By Jeff Birren
VICI Racing, LLC, (“VICI”) operated a sports car racing team in the American Le Mans Series. In March 2009 VICI began discussing a possible sponsorship with T-Mobile USA, Inc. (“T-Mobile”) for the 2009, 2010 and 2011 seasons. VICI’s president, Ron Meixner, told T-Mobile that the sponsorship could be very valuable because VICI Racing could offer T-Mobile the opportunity to become the network service provider for the VW/Audi Group and the Porsche AG Telematics services.
VICI and T-Mobile signed a three-year sponsorship agreement on March 30, 2009. VICI agreed to run one Porsche racecar during the 2009 season that displayed T-Mobile’s trademarks, and to place the marks on its trailers, uniforms and other promotional items. VICI further agreed to race two Porsche cars during the 2010 and 2011 series with the T-Mobile service marks. VICI also granted T-Mobile “the right to be the exclusive wireless carrier supplying wireless connectivity for the Porsche, Audi and VW telematics programs beginning in model year 2011” VICI Racing, LLC v. T-Mobile USA, Inc. (763 F. 3d 273, 279 (2014)).
T-Mobile agreed to pay VICI $1M by April 1, 2009, $7M by January 1, 2010 and $7M by January 1, 2011.
The contract had a force majeure clause and a severability clause that stated, in part:
”…if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions, and pay partially enforceable provisions to the extent enforceable, shall nevertheless be binding and enforceable…”
The contract also had a clause entitled “Limitations of Liabilities.” That read, in part and in all capital letters:
“[t]he maximum aggregate liability of either party and any of its affiliates to the other party, and the exclusive remedy in connection with this agreement for any and all damages, injury, losses arising from any and all claims and/or causes of action, shall be limited to $20,000 or the aggregate payments payable under his agreement, whichever is higher…,” (Id. at 280).
Meixner worked with T-Mobile to secure telematics from VW, Audi and Porsche. However, things moved “a little slower than [T-Mobile] would like” (Id.).
On July 18, 2009, the Porsche crashed. Meixner told T-Mobile that the car would be sidelined for 45 to 60 days while being repaired. T-Mobile objected, and in January 2010, did not pay $7M.
Meixner sent T-Mobile a letter of default and T-Mobile responded by claiming that VICI had breached the contract because it had falsely represented that VICI had the authority to bind VW, Audi and Porsche to telematics. It also claimed that VICI had breached the contract by failing to race at an event where T-Mobile was present with business guests. VICI sued T-Mobile seeking both $7M payments and ceased racing.
During a bench trial, VICI claimed the provision entitled “Limitation of Damages” was a liquidated damages clause that set T-Mobile’s obligation at $14M. T-Mobile did not dispute this interpretation nor, inexplicably, assert that VICI had a duty to mitigate. Rather, it defended the claim on the basis that the telematics provision was an essential part of the contract, that it was fraudulently induced to enter the contract by VICI’s representation that it had the authority to bind VW, Audi and Porsche, and the contract was thereby unenforceable.
The District Court found that the telematics provision was too convoluted to have a clear meaning as it could “have two or more different meanings.” It also found that T-Mobile’s subject intent could not be enforced against VICI since there was no evidence that this subject intent was “objectively manifested” to VICI (Id. at 282).
The Court determined that VICI’s breach in 2009 was excused by the force majeure clause. The court fixed damages at $7M for the 2010 season. It denied damages for 2011 because VICI had not mitigated its damages. The court found the “Limitation of Damages” clause was a quasi-liquidated damages provision and awarding damages for 2011 would be a windfall or unenforceable penalty (VICI Racing, LLC v. T-Mobile, USA, Inc., 921 F. Supp 2d 317 (2013)).
T-Mobile appealed the award of damages for 2010 and VICI cross-appealed the denial of damages for 2011. T-Mobile’s appeal claimed that the telematics section should not have been severed, rendering the entire contract unenforceable. It further asserted that the severability clause required the court to rewrite that section by adding new language that was close to the parties’ intent. It also maintained that the force majeure clause did not excuse VICI’s breach in 2009 because VICI could have spent money to solve the problem more quickly, another issue never raised at trial.
The Appeal
The Third Circuit began its analysis by reviewing the severability clause. It found that the District Court did not err in severing the ambiguous telematics clause, and that the severability clause was “clear and reflects that parties intentions that unenforceable provisions would be severed from the contract” (763 F. 3d at 287).
It rebuffed T-Mobile’s contention that the District Court should have rewritten the ambiguous telematics clause, as “the Court could not possibly have conjured up another provision that would ‘come close to the purpose of the Agreement’ with respect to telematics” (Id.).
The Court also determined that the force majeure provision excused VICI’s breach. T-Mobile maintained that the breach was merely monetary, but the Circuit did not agree. The District Court held that the obligation to race was prevented by an accident that damaged the car. T-Mobile’s contention that VICI could not invoke the force majeure clause because the problem was strictly monetary “is factually inaccurate”. The Circuit agreed it was the accident that caused the failure to race, and a lack of money did not cause the problem (Id.).
T-Mobile also claimed on appeal that VICI failed to prove that damage to the car was unforeseen. However, T-Mobile did not raise foreseeability in the trial court and “it may not secure appellate relief on this issue”. The Circuit “deem(ed) it waived” (Id. at 289).
Damages
T-Mobile maintained that the District Court erred by awarding the full damages for 2010 as it failed to apply the principle of expectation damages. VICI claimed that the “Limitation of Liability” clause was a liquidated damage clause and that it was entitled to the full fourteen million dollars.
The Court did not agree with either party. In the first place, the clause was not entitled “Liquidated Damages” but “Limitation of Liability.” Though not dispositive, the clause sets a maximum liability but does not set a fixed sum, and the phrase that damages “shall be limited” are “words that communicate an unmistakable intention to limit liability, not set a fixed sum,” (Id. at 292). Furthermore, liquidated damage clauses are used when the damages would be hard to calculate. In this case, damages are easily calculated by the payment schedule. Since it was not a liquidated damages clause, the Circuit examined the award of damages for the 2010 season, $7M, and the denial of damages for the 2011 season.
The Circuit was not impressed with T-Mobile’s changing legal theories. It noted “at the outset that T-Mobile failed to raise any issue related to damages in its pretrial statement” (Id. at 293). It failed to set aside the judgment on the basis that the damages were excessive, so it “did not preserve any argument about damages for appeal” (Id.). Damages involve questions of law and fact. The Circuit determined that the District Court used the proper legal standard for the 2010 season. Expectation damage “is measured by the amount of money that would put the promisee in the same position as if the promisor had performed the contract” (Id.).
T-Mobile also complained that the District Court failed to subtract the costs that VICI avoided by not racing. However, T-Mobile never raised this issue in the District Court. The Circuit felt that implicit in the District Court’s ruling was that costs avoided were offset by additional losses.
The Circuit next examined VICI’s duty to mitigate. The Circuit began by stating: “First year law students are generally taught that a plaintiff claiming breach of contract himself has a duty to mitigate” (Id. at 298). So, although it is the plaintiff’s duty, it is an affirmative defense to a damage claim. The defendant is required to plead and prove a failure to mitigate. A plaintiff cannot “anticipate and answer all of the possible theories of mitigation. A defendant must put plaintiff on notice as to what measures the defendant believes were reasonable under the circumstances but the plaintiff failed to take” (Id. at 301).
T-Mobile “did not raise failure to mitigate in its pleadings or in its pre-trial Statement of Disputed Legal Issues…It did not offer any argument or evidence regarding failure to mitigate at trial” (Id.). Notwithstanding this failure, the District Court found that VICI failed to present evidence that it mitigated its damages for 2011.
The Circuit reversed, holding the District Court “improperly placed the burden on VICI to present evidence that it took reasonable steps to mitigate losses” (Id. at 302). Since failure to mitigate is an affirmative defense, T-Mobile waived that defense when it failed to plead it. Moreover, the Circuit overruled the District Court’s determination that the second $7M payment was either a penalty or a windfall. With that, it remanded the case to the District Court “to consider, in the first instance, upon applying the appropriate burden of proof, whether to award VICI the additional $7 million or a lesser sum based on a proper measure of expectation damages, including the deduction of actual costs avoided. The Court shall not consider any evidence or argument that VICI failed to mitigate damages, in view of our holding that T-Mobile waived this issue” (Id. at 304).
The District Court Redux
The District Court stated that it was to calculate expectation damages by determining the loss caused by the breach, less costs avoided: “[a]voided costs and expenses are part of the ‘but-for’ world of lost profits, which the plaintiff must establish with reasonable certainty (Citations omitted). A defendant seeking to offset a damages award due to avoided cost ‘must move forward by pointing out the costs it believes the plaintiff avoided because of its breach” (VICI Racing, LLC, v. T-Mobile USA, Inc., U.S. Dist. Ct. Del, Civ. No. 10-835-SLR (2015) at 3).
Meixner testified that “if you skinny it down…by your teeth, the number is $2.5 million per car” (Id. at 4). He also claimed that he lost two sponsorships that would have been without cost. The court rejected that theory. It did conclude from “Meixner’s testimony that a conservative estimate of the racing costs would have been $2.5 million per car. Thus, by not racing in 2011, plaintiff avoided $5 million in costs” (Id. at 5). The defendants cited a proposed budget in claiming that that the correct figure was between four to five million a year per car. The court declined, as it was “reluctant to rely on a document not vetted through trial at this juncture” (Id. footnote 4).
It ordered T-Mobile to pay an additional two million dollars, plus costs and reasonable attorney fees incurred post remand.
No outsider can know why T-Mobile pursued a fraudulent inducement case while ignoring damages and mitigation at trial. Also strange is its position on the force majeure clause, ignoring the reality that the car was damaged during a race, or to ask a court to redraft a section of the contract to reflect its interpretation of the contract. It seems likely that T-Mobile used a different set of lawyers for the appeal who raised issues on appeal that it had already waived below.
Sponsors and sponsored should carefully read contracts before signing to make sure the written document accurately reflects their understanding of the agreement.
Birren is the former general counsel for the Oakland Raiders and a frequent contributor to Sports Litigation Alert.
