The Lost Volume Seller, R.I.P.
I have already written on the lost volume seller problem a number of times. So why am I doing it yet again? Three reasons. First, and much to my surprise, I noticed that in the treatise by James White and Robert Summers I am characterized as a defender of Uniform Commercial Code (UCC) section 2-708(2)—the section that gives rise to the lost volume remedy. I should like to put that misconception to rest. Second, because the number of reported cases is fairly modest, I had thought that the lost volume seller problem, although interesting analytically, was not of much practical import. A Westlaw search for “lost volume seller” yielded only 147 cases. However, if lost volume profits are being included in damage estimates without objection, the real incidence could be much greater.
I had my first inkling that this might be so when I was digging into the record of a casebook staple, Empire Gas Corp. v. American Bakeries Co. The decision simply acknowledged the jury’s damage determination; there was no discussion of why that determination was made. The amount troubled me. There were two components of damages: the loss on the sale of conversion units and the loss on the sale of propane. Why, I thought, would there be any damages at all when Empire bought conversion units in a competitive market and resold them as an accommodation, and when there was a meeting competition clause for the propane sales? Could it be, I wondered, that the lost volume formulation was taken for granted? (It turns out I was right.)
The third reason is that, as I have reengaged with the lost volume literature, I have learned that a number of scholars have argued that the lost volume remedy should be the primary remedy for a buyer’s breach. Professor Roy Anderson, for example, asserts: “Under the Code’s scheme the profit formula of section 2-708(2) is truly the dominant damage remedy for aggrieved sellers who suffer a breach prior to the time that the buyer accepts the goods. The formula applies to most commercial sellers because such sellers are usually left in a lost volume situation by a buyer’s breach.” Earlier, Robert Childres and Robert Burgess presented a similar argument: “[T]he lost-profit rule of 2-708(2) is no rule of last resort for the few cases that fail to fit the specific rules. It is the dominant damages rule or principle. . . . We think it probable that in the American economy of today and the foreseeable future, the overwhelming proportion of sales contracts should produce the 2-708(2) situation if repudiated by the buyer.”
The basic issue in lost volume cases is that if the buyer cancels an order (breaches), and the seller “mitigates” by selling the unit at the same price to another buyer, an award of the contract-market differential would result in zero damages. However, it is argued, if the second buyer would have bought a unit from the seller anyway, the seller would have made two sales, not one. The seller would have lost the “profit” on the sale that got away. Making the seller whole would require that it be compensated for the profit it would have made but for the breach. That seems plausible. For James White and Robert Summers, that remedy is “the recovery which all right-minded people would agree the lost volume seller should have.”
Nonetheless, I have argued, and will argue here, that all those right-minded people are wrong. This treats the remedy question as tort-like—the buyer has wronged the seller. But this is a matter of contract. By cancelling the order, the buyer in effect invokes an implied termination clause. The remedy would be the price that the buyer would need to pay for termination (cancellation). When framed this way, it becomes clear that the lost-profits remedy makes no sense.
Victor P. Goldberg, The Lost Volume Seller, R.I.P., 2 Criterion J. on Innovation 205 (2017).