Sonnenschein Nath & Rosenthal, LLP, on Winning A Defense Verdict On Damages After Losing Summary Judgment On Liability
Plaintiffs in breach of contract cases often attempt to sustain their burden of proving proximate causation merely by substantiating “but for” causation and then forcing Defendants to prove a negative (i.e., that proximate causation is not present). Emerald Investments Limited Partnership v. Allmerica Financial Life Insurance and Annuity Co., 2008 U.S. App. LEXIS 3513 (7th Cir. Feb. 20, 2008), re-affirmed the often-ignored notion that it is the Plaintiff that bears the burden of proving that the Defendant’s breach of contract proximately caused the alleged damages. In this Expert Commentary, Alan S. Gilbert, a partner in the Chicago office of Sonnenschein Nath & Rosenthal LLP, discusses Emerald, where the court appeared to apply “loss causation” concepts in a common law breach of action.
Emerald purchased two variable annuities from Allmerica. Emerald used the annuities to engage in frequent “market-timing” trading between mutual fund sub-accounts. This market timing essentially usurped profits otherwise available to the mutual fund’s long term holders and hurt the performance of the mutual funds and the variable annuities that held the funds’ shares. Facing pressure from the mutual funds to stop such harmful trading, Allmerica restricted Emerald’s frequent trading. Emerald sued Allmerica in the federal district court in Chicago, obtaining a summary judgment that this restriction was a breach of provisions in its annuity contracts that allowed transfer of funds among mutual fund sub-accounts.
Emerald’s damages expert claimed that Emerald would have made over $150 million in lost profits through market timing trades for the expected duration of the annuities (over 20 years) if it had not been stopped by Allmerica. Emerald argued that “but for” Allmerica’s breach it would have continued to reap the huge 35-40% annual returns it had been making through its market timing.
Gilbert explains how Allmerica defeated Emerald’s claims by attacking Emerald’s proof of causation of its alleged lost profit damages and exploiting damages concepts most extensively developed in securities law:
In securities cases, courts require more than proof that the damages could not have occurred “but for” the wrongful act, i.e., “transaction causation”; there must also be proof that the wrongful act actually caused the purported loss, i.e., “loss causation.” Judge Posner, who wrote the Emerald decision, has applied this same concept in other non-securities cases. The “loss causation” concept is itself based on common law notions of proximate causation. [citations omitted]
In Emerald Investments, the Seventh Circuit re-affirmed the notion that the Plaintiff in a breach of contract case bears the burden of proving that the Defendant’s breach of contract proximately caused its damages. The court stated: “As Emerald had the burden of proving its damages, Allmerica was not obliged to plead or prove that Scudder would have cut off Allmerica and hence Emerald.” 2008 U.S.App. LEXIS at 8.
Gilbert concludes:
The imposition of a “loss causation” requirement in securities cases has focused courts on the need to prove proximate cause for damages in common law cases. The Emerald case demonstrates how strong a causation defense can be, even in a damages-only trial after liability has already been established against the defendant.
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