Merry Gentleman, LLC v. George & Leona Productions, Inc.

                               In the

    United States Court of Appeals
                 For the Seventh Circuit
                     ____________________
No. 15-1195
MERRY GENTLEMAN, LLC,
                                                  Plaintiff-Appellant,

                                 v.

GEORGE AND LEONA PRODUCTIONS, INC.
and MICHAEL KEATON,
                                               Defendants-Appellees.
                     ____________________

         Appeal from the United States District Court for the
           Northern District of Illinois, Eastern Division.
             No. 13 C 2690 — Gary Feinerman, Judge.
                     ____________________

      ARGUED JUNE 4, 2015 — DECIDED AUGUST 25, 2015
                 ____________________

   Before BAUER, ROVNER, and HAMILTON, Circuit Judges.
   HAMILTON, Circuit Judge. Plaintiff Merry Gentleman, LLC
produced the motion picture The Merry Gentleman, which
was released in 2009. Despite some critical acclaim, the film
was a commercial flop. Merry Gentleman blames defendant
Michael Keaton, the film’s lead actor and director, for the
bust. It brought this breach of contract action against Keaton
and defendant George and Leona Productions, Inc., Keaton’s
2                                                    No. 15-1195

“loan-out company” that he uses for professional contract-
ing, alleging that Keaton violated his directing contract by
(1) failing to prepare the first cut of the film in a timely fash-
ion, (2) submitting a first cut that was incomplete, (3) sub-
mitting a revised cut that was not ready for the producers to
watch, (4) communicating directly with officials at the Sun-
dance Film Festival and threatening to boycott the festival if
they did not accept his director’s cut instead of the produc-
ers’ preferred cut, (5) failing to cooperate with the producers
during the post-production process, and (6) failing to pro-
mote the film adequately.
     If the case were to go to trial, one might expect Keaton to
dispute that any of these alleged breaches actually violated
the directing contract. After all, Keaton completed the mov-
ie. It was accepted at the prestigious Sundance Film Festival.
It received critical praise—Roger Ebert, for example, gave it
3.5 stars out of 4 and called it “original, absorbing and curi-
ously moving.” And the film’s executive producer, Paul
Duggan, admitted during his deposition that he was una-
ware of any director who did more publicity than Keaton
did for a movie with a comparable budget.
   Keaton moved for summary judgment, however, on the
narrow ground that Merry Gentleman had failed to produce
sufficient evidence that his alleged breaches of the directing
contract caused it damages. For purposes of deciding this
appeal, we must therefore assume as the district court did
that Keaton in fact breached the contract.
   Illinois law governs the directing contract. Under Illinois
law, a “party injured by another’s breach or repudiation of a
contract usually seeks recovery in the form of damages
based on his ‘expectation interest,’ which involves obtaining
No. 15-1195                                                   3

the ‘benefit of the bargain,’ or his ‘reliance interest,’ which
involves reimbursement for loss caused by reliance on a con-
tract.” MC Baldwin Financial Co. v. DiMaggio, Rosario & Veraja,
LLC, 845 N.E.2d 22, 30 (Ill. App. 2006), quoting Restatement
(Second) of Contracts § 344 (1981). The district court granted
Keaton’s motion for summary judgment, concluding that
Merry Gentleman had failed to present a genuine issue of
material fact on either damages theory.
    First, the district court held that Merry Gentleman for-
feited the expectation damages theory by not addressing it
sufficiently in its response to summary judgment. Merry
Gentleman, LLC v. George & Leona Productions, Inc., 76 F. Supp.
3d 756, 761 (N.D. Ill. 2014). Merry Gentleman does not dis-
pute this conclusion on appeal, so expectation damages are
out.
    Second, the district court held that Merry Gentleman
failed to produce evidence from which a reasonable trier of
fact could find that Keaton’s alleged breaches caused the
damages Merry Gentleman seeks: all $5.5 million it spent
producing the movie. Id. at 761–66. This holding is the focus
of Merry Gentleman’s appeal.
    We review the grant of summary judgment de novo, re-
viewing the record in the light most favorable to Merry Gen-
tleman, as the non-moving party, and drawing all reasonable
inferences in its favor. E.g., Bentrud v. Bowman, Heintz, Boscia
& Vician, P.C., — F.3d —, —, 2015 WL 4509935, at *2 (7th Cir.
2015). Summary judgment is appropriate only where there
are no genuine issues of material fact and the moving party
is entitled to judgment as a matter of law. Fed. R. Civ. P.
56(a).
4                                                 No. 15-1195

    Illinois follows the approach of § 349 of the Restatement
(Second) of Contracts (1981), which provides that as an al-
ternative to expectation damages, “the injured party has a
right to damages based on his reliance interest, including
expenditures made in preparation for performance or in per-
formance, less any loss that the party in breach can prove
with reasonable certainty the injured party would have suf-
fered had the contract been performed.” See, e.g., Herbert W.
Jaeger & Associates v. Slovak American Charitable Ass’n, 507
N.E.2d 863, 868 (Ill. App. 1987) (discussing § 349). Reliance
damages are designed to put the injured party “in as good a
position as [the injured party] would have been in had the
contract not been made.” Restatement (Second) of Contracts
§ 344; MC Baldwin Financial, 845 N.E.2d at 30 (discussing
§ 344); Designer Direct, Inc. v. DeForest Redevelopment Auth.,
313 F.3d 1036, 1049 (7th Cir. 2002) (same).
    Merry Gentleman argues that the district court required
too much when it held that Merry Gentleman failed to estab-
lish a causal connection between its expenditures on the film
and Keaton’s alleged breaches. The causation standard is
minimal when the injured party seeks reliance damages un-
der § 349, Merry Gentleman contends, and it cleared this low
hurdle when it submitted an affidavit from Duggan stating
that the production company spent over $5 million in reli-
ance on the directing contract. Once it produced that evi-
dence, Merry Gentleman continues, the burden shifted to
Keaton to prove that the production company would have
suffered the alleged losses even if Keaton had fully per-
formed. And because Keaton did not submit evidence with
his motion for summary judgment showing beyond reason-
able dispute that these losses were inevitable, summary
No. 15-1195                                                   5

judgment against Merry Gentleman was improper. Or so
goes the argument.
    We agree with Merry Gentleman that a party seeking re-
liance damages under § 349 has a relatively low bar to clear
to establish causation and that once it makes this showing,
the burden shifts to the breaching party to prove any reduc-
tion in those damages. This causation threshold is low be-
cause the injured party is forced to prove a counterfactual:
what would have happened if the contract had not been
signed in the first place. See Autotrol Corp. v. Continental Wa-
ter Systems Corp., 918 F.2d 689, 695 (7th Cir. 1990). Proving
this kind of counterfactual is difficult because the value of
performance can be so difficult to establish. That is especial-
ly true in cases where the injured party is seeking reliance
damages. If damages were easy to calculate, the injured par-
ty likely would have sought expectation damages to begin
with on a benefit-of-the-bargain theory under § 347. Reliance
damages are appropriate precisely because the injured party
is at an evidentiary disadvantage. Cf. Restatement (Second)
of Contracts § 349, cmt. a (1981) (reliance damages are ap-
propriate where the injured party “cannot prove his profit
with reasonable certainty”). That is why courts use the bur-
den-shifting framework of § 349. As Judge Hand explained
long ago:
       It is often very hard to learn what the value of
       the performance would have been; and it is a
       common expedient, and a just one, in such sit-
       uations to put the peril of the answer upon that
       party who by his wrong has made the issue
       relevant to the rights of the other. On principle
       therefore the proper solution would seem to be
6                                                 No. 15-1195

      that the promisee may recover his outlay in
      preparation for the performance, subject to the
      privilege of the promisor to reduce it by as
      much as he can show that the promisee would
      have lost, if the contract had been performed.
L. Albert & Son v. Armstrong Rubber Co., 178 F.2d 182, 189 (2d
Cir. 1949) (footnote omitted).
    The burden does not shift to the breaching party until the
injured party first satisfies this threshold showing of causa-
tion, however. And just because the causation threshold un-
der § 349 is low does not mean it is not there, as Merry Gen-
tleman seems to suggest. To oppose summary judgment on
this point, the injured party must still produce evidence suf-
ficient to permit a reasonable trier of fact to find that the
losses claimed were caused by the breach. See Spitz v. Proven
Winners North America, LLC, 759 F.3d 724, 730 (7th Cir. 2014)
(“To prevail on a breach of contract claim, a plaintiff must
establish the existence of a valid and enforceable contract,
plaintiff’s performance, defendant’s breach of the terms of
the contract, and damages resulting from the breach.”) (em-
phasis added); Avery v. State Farm Mutual Auto. Ins. Co., 835
N.E.2d 801, 832 (Ill. 2005) (“basic theory of damages for
breach of contract” requires plaintiff to prove “an actual loss
or measurable damages resulting from the breach in order to
recover”) (emphasis added); see also Old Stone Corp. v. Unit-
ed States, 450 F.3d 1360, 1375 (Fed. Cir. 2006) (“[R]eliance
damages are subject to two pertinent limitations—the dam-
ages must have been both proximately caused by the breach,
and foreseeable.”).
   In the typical case where reliance damages are sought,
the defendant has simply repudiated the contract and
No. 15-1195                                                   7

walked away from the deal. This causal link will be straight-
forward in those cases. As the district court explained, in
such cases the non-breaching plaintiff is left “holding the
bag after having made its expenditures.” Merry Gentleman,
76 F. Supp. 3d at 763. In those cases, it is appropriate for the
injured party to claim as damages all expenditures it made
in preparation for performance because the other side failed
to perform at all. In such cases, the complete loss of invest-
ment will often be the proximate result of the breach.
    But in cases like this one, where the breaching party has
substantially performed and the alleged breaches have to do
with the quality of the final product, the causal link between
reliance damages and the breach is not so direct. An injured
party cannot reasonably claim that all of its expenditures
were caused by the other party’s breach without some reason
to think the breach destroyed the entire value of the breach-
ing party’s performance. In this context, the breach does not
cause the complete loss of investment.
    Take this case, for example. Who can say why a critically
praised movie did not make money? Merry Gentleman
claims as damages all $5.5 million it spent to produce the
movie. If Keaton had somehow prevented completion of the
movie, Merry Gentleman might well have been entitled to all
expenditures made in preparation for his performance (sub-
ject, of course, to the “losing contract” limitation in § 349).
But here, Keaton actually made the movie. Merry Gentleman
complains that Keaton slowed down the production process
and failed to publicize the movie adequately after it was fin-
ished. No doubt, these services have economic value and, on
a proper showing, Merry Gentleman might have been enti-
tled to recover damages for these shortcomings. (Imagine,
8                                                  No. 15-1195

for instance, if Keaton’s tardiness in submitting the first cut
forced Merry Gentleman to pay the film editors for a longer
period. Or, to take a more extreme example, imagine if Kea-
ton had publicly criticized the film released to theaters so
harshly that no one bought tickets to see it.) But no reasona-
ble trier of fact could find that Merry Gentleman lost its en-
tire investment of $5.5 million because Keaton failed to sub-
mit his first cut on time or failed to publicize the movie bet-
ter. Merry Gentleman entered the directing contract to have
Keaton deliver a finished movie, and he delivered one that
showed well at Sundance and won some critical praise. The
breaches by Keaton that Merry Gentleman alleges cannot
reasonably be said to have rendered the investment com-
pletely worthless.
    The fundamental problem we have been describing is
that Merry Gentleman’s damages theory is completely insen-
sitive to the importance and severity of Keaton’s alleged
breaches. This is how Merry Gentleman explained its dam-
ages theory in opposing summary judgment:
      Keaton’s actions were in breach of his contract,
      and caused damage to MG LLC in that it was
      unable to screen and market the film of its
      choosing (as was its contractual right); in that it
      endured substantial additional costs; and in
      that in reliance on its expectation that Keaton
      would satisfy his contractual obligations, it
      spent millions of dollars to finance Keaton’s
      temper tantrum, money it never would have
      expended if it had been aware of Keaton’s un-
      willingness to conform his behavior to his con-
      tractual obligations.
No. 15-1195                                                       9

That’s it. Merry Gentleman did not explain how Keaton’s cut
differed from “the film of its choosing.” Nor did it explain
how that difference caused it damage. It did not identify
what it meant by “substantial additional costs.” And the last
claim—that it never would have signed the contract if it had
known that Keaton would breach—is something almost any
plaintiff can say in a breach-of-contract dispute.
   The only evidence Merry Gentleman cited in support of
these conclusory assertions were the following facts:
       MG LLC spent over $5 million to produce the
       film, the vast majority of which was spent after
       Keaton entered into his directorial contract.
       Had MG LLC known that Keaton would fail to
       meet his contractual obligations as a director,
       including honoring MG LLC’s right to “sole
       discretion” over “business and creative deci-
       sions,” it would not have entered into the di-
       rectorial contract with him, nor would it have
       expended millions of dollars with Keaton as
       the director.
Dkt. No. 79 at 24, ¶¶ 121–22 (internal record citations omit-
ted). Again, Merry Gentleman made no effort to establish
any causal connection between the particular breaches as-
serted—the failure to submit a first cut on time, submitting a
revised cut that was incomplete, failing to publicize the film
better, etc.—and the $5.5 million that Merry Gentleman
spent on the production process as a whole.1

   1  One of the most troubling aspects of Merry Gentleman’s theory
here is evident from the disparity between the price Merry Gentleman
agreed to pay Keaton under the directing contract ($100,000) and the
10                                                           No. 15-1195

    We agree with the district court that Merry Gentleman, in
seeking $5.5 million in reliance damages, “effectively wants
to shift the entire cost—and risk—of producing The Merry
Gentleman to Keaton for his alleged breaches, giving it a
windfall and placing it in a better position than it would have
been in had the contract never been signed.” Merry Gentle-
man, 76 F. Supp. 3d at 766. Reliance damages are not insur-
ance. Courts “will not ‘knowingly put the plaintiff [receiving
a reliance recovery] in a better position than he would have
occupied had the contract been fully performed.’” Bausch &
Lomb Inc. v. Bressler, 977 F.2d 720, 729 (2d Cir. 1992), quoting
L.L. Fuller & William R. Perdue, Jr., The Reliance Interest in
Contract Damages: 1, 46 Yale L.J. 52, 79 (1936); see also, e.g.,
V.S. Int’l, S.A. v. Boyden World Corp., 862 F. Supp. 1188, 1198
(S.D.N.Y. 1994) (assuming for sake of argument that defend-
ant breached contract but declining to award reliance dam-
ages: “Based on plaintiffs continued running of a successful
business, any compensation for these initial expenses would
not place plaintiffs in the same position as they were prior to
the execution of the contract, as reliance damages are in-
tended to do, but would instead constitute a windfall for
plaintiffs.”).
   As noted, we must assume here that Keaton breached the
$100,000 contract as alleged, but these alleged breaches did

damages Merry Gentleman seeks ($5,500,000). Comment a to § 349 of the
Restatement (Second) of Contracts (1981) teaches: “If the injured party’s
expenditures exceed the contract price, it is clear that at least to the ex-
tent of the excess, there would have been a loss. For this reason, recovery
for expenditures under the rule stated in this section may not exceed the
full contract price.” The relevant contract price here would seem to be
the price for the contract that was breached, which would be $100,000.
Nevertheless, we do not need to depend on that theory to affirm here.
No. 15-1195                                                         11

not render his performance completely worthless. He di-
rected the movie, it was accepted by Sundance, and it was
released to the public. Reimbursing Merry Gentleman for all
$5.5 million it spent, even though it received from Keaton a
finished film praised by critics, would put it in a better posi-
tion than if the contract had not been made. Perhaps Merry
Gentleman might have been able to present a genuine issue
for trial on a more modest damages theory, but it decided to
shoot for the moon and missed. A reasonable trier of fact
could not find that Keaton’s alleged breaches caused Merry
Gentleman to sustain $5.5 million in damages.2
   The district court’s judgment is AFFIRMED.




   2  Merry Gentleman’s contention that Keaton forfeited the argument
that Merry Gentleman failed to establish causation is meritless. Keaton
attacked both possible damages theories simultaneously. The district
court did not abuse its discretion in considering his method of framing
the argument sufficient to raise the issue. See Merry Gentleman, 76 F.
Supp. 3d at 761 n.*.