Teradyne, Inc. v. Teledyne Industries, Inc., Teradyne, Inc. v. Teledyne Industries, Inc.
676 F.2d 865, 33 U.C.C. Rep. Serv. (West) 1669, 1982 U.S. App. LEXIS 20558 (1982)
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Rule of Law:
For a 'lost volume seller,' damages under UCC § 2-708(2) are calculated as the lost profit (including reasonable overhead), which is determined by subtracting the direct, variable costs saved due to the breach from the contract price; proceeds from a subsequent resale of the same goods are not credited against the damages.
Facts:
- On July 30, 1976, Teradyne, Inc. (seller) entered into a contract to sell a T-347A transistor test system to Teledyne Industries, Inc. (buyer) for $98,400, less a $984 discount.
- Teledyne cancelled the purchase order when the T-347A was already packed and scheduled for shipment two days later.
- Teradyne was a 'lost volume seller,' meaning it had the capacity to produce and sell more units than it sold and would have made the subsequent sale even if Teledyne had not breached its contract.
- After the breach, Teledyne offered to purchase a different, less expensive system (a $65,000 FET) from Teradyne, but Teradyne refused the offer.
- Following the cancellation, Teradyne spent $614 to dismantle, test, and reassemble the specific T-347A unit.
- Teradyne then sold that same T-347A unit to another customer for the full price of $98,400, fulfilling an order that was on hand prior to Teledyne's breach.
Procedural Posture:
- Teradyne, Inc. sued Teledyne Industries, Inc. in the United States District Court, a federal trial court, for damages resulting from a breach of contract.
- The district court referred the case to a master to make factual findings and calculate damages.
- The master's report recommended an award of $75,392 to Teradyne, calculated by subtracting only manufacturing and sales costs from the contract price.
- The district court adopted the master's report and entered a judgment in favor of Teradyne for $75,392.
- Teledyne (appellant) appealed the judgment to the U.S. Court of Appeals for the First Circuit, challenging the damage calculation. Teradyne (appellee) cross-appealed regarding court costs.
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Issue:
Under UCC § 2-708(2), must a seller's damages for lost profit be calculated by deducting direct labor costs associated with testing, shipping, and installation, as well as associated fringe benefits, from the contract price?
Opinions:
Majority - Wyzanski, Senior District Judge
Yes. A seller's damages for lost profit must be calculated by deducting all direct, variable costs saved by the breach, including labor costs for testing, shipping, and installation. The court reasoned that UCC § 2-708(2) applies because damages under § 2-708(1) (contract price minus market price) would be inadequate for a 'lost volume seller' like Teradyne, who lost the volume of one entire sale. The proper measure is the profit the seller would have made, which is the contract price less the direct costs saved. The court found that the wages of employees who directly handle the product, such as testers, shippers, and installers, as well as their fringe benefits, are direct costs, not 'reasonable overhead.' Therefore, these costs must be deducted from the contract price to accurately calculate the lost profit. The court also held that Teradyne had no duty to mitigate by accepting Teledyne's offer for a different product, as that offer was conditioned on Teradyne surrendering its claim for breach of the original contract.
Analysis:
This case provides a crucial clarification for the calculation of damages for lost volume sellers under UCC § 2-708(2). It refines the 'profit (including reasonable overhead)' formula by establishing a clear distinction between non-deductible fixed overhead and deductible variable direct costs. The decision's key impact is its holding that labor costs directly associated with preparing a specific unit for a specific sale (testing, shipping, etc.) are variable costs to be deducted, even if the seller would have paid those employees anyway. This precedent prevents sellers from receiving a windfall and ensures that the damage award accurately reflects the profit actually lost due to the breach.
