptcy in Delaware. The North Carolina Business Court then put its case on inactive status. So far, Glaxo has not moved for relief from the automatic bankruptcy stay.