Lead Opinion
This case originated as an employment dispute sounding in, inter alia, breach of contract. The issue before this Court is whether a damages award for lost future income derived from business profits should be discounted to present value.
The relevant facts are as follows. Mark L. Helpin, D.M.D., (“Dr. Helpin”) accepted a position in 1989 at the School of Dental Medicine at the University of Pennsylvania, with primary responsibilities as the Director of Pediatric Dentistry at the Children’s Hospital of Philadelphia (“CHOP”). In an offer letter to Dr. Helpin dated September 1, 1989, then-Dean Raymond J. Fonseca, D.M.D., informed Dr. Helpin that his base salary for the 1989-90 academic year would be $60,000. In addition, this base salary was to be supplemented with bonuses and salary increments, which the offer letter set forth as follows:
In the future, patient care activities at CHOP will offer you the opportunity for bonuses and salary increments, with 50% of CHOP Dental’s net operations available to you for such increases. I envision that a large portion of yоur future salary will, in fact, be derived from the net operations and success you will have at CHOP. I assure you this financial and salary/bonus arrangement will continue even if you no longer serve as Director or Chairman.
Letter to Dr. Helpin from Dean Fonseca, dated 9/1/89 (Plaintiffs Exhibit P-1).
In 1996, Dr. Helpin was promoted to associate professor, in which capacity he could be terminated only for “just cause” or in the event that he was not able to generate sufficient income to offset his salary and expenses, pursuant to the policies of the University of Pennsylvania (“Penn”). Dr. Helpin remained at CHOP until December 2003, each year having available 50% of the profits from the CHOP dental clinic to use for any purpose he wished, including paying himself or reinvesting in the clinic. In December 2003, Marjorie Jeff-coat, D.M.D., the then-new dean of the School of Dental
In 2005, Dr. Helpin brought an action in, inter alia, breach of contract against the Trustees of the University of Pennsylvania, and tortious interference with prospective economic relationship against Penn; Dean Jeffcoat; Thomas Freitag, the Associate Dean for Finance of the School of Dental Medicine at the University of Pennsylvania; and Lawrence M. Levin, the Chief of the Division of Oral and Maxillofacial Surgery at the University of Pennsylvania Health System. A jury heard testimony over a period of three weeks in June 2007.
At the end of Dr. Helpin’s case, the trial court granted the defendants’ motion for a nonsuit on the claim of tortious interference with prospective economic relationship, thereby dismissing Drs. Jeffcoat, Freitag, and Levin from the action. However, the jury returned a verdict in favоr of Dr. Helpin on the breach of contract claims and awarded him $4.04 million in damages. The jury found that Penn had constructively discharged Dr. Helpin without “just cause,” and had improperly failed to continue to pay him 50% of the profits from the CHOP dental clinic. Penn filed a post-trial motion seeking judgment notwithstanding the verdict or a new trial, and Dr. Helpin filed a “conditional motion for post-trial relief and to award interest.” The trial court denied all post-trial motions and entered judgment on the jury’s verdict on December 10, 2007.
The Superior Court affirmed. Helpin v. Trustees of the University of Pennsylvania,
Should damages for future income that would have been calculated as рart of a business’s profits be discounted to present value?
Helpin v. Trustees of the University of Pennsylvania,
Did the trial court properly grant a nonsuit on [Dr. Helpin’s] claim for tortious interference with prospective economic relations?
Helpin v. Trustees of the University of Pennsylvania,
We begin with Penn’s appeal, which presents a question of law as to the calculation of damages for lost future income that would have been derived from a specified percentage of the profits of a business. Because this is a question of law, our standard of review is de novo and our scope is plenary. In re Novosielski,
Where one party to a contract without any legal justification, breaches the contract, the other party is entitled to recover, unless the contract provided otherwise, whatever damages he suffered, provided (1) they were such as would naturally and ordinarily result from the breach, or (2) thеy were reasonably foreseeable and within the contemplation of the parties at the time they made the contract, and (3) they can be proved with reasonable certainty.
Ferrer v. Trustees of the University of Pennsylvania,
The purpose of a damage award is to place the non-breaching party “as nearly as possible in the same position [it] would have occupied had there been no breach.” Lambert v. Durallium Products Corporation,
*51 The measure of damages for breach of contract is compensation for the loss sustained. The aggrieved party can recover nothing more than will compensate him.
Id. (emphasis in original).
Loss of future earnings, if proven, is properly included in a damage award. See, e.g., Robertson v. Atlantic Richfield Petroleum Products Company,
In 1916, the United States Supreme Court held that, when damages are based upon the deprivation of future pecuniary benefits, any lump-sum award should be discounted to the
In 1922, in a personal injury case, this Court held that a jury must discount an award of future damages to present value and that, in such a calculation, “interest must be computed at the lawful rate of 6 [six] per cent.” Windle v. Davis,
Not until 1980, in Kaczkowski, supra, a wrongful death and survival action, did this Court abandon Windle’s six percent rule in the context of lost future earning capacity. The decedent in Kaczkowski was a 20-year-old man who had been studying computer operations at the time of his death in a motor vehicle accident. After liability for the decedent’s death had been established and during retrial on the question of damages, the trial court refused to allow plaintiffs expert to testify regarding a four percent annual increment to the decedent’s projected salary to account for the impact on his lost future earnings of both the inflation rate and productivity gains
Considering first the impact of inflation, Kaczkoivski noted that, in the absence of inflation, there was no economic disagreement with the theory behind discounting future damages awards to present value. Id. at 1030 n. 10. However, economic data established that “[ejven though the rate of
To compensate for the competing effects of interest and inflation on a lump-sum dаmages award for lost future earnings, we adopted the “total offset” approach, which is based on the following assumption:
Under the total offset method, a court does not discount the award to its present value but assumes that the effect of the future inflation rate will completely offset the interest rate, thereby eliminating any need to discount the award to its present value.
Id. at 1036.
Thus, the total offset method assumes that, viewed long term, inflation rate and interest rate will completely offset each other.
Since over the long run interest rates, and, therefore, the discount rates, will rise and fall with inflation, we shall exploit this natural adjustment by offsetting the two factors in computing lost future earning capacity. We are satisfied that the total offset method provides at least as much, if not greater, accuracy than an attempt to assign a factor that would reflect the varying changes in the rate of inflation ovеr the years. Our experiences with the use of the six percent discount rate suggest the difficulties inherent in such an approach. As to the concomitant goals of efficiency and predictability, the desirability of the total offset method is obvious. There is no method that can assure absolute accuracy. An additional feature of the total offset method is*55 that where there is a variance, it will be in favor of the innocent victim and not the tortfeasor who caused the loss.
Id. at 1037-38.
In Kaczkowski, we concluded that current economic theory-supported adoption of the total offset approach:
Current economic theory demonstrates the accuracy of the total offset approach to inflation. As previously noted, the total offset method assumes that in the long run, future inflation and the discount rate will offset each other.... [C]ritics of the total offset approach fail to realize that future inflation rates and future interest rates do not exist in a vacuum, but co-vary significantly. It can be stated with assurance that present interest rates depend at least in part upon expectations of future inflation.
Id. at 1037 (internal citations omitted) (emphasis added).
Finally, the Kaczkowski Court also addressed the effect on future earnings of gains in productivity. Productivity includes such factors as age, maturity, education, skill, and technology advances. Id. at 1029 n. 5, 1031, 1033-34. We emphasized that productivity is separate and distinct from inflation, and that both had to be considered in estimating lost future earning capacity. Id. at 1029 n. 5 and 1032-33. To determine the effect of productivity factors on lost future earnings, we directed the trial court to adopt an evidentiary approach; i.e., the fact-finder should consider relevant evidence as to productivity factors and then make an informed estimation as to lost future earnings based on all the evidence presented.
Thus, to summarize, Kaczkowski set forth a framework for calculating a dаmages award based on lost future earnings. First, with respect to gains in productivity, Kaczkowski directed the fact-finder to consider relevant evidence, and then, based on that evidence, to estimate lost future earnings, and award damages that fully compensate the aggrieved party. Second, Kaczkowski directed that the award for lost future earnings was not to be discounted to present value because, as a matter of law, the future inflation rate was presumed to
Penn argues that its damages expert was erroneously barred from presenting evidence as to the present value of Dr. Helpin’s lost future earned income. The trial court relied on Kaczkowski to hold that no present value discount should be applied to Dr. Helpin’s lost future earnings because the total offset approach was established law in Pennsylvania under the circumstances of this case. Before reviewing the trial court’s application of Kaczkowski, we must first consider in some detail what occurred at trial.
During Dr. Helpin’s case-in-chief, he presented the testimony of his damages expert, Edwin Rosenthol, a certified public accountant. Notes of Testimony (“N.T.”), 6/8/07 (a.m.), at 80-118. Mr. Rosenthol testified that, based on his calculations,
It was ten days after Mr. Rosenthol’s testimony, during the testimony of Penn’s damages expert, Dr. Brian Sullivan, that the concept of discounting future loss to present value was introduced into the proceedings. N.T., 6/18/07, at 4-55. Dr. Sullivan, a forensic economist, testified that, according to his calculations, Dr. Helpin’s loss of future earnings was between $456,071 and $713,023.
Later in the afternoon, the court held another in camera conference with counsel concerning Dr. Helpin’s motion to strike Exhibit D-30 and, more generally, the аpplicability of the discounted present value method to future damages under the facts of this case. Dr. Helpin argued that the holding of Kaczkowski, which rejected discounting to present value in favor of the total offset approach for calculating future damages due to loss of earnings, applied to the instant case. In contrast, Penn distinguished Kaczkowski by arguing that its holding did not apply to lost profits, which constituted the portion of Dr. Helpin’s earnings derived from the CHOP dental clinic. Following argument, the trial court excluded Exhibit D-30; however, Dr. Sullivan had already completed his testimony and had used Exhibit D-30. N.T., 6/18/07, at 55, 78. There is no indication from the record that any of Dr. Sullivan’s testimony regarding his calculations of Dr. Helpin’s lost earned income was stricken.
In this appeal, Penn continues to assert that future damages in the form of lost profits are inherently distinct from future damages in the form of lost wages because profits “depend on myriad factors having nothing to do with inflation, including supply and demand, competition, sales volume, macroeconomic conditions, cost and profitability analysis, revenue forecasts, marketing and advertising, and the condition of the industry and the local and/or regional economy.” Penn’s Brief at 15. Penn argues that “the central rationale” of Kaczkowski, i.e., that “ ‘in the long run, future inflation and the discount lie., interest] rate will offset each other[,]’ ... applies only to types of future damages, like wages, that co-vary with inflation because only in that context does the ‘offset’ concept even arguably make economic sense.” Penn’s Brief at 15 (citing Kaczkowski,
We cannot agree that this Court’s approach to damages based on lost future earnings, as set forth in Kaczkowski, is inapplicable to the circumstances presented here. If, as Penn seeks, the trial court merely discounted Dr. Helpin’s damages award for lost future earned income to present value, then the negative effects of inflation on the ultimate purchasing value of the award would be ignored, contrary to Kaczkowski, and Dr. Helpin would be under-compensated.
We recognize that a large portion of Dr. Helpin’s lost future earned income, like his past earned income, is attributable to his contractual share of the profits from CHOP’S dental clinic. We further acknowledge, as Penn asserts, that the quantitative level of these profits will likely be determined by a multitude of factors, many of which may not be directly tied to the rate of inflation. Under Kaczkowski, such factors should be — and indeed were — a topic of evidence-based inquiry at trial. Mr. Rosenthol, Dr. Helpin’s economics expert, testified at length and was subjected to extensive cross-examination as to his estimations of Dr. Helpin’s lost future earned income from the CHOP clinic profits. Penn’s economics expert, Dr. Sullivan, also testified as to his estimations of Dr. Helpin’s lost future earned income. The jury heard and presumably incorporated into its future damages award all the testimony from both parties regarding factors relevant to projections of clinic profitability.
The total offset approach, as set forth by this Court in Kaczkowski, is not relevant to the consideration of such case-specific, individualized factors as those offered by Mr. Rosenthol and Dr. Sullivan. Rather, Kaczkowski’s total offset approach addresses the very general effects of inflation on the value, over time, of a lump-sum damages award for lost future earnings. Kaczkowski’s central assumptions — that inflation must be considered and that, over time, inflation rate totally offsets interest rate — are not dependent on the individual facts surrounding any specific lump-sum future damages award.
We do not accept Penn’s assertion that Kaczkowski applies only to cases involving lost future wages that “co-vary with inflation,” presumably via periodic cost-of-living adjustments or a similar mechanism. Penn’s Brief at 15. The determinative co-variance in Kaczkowski was between inflation, which decreases the purchasing power of money over time, and interest, which increases the value of money over time. By adoption of the total offset approach, Kaczkowski resolved the specific problem of the competing effects of these two factors — inflation and interest — on a lump-sum damages award for lost future earnings. The competing effects of these two co-variables neither disaрpear nor become irrelevant — and Kaczkoivski is not rendered inapplicable — merely because a portion of Dr. Helpin’s future lost earned income is derived from profits of the CHOP clinic.
[Under the total offset approach, ljitigators are freed from introducing and verifying complex economic data. Judge and juries are not burdened with complicated, time consuming economic testimony. Finally, by eliminating the variables of inflation and future interest rates from the damage calculation, the ultimate award is more predictable.
Id. at 1038.
We are not persuaded that these considerations have any less significance or import or relevance merely because, as in Dr. Helpin’s case, the lost future earnings at issue are partially derived from future profits of a business. The general effect of inflation to diminish the purchasing power of a lump-sum award for lost future earned income does not depend on whether some of those lost future earnings are derived from profits. We conclude that Kaczkowski’s total offset approach is applicable to the circumstances presented here, and accordingly, we affirm.
Notes
. The inherent and unavoidable lack of precision in the calculation of future losses based upon an individual's prospects has been the subject of judicial observation. The United States Supreme Court has recognized the difficulty in estimating an award for lost future earnings:
We do not suggest that the trial judge should embark on a search for ‘delusive exactness.' It is perfectly obvious that the most detailed inquiry can at best produce an approximate result.
Jones & Laughlin Steel Corporation v. Pfeifer,
See also Conte v. Flota Mercante Del Estado,
. As discussed in the text infra, productivity includes factors such as age, maturity, education, skill, and technology advances. Kaczkowski, supra at 1029 n. 5, 1031, 1033-34.
Inflation is defined in Kaczkowski as "the increase in the volume of money and credit relative to available goods resulting in a substantial and continuing rise in the general price level.” Id. at 1029 n. 4 (quoting Webster’s, Third International Dictionary (1965)).
. Although implicitly critical of Kaczkowski, Penn does not ask this Court to overturn it. See Penn’s Reply Brief at 3. Rather, Penn argues that Kaczkowski established only a "narrow exception” to the general rule requiring that future damages be discounted to present value, which exception applies only to lost future wages, which are subject to cost-of-living or similar inflation-driven increases.
. Penn points out that "Kaczkowski stands alone,” in that Pennsylvania is the only state that has established a conclusive legal presumption that the inflation rate totally offsets the interest rate for purposes of a damages award based on lost future earnings. Penn’s Brief at 13. Penn also notes that the “United States Supreme Court has twice declined to extend Kaczkowski to claims for lost wages under federal statutes, both times reversing appellate courts (this Court and the Third Circuit Court of Appeals, respectively) for doing so.” Penn’s Brief at 12 (citing Monessen Southwestern Railway Company v. Morgan,
In Pfeifer, a work injury case brought under the Longshoremen’s and Harbor Workers’ Compensation Act, a federal district court in Pennsylvania applied Kaczkowski "as a mandatoiy fedеral rule of decision” and the Third Circuit affirmed. Id. at 550,
While analyzing the circumstances presented in Pfeifer, the Supreme Court compared several methods, including the total offset approach of Kaczkowski, that had been used by the federal judiciary, the states, or our sister common law nations to account for the impact of inflation on lost future income. Id. at 538-48,
. The range of lost earnings in Dr. Sullivan’s calculations arose from his use of two different assumptions as to Dr. Helpin’s age at retirement as well as from different estimations as to the lеvel of bonus payments he would receive from his new employer.
. Disputing Kaczkowski's basic assumptions and questioning the wisdom of Kaczkowski s holding, the dissent "would hold that lump-sum awards based on lost future income should be discounted to present value.” Dissenting Opinion (Saylor, J.) at 63,
The instant case does not present an appropriate forum for a consideration of whether Kaczkowski was wrongly decided and ultimately should be overturned. No analytical error or fundamental economic deficiency in Kaczkowski’s holding was claimed or argued below, and the lower courts did not consider such possibilities. Thus, in the absence of any testimony or other evidence of record, it would be imprudent to conclude here that Kaczkowski’s theoretical underpinnings are weak and its basic assumptions are unsupportable. Rather, we note that the Kaczkowski Court examined a variety of approaches to calculation of future lost wages, recognized that all approaches required estimates and predictions, and concluded that the total offset method was preferable for a variety of reasons, including accuracy, predictability, and judicial ease and efficiency.
With regard to the specifics of the instant case, the dissent suggests that "blind application” of the total offset method is inappropriate because, inter alia, Dr. Helpin’s damages expert "may have already folded an expectation of price inflation into his estimate, not only with regard to lost profits or bonuses, but relative to [Dr. Helpin’s] base academic salary.” Dissenting Opinion (Saylor, J.) at 69,
Dissenting Opinion
dissenting.
I respectfully dissent, as I would hold that lump-sum awards based on lost future income should be discоunted to present value.
Since Kaczkowski was decided, moreover, the General Assembly has provided some guidance, at least with regard to lost earnings resulting from medical negligence. In particular, the Medical Care Availability and Reduction of Error (MCARE) Act provides:
Future damages for loss of earnings or earning capacity in a medical professional liability action shall be reduced to present value based upon the return that the claimant can earn on a reasonably secure fixed income investment. These damages shall be presented with competent evidence of the effect of productivity and inflation over time. The trier of fact shall determine the applicable discount rate based upon competent evidence.
40 P.S. § 1303.510. This shows the Legislature’s recognition that inflation and interest rates will not always be equal, and that competent evidence is necessary to determine the appropriate discount rate as a factual matter. Accord Monessen Sw. Ry. Co. v. Morgan,
This is not the only theoretical shortcoming appearing on the face of the Kaczkowski decision. The second one, related to the first, has to do with the Court’s apparent misunderstanding of the role of expected future salary raises occasioned by industry-wide productivity enhancements and the employee’s rising skill and experience level. In particular, the Kaczkowski rule was devеloped by reference to the federal district court’s Feldman decision and two cases from the Alaska Supreme Court, Beaulieu v. Elliott,
What Kaczkowski failed to realize is that, because safe investments tend to offer a real interest rate that, while low, is above zero, the prospect of having a lump-sum award grow in real terms would approximately compensate for the victim’s lost opportunity to benefit from these other factors — i.e., his increasing value to his employer due to skill and experience, as well as industry-wide productivity gains, presumably due to improved technology and business methods. Accord Pfeifer,
Even to the degree Kaczkowski is entitled to deference under stare decisis, for several reasons, I believe it would be best not to extend its approach to other scenarios, such as the present breach-of-contract action involving, inter alia, lost profits and/or bonuses. First, as explained above, the Kaczkowski Court’s decision to apply the total-offset rule to damage estimates that include projected raises above and beyond predictable seniority-based increases stems from an analytical error, and ultimately results in overcompensation. Thus, it would be best, in my view, not to expand that error into other types of civil cases. See generally Kaczkowski,
Second, a contract breach does not ordinarily result in physical injury or death to the victim. This is relevant because, even if one assumes the validity of the Kaczkowski approach аs to tortious conduct, within a contract-breach framework the victim can reasonably expect to continue to “progressf ] in his chosen occupation in terms of skill, experience and value to the employer.” Id. at 579,
There are other features specific to this case, moreover, that counsel against a blind application of the total-offset method. First, Dr. Helpin’s damages expert, Edwin Rosenthol, C.P.A., may have already folded an expectation of price inflation into his estimate, not only with regard to lost profits or bonuses, but relative to Dr. Helpin’s base academic salary. In particular, Mr. Rosenthol assumed that Dr. Helpin would receive a yearly two-and-one-half percent structural salary increase in accordance with departmental policy. See N.T., June 8, 2007 (a.m.), at 106. It seems reasonable that some of that annual increase represents a cost-of-living adjustment intended to compensate for the effects of general price inflation; if so, at least some discounting would be necessary to avoid a double recovery. See generally Pfeifer,
Just as significantly, Mr. Rosenthol factored in projected increаses in clinic-based bonuses and/or profits occasioned by a number of items, such as: the addition of new operating rooms and other treatment facilities at the clinic; the hiring of additional medical staff; enhanced efficiencies with regard to the procedures used to schedule patients for treatment; and the inclusion of subsidies from the hospital in the amount of $116,000 per year — subsidies that were not certain to continue.
Accordingly, I respectfully dissent from the majority’s decision to expand the rule of Kaczkowski to encompass future lost earnings in the present case.
. See, e.g., Feldman v. Allegheny Airlines, Inc., 524 F.2d 384, 387-88 (2d Cir.1975) (accepting a real growth rate, and hence a discount rate, of one-and-one-half percent); Doca v. Marina Mercante Nicaraguense, S.A.,
. I am not convinced that systematically over-penalizing civil defendants is appropriate, not only because it runs counter to basic notions of corrective justice, but because civil liability is decided on a preponderance of the evidence, which subsumes a risk that civil defendants will wrongly be found liable. See generally Commonwealth v. Maldonado,
. Intermediate appellate courts in at least two other jurisdictions allow the use of total-offset, but do not require it, leaving the question to the discretion of the trial court. See Wal-Mart Stores, Inc. v. Coleman,
. I note, as well that the Beaulieu line of decisions has been overridden by a statute, see Alaska Stat. § 09.17.040(b) (1986), the purpose of which "was to bring Alaska in line with other states which reduce future economic awards to present value[.]” Beck v. State,