## Facts

- Diasonics contracted to sell Davis a .35 tesla MRI system for $1,500,000, with (1) a $225,000 “research grant” payable upon full payment and (2) an option to upgrade by June 1, 1985 for $700,000.
- Davis paid a $300,000 deposit but repudiated and failed to take delivery, breaching the contract.
- Diasonics resold the MRI to a third party at the same contract price.
- Diasonics refused to return the deposit; Davis sought restitution under UCC § 2-718(2).
- Diasonics counterclaimed for lost profits under UCC § 2-708(2), asserting it was a lost-volume seller.
- On remand from an earlier appeal, the district court found Diasonics to be a lost-volume seller, allowed it to retain the deposit, and awarded additional damages based on net lost profits (contract profit adjusted for costs incurred and avoided).
- Davis appealed, disputing lost-volume status, the cost/overhead methodology, and the inclusion or characterization of the research grant and upgrade option in the profit calculation.

## Issues

1. Whether Diasonics proved it was a lost-volume seller entitled to lost-profit damages under UCC § 2-708(2) despite a same-price resale.
2. How “profit (including reasonable overhead)” under UCC § 2-708(2) should be calculated, including the treatment of avoided costs and the degree of precision required.
3. Whether the $225,000 “research grant” functioned as a price discount (reducing profit) or as a separate obligation (requiring different treatment).
4. Whether, and on what basis, the $700,000 upgrade option could be included in the UCC § 2-708(2) profit calculation.
5. How seller damages under UCC § 2-708(2) interact with buyer restitution rights under UCC § 2-718(2) when the buyer has paid a deposit.

## Decision

- The Seventh Circuit affirmed the district court’s use of UCC § 2-708(2) lost-profit damages for a lost-volume seller and upheld the finding that Diasonics qualified on the record.
- The court upheld the general damages methodology, including using reasonable estimates for overhead and costs rather than requiring exact line-item certainty, so long as the approach was supported and not speculative.
- The court remanded for further findings on whether the $225,000 research grant was a disguised price reduction or a separate obligation, because that characterization could change the profit baseline.
- The court remanded for further findings on the legal and economic status of the upgrade option and whether any option-related profit could be included without speculation.
- The court accepted the deposit-as-credit framework: if proven damages exceed the deposit, the buyer receives no restitution and may owe additional amounts.

## Legal Principles

- UCC § 2-708(2) permits recovery of “profit (including reasonable overhead)” when ordinary resale/market formulas do not place the seller in as good a position as performance would have.
- A seller may be a lost-volume seller even after resale at the same price if the resale is not a replacement sale but an additional sale the seller likely would have made anyway.
- Lost-volume status generally requires proof that the seller (1) had capacity to make both sales, (2) would have profited from both, and (3) probably would have made the resale-buyer sale even if the original sale had been completed.
- Lost-profit damages are net profits: contract revenue less variable costs avoided due to the breach, plus reasonable overhead; exact precision is not required if the estimate is grounded and methodologically sound.
- Under UCC § 2-718(2), a breaching buyer’s restitution is limited to payments exceeding the seller’s provable damages; a deposit is credited against damages rather than automatically refunded.
- Contract add-ons affecting profit (such as rebates/credits labeled as grants and contingent options) must be correctly characterized before being included in the UCC § 2-708(2) profit computation.

## Conclusion

The court largely sustained Diasonics’ entitlement to lost-volume seller damages under UCC § 2-708(2) and the district court’s reasonable-estimate approach to net lost-profit computation, but remanded for specific factual findings on whether the research grant reduced the effective price and whether the upgrade option could be included in damages without speculation, because those items could materially change the profit measure and deposit setoff.


R.E. Davis Chem. Corp. v. Diasonics, Inc., 924 F.2d 709 (7th Cir. 1991)