In Re WorldCom, Inc.
361 B.R. 675 (2007)
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Rule of Law:
A party claiming to be a 'lost volume seller' must prove not only the capacity to enter into additional contracts but also the subjective intent to do so; a stated desire to scale back or withdraw from the market defeats this claim and re-imposes the duty to mitigate damages.
Facts:
- On or about July 10, 1995, Michael Jordan entered into a ten-year endorsement agreement with WorldCom, Inc. (MCI) to promote its products and services.
- The agreement required Jordan to be available for a maximum of sixteen hours per year for producing advertisements and making promotional appearances.
- Under the agreement, Jordan was to be paid $2 million annually and was explicitly classified as an independent contractor, with no taxes withheld by MCI.
- From 1995 to 2000, Jordan appeared in several television commercials and print ads for MCI.
- Around 2003, Jordan's business representatives communicated that Jordan had implemented a strategy of not accepting new endorsement deals.
- Jordan's stated goal was to scale back his role as a 'pitchman' to cultivate an image more compatible with his primary goal of achieving National Basketball Association (NBA) franchise ownership.
- Following the termination of the MCI agreement, Jordan and his representatives did not seek out alternative endorsement opportunities to replace the lost revenue.
Procedural Posture:
- On July 1, 2002, WorldCom, Inc. (MCI) filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York.
- On January 16, 2003, Jordan filed a claim for amounts due under the endorsement agreement.
- On July 18, 2003, MCI, as the debtor, formally rejected the executory contract with Jordan.
- Following the rejection, Jordan filed an amended claim for $8 million, representing payments for the final four years of the contract.
- MCI objected to the final $4 million of the claim, arguing it should be limited by the statutory cap on employment contracts or disallowed due to Jordan's failure to mitigate damages.
- Jordan and MCI filed cross-motions for summary judgment in the bankruptcy court on the validity of MCI's objections.
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Issue:
Does a celebrity endorser, who is an independent contractor, qualify as a 'lost volume seller' exempt from the duty to mitigate damages when he possessed the capacity to take on more endorsements but subjectively intended not to seek new deals?
Opinions:
Majority - Gonzalez, J.
No. A celebrity endorser does not qualify as a 'lost volume seller' and is not exempt from the duty to mitigate damages if he lacks the subjective intent to pursue additional endorsement contracts. First, the court determined that the endorsement agreement was not an 'employment contract' under § 502(b)(7) of the Bankruptcy Code. The court reasoned that Jordan was an independent contractor, not a key executive or officer, based on the contract's terms, tax treatment, limited hours, and the legislative intent behind the statute. Second, on the primary issue of mitigation, the court rejected Jordan's 'lost volume seller' argument. The court explained that this doctrine requires the non-breaching party to prove both the capacity to perform additional contracts and the intent to enter into them. While Jordan clearly had the capacity (the MCI contract only required 16 hours per year), his own representatives testified that he intended to scale back his endorsements to pursue NBA ownership. This lack of 'subjective intent' was fatal to his claim. Because Jordan was not a lost volume seller, he had a duty to make reasonable efforts to mitigate his damages. The court found that Jordan took no affirmative steps to secure a replacement endorsement. His justifications, such as avoiding brand 'dilution' or protecting his reputation for future NBA ownership, were deemed unreasonable or irrelevant to the duty to mitigate damages from a rejected endorsement contract. Therefore, Jordan failed his duty to mitigate, and his claim for damages must be reduced by the amount he could have earned through reasonable efforts.
Analysis:
This case clarifies the application of the 'lost volume seller' doctrine to contracts for personal services, particularly for individuals with unique and finite capacities like celebrities. The court's emphasis on 'subjective intent' alongside 'capacity' establishes a critical prong for the lost volume test. This precedent signals that a party's strategic decision to change careers or scale back business operations cannot be used to circumvent the fundamental duty to mitigate damages. For high-earning service providers, the decision underscores that the duty to mitigate is tied to the breached agreement's subject matter, and a desire to pursue unrelated ventures does not excuse the obligation to minimize losses within that original field.
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