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ATA Airlines Won’t Get $66M for Busted Contract

CHICAGO (CN) - FedEx does not have to pay a $66 million jury award for booting ATA Airlines from a team that bid on defense transportation contracts, the 7th Circuit ruled, finding numerous errors in the damages calculation.

In emergency situations, the Department of Defense can use commercial aircraft from the Civil Reserve Air Fleet, a pool of aircraft voluntarily committed by commercial air carriers. Commercial carriers pledge their planes in exchange for Mobilization Value Points, which are exchanged for the ability to bid on the DOD's nonemergency air transportation contracts.

Smaller carriers are willing to pay for the larger carriers' points as they value DOD contracts more than bigger carriers. To facilitate this process, carriers form teams to bid on and transfer points.

FedEx leads a team that includes ATA Airlines and Omni Air International, netting $600 million in revenues annually.

Three separate contracts between each of the entities govern the allocation of military business, FedEx's commission rate for serving as team leader and the number of aircraft each carrier commits to the fleet.

In 2007 and 2008, the contracts specified that ATA and Omni would split the team's military business 50-50 - assuming that the DOD accepted the team's bid and each carrier could accommodate the number of flights required.

But in 2008, ATA was reduced by 10 flights per month. FedEx made plans in 2009 to swap the carrier for Northwest Airlines, which was soon after acquired by Delta.

ATA withdrew in mid-2008 and later went bankrupt. After suing FedEx for breach of contract, the airline presented expert testimony that the move deprived it of $66 million in profits. An Indianapolis jury ultimately awarded such damages in full, but the federal appeals court decided Tuesday that the contracts in question were too vague for enforcement.

"ATA's breach of contract claim should never have been permitted to go to trial," Judge Richard Posner wrote for a three-judge panel. "Courts interpret and enforce contracts; they don't make contracts. A contract is unenforceable if it is 'indefinite' in the sense of missing vital terms, such as price, that can't be readily supplied by a court, for example by reference to a price formula agreed on by the parties."

"So ATA loses. But we do not want to ignore the jury's award of damages, which presents important questions that have been fully briefed and are bound to arise in future cases."

The $66 million award was based entirely on a regression analysis presented by forensic accountant who testified for ATA, Lawrence D. Morriss.

U.S. District Judge Richard Young rejected FedEx's objection to Morriss' analysis, saying that the company could argue subjectivity on cross-examination. The 7th Circuit called that ruling was a misstep.

"The judge can require the lawyer who wants to offer the expert's testimony to explain to the judge in plain English what the basis and logic of the proposed testimony are, and the judge can likewise require the opposing counsel to explain his objections in plain English," Posner wrote.

"This might not have worked in the present case; neither party's lawyers, judging from the trial transcript ... understand regression analysis; or if they do understand it they are unable to communicate their understanding in plain English," Posner wrote.

The 28-page opinion points out extensive errors with the trial court's analysis, including a $90 million margin of error, which Posner concluded was "fatally flawed."

"This is not nitpicking," Posner wrote. "Morriss's regression had as many bloody wounds as Julius Caesar when he was stabbed 23 times by the Roman senators led by Brutus."

"We have gone on at such length about the deficiencies of the regression analysis in order to remind district judges that, painful as it may be, it is their responsibility to screen expert testimony, however technical."

On remand, the trial court must dismiss the suit with prejudice.

"Both because FedEx tendered no estimate of damages and because neither Morriss nor the lawyers nor the judge presented an intelligible damages analysis to the jury, it is no surprise that, having decided that ATA should win, the jury simply awarded the exact figure that ATA had asked for in damages," Posner concluded.

"If a party's lawyer cannot understand the testimony of the party's own expert, the testimony should be withheld from the jury. Evidence unintelligible to the trier or triers of fact has no place in a trial."

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