Free Published Opinion - District Court of Federal Claims - federal

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In the United States Court of Federal Claims
No. 98-720 C Filed September 19, 2006 ____________________________________ ) Timber sale contracts, suspensions, PRECISION PINE & TIMBER, INC., ) lost profits, independent and collateral ) undertakings, subject matter of the ) contract, foreseeability at time of Plaintiff, ) contracting, availability of cover, v. ) partial breach, delayed delivery, election, ) waiver, expectancy damages, lost THE UNITED STATES, ) volume seller, burden of proof, offset of ) profits on previously suspended sales, lost Defendant. ) production opportunity, "hole in the ____________________________________) profit pipeline", additional timber sale contracts, full operating capacity, ability to sell additional lumber, profitability of additional sales Alan I. Saltman, Saltman & Stevens, P.C., Washington, D.C., for plaintiff. Richard W. Goeken and Bryan T. Bunting, Saltman & Stevens, P.C., Washington, D.C., of counsel. David A. Harrington, Trial Attorney, Kathryn A. Bleecker, Assistant Director, David M. Cohen, Director, Commercial Litigation Branch, Civil Division, Peter D. Keisler, Assistant Attorney General, United States Department of Justice, Washington, D.C., for defendant. Lori Polin Jones and Patricia L. Disert, U.S. Department of Agriculture, Washington, D.C., of counsel. OPINION AND ORDER GEORGE W. MILLER, Judge. This matter is before the Court following a 24-day trial on damages held in Washington, D.C., between May 12, 2005 and June 20, 2005. The parties filed Post-Trial Proposed Findings of Fact and Conclusions of Law on September 2, 2005, and responses thereto on November 14, 2005.1
1

By leave of the Court, plaintiff filed Plaintiff's Corrected Post-Trial Brief and Plaintiff's Corrected Proposed Findings of Fact on September 16, 2005. For the sake of simplicity, throughout this Opinion and Order the Court will refer to Plaintiff's Corrected PostTrial Brief and Plaintiff's Corrected Proposed Findings of Fact filed on September 16, 2005 as "Plaintiff's Post-Trial Brief" and "Plaintiff's Proposed Findings of Fact." By leave of the Court,

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The Court heard closing argument on February 17, 2006 and on March 1, 2006. Prior to closing argument, the Court issued Orders on January 23, 2006, February 1, 2006, February 15, 2006, and February 16, 2006 setting forth hypothetical cases and questions that the Court requested that the parties be prepared to address at closing argument.2 The purpose of these questions and hypothetical cases was to provide the parties with an opportunity to clarify issues that had not been fully explained in the parties' Post-Trial Briefs and Post-Trial Response Briefs.

BACKGROUND3 This case concerns 14 timber sale contracts that were either awarded or transferred to Precision Pine & Timber, Inc. ("Precision Pine") prior to August 1995: 1) the Hay contract; 2) the St. Joe contract; 3) the O.D. Ridge contract; 4) the U-Bar contract; 5) the Jersey Horse contract; 6) the Salt contract; 7) the Hutch-Boondock contract; 8) the Mud contract; 9) the Monument contract; 10) the Saginaw-Kennedy contract; 11) the Brann contract; 12) the Manaco contract; 13) the Brookbank contract; and 14) the Kettle contract.4 On August 25, 1995, pursuant

defendant filed Defendant's Corrected Proposed Findings of Fact on January 10, 2006. For the sake of simplicity, throughout this Opinion and Order the Court will refer to Defendant's Corrected Proposed Findings of Fact filed on January 10, 2006 as "Defendant's Proposed Findings of Fact." The January 23, 2006 Order was modified by the Court's Order of February 14, 2006 to correct an error in one of the questions set forth in the January 23, 2006 Order. This recitation of facts sets forth certain of the Court's findings of fact in accordance with Rule 52(a) of the Rules of the United States Court of Federal Claims ("RCFC"). Additional findings of fact and rulings on mixed questions of fact and law are set forth in the Discussion section of this Opinion and Order. The Court states herein background facts necessary to an understanding of the issues in this case and facts relevant to defendant's collateral undertakings, foreseeability, and partial breach arguments and plaintiff's lost volume seller arguments, which are the subjects of this Opinion and Order. For a more complete account of the background facts and procedural history in this case, see Chief Judge Damich's Opinion on liability, Precision Pine & Timber, Inc. v. United States, 50 Fed. Cl. 35 (2001), this Court's decision granting in part and denying in part Defendant's Motion for Partial Summary Judgment, Precision Pine & Timber, Inc. v. United States, 63 Fed. Cl. 122 (2004), and this Court's decision denying Defendant's Motion for Partial Reconsideration and Clarification of the Court's decision granting in part and denying in part Defendant's Motion for Partial Summary Judgment, Precision Pine & Timber, Inc. v. United States, 64 Fed. Cl. 165 (2005). Several of the contracts at issue provided for the harvesting of both sawlogs and roundwood, whereas other contracts only provided for the harvesting of sawlogs. See Plaintiff's -24 3 2

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to an order of the United States District Court for the District of Arizona in Silver v. Babbitt, 924 F. Supp. 976, 989 (D. Ariz. 1995) the United States Forest Service (the "Forest Service") suspended harvesting on all Forest Service timber sale contracts in Forest Service Region Three, including Precision Pine's 14 contracts. March 11, 2005 Joint Stipulation of Facts ¶¶ 28-29. The Arizona District Court ordered that harvesting be enjoined until the Forest Service complied with its obligation to consult with the United States Fish and Wildlife Service ("FWS") regarding the impacts of the Forest Service's Land and Resource Management Plans ("LRMPs") upon the Mexican Spotted Owl. Silver v. Babbitt, 924 F. Supp. at 981-89. The District Court ordered the suspensions because the Forest Service had failed to submit its LRMPs for consultation with the FWS as it was required to do under the Section 7 of the Endangered Species Act ("ESA"), 16 U.S.C. § 1531 et. seq., when the Mexican Spotted Owl was listed as a threatened species. Precision Pine, 50 Fed. Cl. at 38-39. LRMPs were completed for National Forests in Forest Service Region Three between 1985 and 1988, before the Mexican Spotted Owl was listed as a threatened species in 1993. Id. at 41. On July 7, 1994, the United States Court of Appeals for the Ninth Circuit held that LRMPs represent ongoing "agency actions" for which the Forest Service is required to engage in consultations under Section 7 of the ESA whenever a new species is listed as threatened or endangered. Pacific Rivers Council v. Thomas, 30 F.3d 1050, 1057 (9th Cir. 1994). However, the Forest Service did not submit any LRMPs from Region Three for consultation with the FWS after the Ninth Circuit's decision in Pacific Rivers. Precision Pine, 50 Fed. Cl. at 44. In fact, the Forest Service did not commence the required consultations on existing LRMPs in Region Three until well after it was ordered to do so by the Arizona District Court in Silver v. Babbitt on August 24, 1995, more than one year after the date of the Pacific Rivers decision. See Silver v. Babbitt, 924 F. Supp. at 989. On October 18, 1995, less than eight weeks after the suspensions required by Silver v. Babbitt were imposed, the Forest Service released the Brann, Hutch-Boondock, and St. Joe timber sale contracts from the suspension pursuant to a stipulation with the plaintiffs in Silver v. Babbitt.5 Precision Pine, 50 Fed. Cl. at 47 n.18. Pursuant to a settlement in a second lawsuit,

Exhibit ("PX") 320. "Sawlogs" refer to trees that are 9.0 inches in diameter or greater at breast height, whereas "roundwood" or "pulpwood" refers to trees that are between 5.0 and 9.0 inches in diameter at breast height. See Trial Transcript ("Trial Tr.") at 111-12. Technically, contracts that only require sawlogs to be harvested are referred to as "timber sale" contracts. See Precision Pine, 63 Fed. Cl. at 126 n.3. Contracts that require both sawlogs and roundwood to be harvested are referred to as "multi-product sale" contracts. Id. For the purposes of this Opinion and Order, the distinction is not relevant, and the Court will refer to all of the contracts as "timber sale contracts." In his decision on liability, Chief Judge Damich found that the St. Joe and HutchBoondock timber sale contracts had not been breached. Precision Pine, 50 Fed. Cl. at 71; see -35

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Southwest Center For Biological Diversity v. United States Forest Service, No. 95 Civ. 1927 (D. Ariz. filed Sept. 13, 1995), the Mud contract was partially cancelled and was released for harvesting on March 11, 1996. See PX 106, PX 109. However, because the formal consultations initiated by the Forest Service became unreasonably protracted in length due to the Forest Service's failure to initiate the consultations in a timely manner and to provide a legally sufficient Biological Opinion, it was not until December 4, 1996 that the Arizona District Court dissolved the injunction against harvesting in Forest Service Region Three. Precision Pine, 50 Fed. Cl. at 47-51; see also March 11, 2005 Joint Stipulation of Facts ¶ 31. The Forest Service subsequently lifted the suspension of the Brookbank, Hay, Jersey Horse, Kettle, Manaco, Monument, O.D. Ridge, Saginaw-Kennedy, Salt and U-Bar contracts. Id. Throughout the suspensions, Precision Pine informed the Forest Service that it considered the Forest Service to have breached the timber sale contracts. See PX 116, PX 299, Precision Pine, 62 Fed. Cl. at 637. However, rather than treating the breaches as total and terminating the contracts, Precision Pine elected to treat the breaches as partial and continue its performance. Precision Pine, 62 Fed. Cl. at 648-51. Precision Pine continued harvesting the previously suspended contracts once the suspensions were lifted. Trial Tr. at 1479. In addition, Precision Pine requested contract term adjustments for each contract affected by the suspensions. March 11, 2005 Joint Stipulation of Facts ¶ 34. The Forest Service granted each of Precision Pine's requests for contract term adjustments and provided adjustments equivalent to the number of days lost during each contract's normal operating season. Id. In 1997, Precision Pine submitted claims to the appropriate Forest Service contracting officer requesting a total of $13,097,209.62 in damages resulting from the suspension of the 14 contracts. See Precision Pine, 50 Fed. Cl. at 51. The contracting officer issued a final decision that Precision Pine was entitled to only $18,242.78 in damages. See id. 1. The Court's Decision on Liability

On September 11, 1998, plaintiff filed this action in the Court of Federal Claims, arguing that the suspensions breached the Forest Service's implied duties to cooperate and not to hinder performance of Precision Pine's timber sale contracts. Precision Pine, 50 Fed. Cl. at 39. Chief Judge Damich held that if a contract contains a specific warranty, a breach of that warranty breaches the implied duty to cooperate. Id. at 59 (citing Cedar Lumber, Inc. v. United States, 5 Cl. Ct. 539, 549 (1984)). On July 30, 2001, Chief Judge Damich issued a decision holding that the Forest Service had breached its implied duty to cooperate with respect to the Mud, Monument, Saginaw-Kennedy, Brann, Manaco, Brookbank, and Kettle contracts. Precision Pine, 50 Fed. Cl. at 73. Each of the contracts at issue contained Special Contract Clause CT

also Precision Pine, 63 Fed. Cl. at 126. As discussed in Section 1., infra, Chief Judge Damich found that the Forest Service had breached its implied duty to cooperate with respect to the Brann contract. -4-

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6.25, "Protection of Endangered Species," which provided: Location of areas needing special measures for protection of plants or animals listed as threatened or endangered under the Endangered Species Act of 1973 and R-3 Sensitive Plant and Animal Species List are shown on Sale Area Map and identified on the ground. Measures needed to protect such areas have been included elsewhere in the contract . . . . Precision Pine, 50 Fed. Cl. at 40. Chief Judge Damich found that Special Contract Clause CT 6.25 warranted that, at the time the contracts were entered into, the Forest Service had identified special measures necessary to protect endangered species under the ESA based upon an analysis of reasonably available information, and that based upon the information reasonably available, the measures identified were adequate for the protection of threatened or endangered species. Id. at 66-67. Chief Judge Damich found that the Forest Service breached this warranty with respect to those contracts entered into after July 7, 1994 (the date of the Ninth Circuit's decision in Pacific Rivers), because the Forest Service had no reasonable basis to know whether the warranty contained in CT 6.25 was true, due to its unreasonable failure to suspend logging activities and submit its LRMPs for consultation with the FWS after Pacific Rivers made it clear that it was required to do so. Id. at 69-70. Chief Judge Damich also found that the Forest Service had breached its implied duty not to hinder with respect to the Hay, O.D. Ridge, U-Bar, Jersey Horse, Salt, Mud, Monument, Saginaw-Kennedy, Manaco, Brookbank, and Kettle contracts. Id. at 73-74. Chief Judge Damich found that even if a contract does not contain a specific warranty, an unreasonable delay in performance that is caused by the Government can breach the implied duty not to hinder. Id. at 59. Chief Judge Damich held that the length of the suspensions was unreasonable for these contracts, and that the Forest Service was at fault for the delay. Id. at 70-72. Although the Arizona District Court order required the Forest Service to commence consultation with the FWS on the LRMPs in Region Three on August 24, 1995, the Forest Service did not request formal consultations until September 6, 1995 and did not formally reinitiate consultations until November 9, 1995. Id. The Forest Service also unreasonably delayed completion of the consultation process by failing to provide the Arizona District Court with a legally sufficient Biological Opinion in conformity with the joint stipulation of Silver v. Babbitt until November 26, 1996. Id. at 71. As a result, Chief Judge Damich found that the suspensions became unreasonably protracted and plaintiff's operations were significantly hindered. Id. 2. Plaintiff's Claim for Lost Profits Damages

Chief Judge Damich's decision on liability did not address the appropriate measure of damages in this case. Among other items, Precision Pine seeks to recover lost profits that it claims it would have earned on the sale of lumber and lumber by-products if it had been able to harvest the timber on the suspended sales between August 25, 1995 and the time that the

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suspensions were lifted.6 Pl.'s Post-Trial Brief at 15-16. Precision Pine's damages expert, Mr. Robert Ness, attempted to calculate these lost profits by determining "what would have changed" between what Precision Pine actually did during the period of the suspension and ensuing winter, and what Precision Pine would have done absent the Forest Service's breach. See Pl.'s Proposed Findings of Fact ¶ 63, Trial Tr. at 2218-19. In broad terms, Mr. Ness determined what he believed Precision Pine's gross profits before manufacturing and overhead would have been if there had been no suspension and Precision Pine had been able to produce and sell lumber and lumber by-products7 from timber on the suspended sales in 1995, 1996, and early 1997.8 Pl.'s Post-Trial Brief at 17. To do this, he calculated what he believed Precision Pine's total revenues would have been with respect to lumber that would have been produced from timber that would have been harvested from the breached sales during the suspension period, and then deducted what he asserted were the direct manufacturing costs that Precision Pine would have incurred in harvesting this timber and manufacturing it into lumber and lumber by-products. Id. at 17-18. In total, Mr. Ness estimated that Precision Pine incurred $6,865,541.21 in lost profits damages (or what Mr. Ness termed a "lost market opportunity") from being unable to harvest the Monument, Mud, Saginaw-Kennedy, U-Bar, Brookbank, Jersey Horse, Manaco, Salt, Hay, Kettle, and O.D. Ridge sales during the suspension period.9 See PX 131 Ex. 1, 4.

As a result of manufacturing logs into lumber, Precision Pine produced bark, chips, shavings and grindings as by-products. March 11, 2005 Joint Stipulation of Facts ¶ 33. Throughout this Opinion and Order, the Court will use the term "lost lumber profits" to refer to lost profits from lumber and lumber by-products. In addition, when addressing plaintiff's lost volume seller arguments, summarized at Section 3.D., infra, and analyzed at Section IV.A. and B. of the Discussion section, infra, the Court will refer to a lost "opportunity to produce and sell lumber" to denote a lost opportunity to produce and sell both lumber and lumber by-products. Defendant argues that the model used by Mr. Ness to determine lost profits damages is inaccurate and does not attempt to describe what Precision Pine would have done "but for" the suspensions. Def.'s Post-Trial Memorandum of Law ("Def.'s Post-Trial Brief") at 30-48. As discussed infra at page 7, for the purpose of this Opinion and Order, the Court does not intend to discuss or rule upon the reasonableness of Mr. Ness's damage calculations, except to discuss Mr. Ness's contention that Precision Pine should be compensated as a lost volume seller. Mr. Ness's $6,865,541.21 damages calculation includes lost profits damages for lumber, roundwood, and lumber by-products that he claims would have been earned from the suspended sales but for the suspensions. Id. Precision Pine is not seeking to recover lost profits damages with respect to the Brann contract, which is the only other contract that Chief Judge Damich found had been breached. See February 17, 2006 Closing Argument Tr. at 9. Plaintiff concedes that the suspension did not cause lost profits on the Brann contract because the -69 8 7

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3.

Arguments That the Court Will Address in This Opinion and Order

In this Opinion and Order, the Court will address plaintiff's argument that it should not be required to offset profits that it earned by partially harvesting the suspended sales in the postsuspension period. After reviewing the parties' Post-Trial Briefs and Post-Trial Response Briefs and considering the parties' responses at closing argument to the questions and hypothetical cases set forth in the Orders identified at page 2, supra, the Court concludes that it is not possible for the Court to determine at this time whether Precision Pine should be required to offset such profits, because neither party has addressed the proper standard for determining whether Precision Pine is entitled to be compensated as a lost volume seller. Accordingly, the Court believes that limited additional briefing consistent with the standard set forth in this Opinion and Order would be beneficial to both the parties and the Court. In this Opinion and Order, the Court will also address defendant's arguments that plaintiff cannot recover lost lumber profits because the manufacture and sale of lumber constituted independent and collateral undertakings and that plaintiff is precluded from recovering lost profits damages because plaintiff elected to assert a claim for partial breach and continue the timber sale contracts. These issues can be resolved without first determining whether plaintiff is entitled to be compensated as a lost volume seller. Furthermore, the additional briefs required by this Opinion and Order would be unlikely to further clarify the parties' arguments on these issues. The Court will also address defendant's argument that lost lumber profits were not a foreseeable result of the suspensions of plaintiff's timber sale contracts. As discussed in Section II., infra, plaintiff argues that defendant's foreseeability arguments are only relevant to the extent that the Court determines that plaintiff is not entitled to be compensated as a lost volume seller. The parties have not yet sufficiently addressed whether plaintiff is entitled to be compensated as a lost volume seller. However, all of the information and arguments necessary for the Court to determine whether lost lumber profits were foreseeable as a result of the suspensions are before the Court at this time, and therefore, the Court intends to address defendant's foreseeability arguments in this Opinion and Order. After the parties have submitted the additional briefing required by this Opinion and Order addressing whether plaintiff is entitled to be compensated as a lost volume seller, the Court will issue a further Opinion and Order addressing the remaining factual and legal issues in this case, including but not limited to whether plaintiff has established that its lost profits damages were caused by defendant's breach and whether plaintiff has proved its damages with reasonable certainty. The Court now turns to a description of the parties' arguments regarding independent and

suspension of that contract was lifted in October, 1995, long before Precision Pine would have harvested the contract if there had been no suspension. Id. -7-

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collateral undertakings, the foreseeability of lost lumber profits, plaintiff's entitlement to recover lost profits damages for a partial breach, and whether plaintiff is entitled to be compensated as a lost volume seller. After having described the parties' arguments, the Court will proceed to analyze, and to the extent possible at this time, resolve the parties' contentions. A. Defendant's Independent and Collateral Undertaking Arguments

Defendant argues that plaintiff cannot recover damages attributable to lost lumber profits because the contracts at issue in this case are timber contracts that do not require the manufacture of lumber after the timber is removed from Forest Service land. Def.'s Post-Trial Brief at 12. Defendant claims that Forest Service timber sales are frequently awarded to purchasers who do not own or do not have access to a sawmill, and that purchasers are free to and often choose to put Forest Service timber to a variety of uses other than the manufacture of lumber. Id. Therefore, defendant argues that Precision Pine cannot recover lost lumber profits because such profits arise from activities that are independent of and collateral to the breached contracts, and are therefore unrecoverable as a matter of law. See Def.'s Post-Trial Brief at 12-15. Rather than putative profits from the sale of lumber products, defendant argues that Precision Pine's damages should be based upon the difference between the contract price/market value differential for the timber at issue at the time of breach and the contract price/market value differential on the day that the suspensions were lifted. See Def.'s Post-Trial Brief at 10-11. Plaintiff argues that where a contract to supply raw materials to a party in the business of manufacturing is breached, lost profits on the manufactured goods that would have been produced are not collateral to the contract. Pl.'s Post-Trial Brief at 6. Plaintiff also argues that Precision Pine's bidding documents, the timber sale contracts themselves, and the Forest Service Timber sale program all refer to the production of lumber from timber, demonstrating that the manufacture and sale of lumber do not constitute independent and collateral undertakings. Id. at 8. Plaintiff notes that the Forest Service's manual states that an objective of the Forest Service's commercial timber sale program is "to provide a continuous flow of raw material to local forest industries." Pl.'s Post-Trial Brief at 9. Furthermore, plaintiff notes that in bidding on Forest Service timber sale contracts, prospective purchasers are required to identify whether they are manufacturers of lumber, and that as part of their standard bid packages, potential purchasers are required to identify the plant at which the timber is to be manufactured into lumber. Id. Plaintiff also notes that clauses in Precision Pine's timber sale contracts provided additional time to harvest the timber in the event of a downturn in the lumber market, and required Precision Pine to certify that the timber would be processed domestically. Id. at 9-10. Plaintiff argues that these provisions demonstrate that Precision Pine's timber sale contracts were drafted and awarded with the production and sale of lumber in mind, and as such, lumber production and sale cannot be collateral to the contracts. Id. at 11. B. Defendant's Foreseeability Arguments

Defendant also argues that Precision Pine's lost lumber profits claims should be rejected -8-

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because plaintiff has failed to establish that lost lumber profits were a legally foreseeable result of the Mexican Spotted Owl suspensions. Def.'s Post-Trial Brief at 28-30. Defendant argues that the suspensions merely delayed the harvesting of plaintiff's timber sale contracts, and that when the suspensions ended, Precision Pine elected to continue the contracts, and the very same trees on the very same contracts were available for harvesting. Id. at 29. According to defendant, the time for performance was also not affected, because the contract terms were adjusted to provide Precision Pine with additional time to harvest the sales. Id. Therefore, defendant argues, at the time of contracting there was no reason for defendant to foresee that the delays caused by the suspensions would result in a loss of profits, as opposed to a mere deferral of profits. Id. at 30. Plaintiff argues that many of the facts discussed in Section 3.A., supra, demonstrating that the manufacture and sale of lumber were not independent of or collateral to Precision Pine's timber sale contracts also demonstrate that lost profits were a foreseeable result of the suspensions. Pl.'s Post-Trial Brief at 16. Furthermore, plaintiff argues that in documents prepared just days after the suspensions were imposed, the Forest Service indicated that it was aware of the impact of the suspensions on the profitability of timber companies. Id. On August 28, 1995, just three days after Precision Pine's contracts were suspended, the Forest Service prepared a document entitled "Effects of Injunction on Timber Harvest Activities on Region Three's Existing and Planned Timber Sales Program." See PX 138. This document stated that: if this injunction continues for 2-3 months, it is essentially a 12 month delay for a very high percentage of our sales. It also means that many mills will have to shut down for extended periods. Since they have been operating "on the edge" for some time due to low availability of logs to process, this injunction could cause mills to close permanently. Id. On September 14, 1995, less than one month after Precision Pine's contracts were suspended, the Forest Service prepared a document entitled "Summary Effects of Mexican Spotted Owl Injunction Southwest Region," which stated: The effect on the timber industry is very serious . . . . The logging season is restricted in most places to the fall months due to protective requirements for the owl and goshawks. Thus we expect to lose the 1995 year of production which will put several mills out of business permanently . . . . T[his] represents about 1300 job[s] or families that will lose some or all of their annual income with another 700 secondary jobs affected. Twelve communities in Arizona and 28 in New Mexico will feel the effects. We expect about three sawmills to go out of business permanently if the injunction lasts through this logging season. PX 103. -9-

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Finally, plaintiff argues that foreseeability, to a large degree, has already been addressed by the Court and is now the law of the case. Pl.'s Post-Trial Brief at 16. Plaintiff argues that in his decision on liability, Chief Judge Damich already addressed the issue of foreseeability in stating that "[t]he Court finds that the Defendant was aware that the Plaintiff's operations would be significantly hindered by the delay" and "[t]he Forest Service was aware of the effects of the suspension of the timber sales contracts on the timber industry as a whole within Region 3." See Precision Pine, 50 Fed. Cl. at 71; see also Pl.'s Post-Trial Brief at 16. Defendant argues that the Forest Service documents identified by plaintiff are not relevant in determining foreseeability because foreseeability should be assessed at the time of contracting, and the Forest Service documents discussed above were created at or after the time that the Mexican Spotted Owl suspensions were imposed. Def.'s Response to Pl.'s Post-Trial Memorandum of Law ("Def.'s Post-Trial Response Brief") at 26. Defendant claims that the statements made by the Forest Service after the timber sale contracts were entered into do not demonstrate what the Forest Service had reason to foresee at the time of contracting, which was as much as five and a half years before the suspensions occurred. Id. Furthermore, defendant argues that when stating that the Forest Service was "aware" of the effects of the suspensions, Chief Judge Damich was discussing what the Forest Service was aware of after the suspensions were imposed, not at the time of contracting. Id. In response, relying on Gardner Displays Co. v. United States, 171 Ct. Cl. 497, 505, 346 F.2d 585, 589 (1965), plaintiff argues that there may be reasons to assess foreseeability at the time of breach, at which point plaintiff claims there can be no dispute that the impact of the suspension on Precision Pine was actually foreseen by the Forest Service. Pl.'s Post-Trial Response Brief at 24. Plaintiff also argues that Myerle v. United States, 33 Ct. Cl. 1, 27 (1867), Specialty Assembly & Packing Co., Inc. v. United States, 174 Ct. Cl. 153, 567-68, 355 F.2d 544 (1966), and Lewis v. United States, 1982 WL 36718 *17 (Ct. Cl. July 16, 1982) support plaintiff's argument that foreseeability should be assessed at the time of breach. Id. On June 9, 2006, defendant filed a Notice of Supplemental Authority asserting that the Federal Circuit's May 25, 2006 decision in Old Stone Corp. v. United States, 450 F.3d 1360, 1375 (Fed. Cir. 2006) supports defendant's argument that plaintiff's loss must have been foreseeable at the time of contracting. Def.'s Notice of Supp. Auth. at 1. Defendant also argues that Old Stone established that plaintiff's alleged inability to make "substitute arrangements" (i.e., to obtain cover) must itself have been foreseeable at the time of contracting. Id. at 4; see also Old Stone, 450 F.3d at 1376-77. Defendant claims that because plaintiff failed to establish that Precision Pine's asserted inability to obtain substitute timber was foreseeable at the time of contracting, plaintiff is not entitled to recover lost profits damages.10 Def.'s Notice of Supp. Auth. at 4.
10

Defendant does not concede that cover was unavailable during the suspensions. See Section III. of the Discussion section, infra. -10-

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C.

Defendant's Partial Breach Arguments

Defendant also argues that because plaintiff elected to continue the Forest Service timber sale contracts and bring a claim for partial breach, plaintiff is not entitled to recover damages in the form of lost profits. Def.'s Post-Trial Brief at 9-11; Def.'s Post-Trial Response Brief at 1215. Defendant notes that in the face of a material breach, an injured party can elect to either continue a contract or to cancel it. Def.'s Post-Trial Brief at 9; see also Cities Service Helix, Inc. v. United States, 211 Ct. Cl. 222, 234-35, 543 F.2d 1306, 1313 (1976). Plaintiff elected to continue the Forest Service timber sale contracts that had been affected by the Mexican Spotted Owl suspensions. Precision Pine, 62 Fed. Cl. at 651; March 11, 2005 Joint Stipulation of Facts ¶ 34; Trial Tr. at 1479. Defendant asserts that because plaintiff chose to continue the contracts, plaintiff has already received the benefit of its bargain with the Forest Service through performance of the contracts, and cannot also recover through damages for lost profits. Def.'s Post-Trial Brief at 10. As defendant also argued in support of its collateral undertakings argument, defendant contends that plaintiff's damages should be measured by the difference between the contract price/market value differential at the time of breach and the contract price/market value differential when the suspensions were lifted. Id. at 10-11; February 17, 2006 Closing Argument Tr. at 110. Counsel for defendant explained defendant's position with regard to partial breach at closing argument: what the election really is, in a broader context, is an allocation of the risk regarding the future performance of the contract. When you choose to cancel the contract, what you're saying is I want to take a bird in the hand. It's been materially breached, I know I'm within my rights to cancel it, I'm going to take the profits that I anticipate getting from this contract. When you elect to continue the contract, on the other hand, what you're saying is, I want to see how this turns out. I think there is a real upside with this contract, and I recognize that there's a possibility that I might not do as well as I would by cancelling and taking damages. I recognize that there is a possibility I might do much, much better. And why this is important, particularly in the context of a case like this . . . if they choose to continue the contract and then come back and say well, it didn't work out, I want my profits that I would have gotten if I had simply cancelled, it changes the entire dynamic. It makes the Defendant a guarantor of those profits. February 17, 2006 Closing Argument Tr. at 128-29. Plaintiff, of course, vigorously contests defendant's assertions that it is not entitled to recover lost profits damages. See Pl.'s Post-Trial Brief at 13-15. Plaintiff argues that it is entitled to recover expectancy damages for defendant's partial breach, which it claims include lost profits in this case. Id. Furthermore, Precision Pine argues that it essentially had no choice -11-

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other than to treat the suspensions as a partial breach and continue the contracts, because if it had cancelled the contracts, Precision Pine would have lost its primary timber supply. March 1, 2006 Closing Argument Tr. at 258-60. Precision Pine also argues that it if had treated the suspensions as a total breach and had failed to meet its obligations to harvest timber under the contracts, the Forest Service would have declared Precision Pine in default, and as a result, Precision Pine would have had difficulty being considered as a bidder for future contract awards. Id. at 259. Accordingly, plaintiff argues that contrary to defendant's assertions, by electing to pursue damages for partial breach, Precision Pine was not engaging in speculation to see whether the contracts would be profitable in the post-suspension period or whether it wished to pursue lost profits through litigation. Id. at 260. Rather, Precision Pine was simply trying to survive as a business. Id. D. Plaintiff's Lost Volume Seller Arguments

Plaintiff argues that its claim for lost lumber profits should not be reduced by any profits that it actually earned from the sale of lumber produced from the suspended sales after the suspensions were lifted. See Pl.'s Post-Trial Brief at 44-47. As discussed at page 4, supra, after the suspensions were lifted, the Forest Service granted Precision Pine's request for contract term adjustments and provided adjustments equivalent to the number of days that had been lost during each contract's normal operating season. See March 11, 2005 Joint Stipulation ¶ 34. After the suspensions had been lifted and contract term adjustments had been granted, Precision Pine harvested timber on the Hay sale, the Mud sale, the U-Bar sale, the Brookbank sale, the Jersey Horse sale, the Manaco sale, the Kettle sale, and the O.D. Ridge sale. See Def.'s Exhibit ("DX") 832. During the post-suspension period, Precision Pine cut and removed approximately 45% of the total timber available from these sales.11 Id. Plaintiff contends that its lost profit damages should not be offset by any profits that it earned from harvesting these sales after the suspensions were lifted because, as a result of the Mexican Spotted Owl suspensions, Precision Pine lost an opportunity to produce and sell lumber that can never be replaced. Pl.'s Post-Trial Brief at 44. Plaintiff asserts that but for defendant's breach, Precision Pine would have processed all of the timber on the breached contracts during the period of the suspension and the ensuing winter, and thereafter, would have purchased additional timber from sales offered by the Forest Service in the post-suspension period and would have also earned profits on lumber produced from that subsequently-purchased timber. Pl.'s Post-Trial Response Brief at 8-9. Therefore, plaintiff argues that deducting post-suspension profits would put Precision Pine in a worse position than it would have been in but for defendant's breach. Id. at 9. Absent the breach, according to plaintiff, Precision Pine would have earned profits on lumber produced from the suspended timber sales during the suspension period in addition to profits on lumber produced from subsequently purchased timber sales in the

Specifically, Precision Pine harvested 100% of the Hay sale, 98% of the Mud sale, 11% of the U-Bar sale, 52% of the Brookbank sale, 55% of the Jersey Horse sale, 31% of the Manaco sale, 27% of the Kettle sale, and 40% of the O.D. Ridge sale. Id. -12-

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post-suspension period. Id. Mr. Ness, plaintiff's economic and accounting expert, testified that he believed that it would be inappropriate to deduct profits that Precision Pine earned in the post-suspension period for the following reason: the critical factor is that you had lost production capability in the time periods that we were examining during the suspension period where this timber would have been cut and processed. Those are lost opportunities. There is no way to go back and put logs into that period and manufacture those. Anything that happened post-suspension would have been opportunities that existed with or without the suspension. Precision Pine would have still had those mills. They would still have been able to buy timber, and they would have been able to earn additional profits during that period whether they were from breach[ed] timber sales, or new timber sales . . . or whatever timber they wanted to get. They had that opportunity to do that, and you can't go back and fill in those holes that existed during that 20-month suspension period. There is no way to go back. Trial Tr. at 2362-2363. Similarly, Precision Pine's president, Mr. Lorin Porter, testified that "[Precision Pine] had a period of time there that was taken from us that we could not produce, we could not sell, we could not do anything with that timber that was taken from us and therefore it's something that you never get back." Trial Tr. at 629. Defendant argues that plaintiff should not be compensated as a lost volume seller because the Mexican Spotted Owl suspensions merely delayed harvesting the timber on the suspended contracts, and Precision Pine did eventually earn profits from these contracts after the suspension was lifted. Def.'s Post-Trial Brief at 15-16. Furthermore, defendant notes that, unlike the typical lost volume seller scenario, in this case, defendant is not seeking to offset profits earned on other timber sale contracts that Precision Pine was awarded after the suspension was lifted. Id. at 17. Instead, the Government is asking to offset post-suspension profits earned on the suspended contracts themselves. Id. For these reasons, defendant asserts that if Precision Pine's damage claims are not reduced by its post-suspension profits, Precision Pine would be compensated twice for lost profits on the same timber contracts ­ once when it earned profits from harvesting and processing the timber, and once again through damages in this action. Id. Alternately, defendant argues that Precision Pine has failed to demonstrate that it is entitled to be compensated as a lost volume seller as a factual matter because Mr. Porter was unable to identify specific contracts that Precision Pine would have bid on or been awarded absent the Mexican Spotted Owl suspension. Id. at 18. Finally, defendant argues that Precision Pine should not be compensated as a lost volume seller because Precision Pine did not actually lose volume as a result of the suspensions. See Def.'s Post-Trial Response Brief at 18-19; February 17, 2006 Closing Argument Tr. at 144-45. Specifically, defendant argues that had plaintiff wished to do so, it had the sawmill capacity to process both the suspended sales and the additional sales that plaintiff argues it would have acquired in the post-suspension period had -13-

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there been no suspensions. Def.'s Post-Trial Response Brief at 19. The Court now turns to an analysis and, where possible at this time, resolution of the parties' arguments described above. DISCUSSION I. The Manufacture and Sale of Lumber Products Do Not Constitute Independent and Collateral Undertakings

For lost profits to be recoverable in this Circuit, they must flow from the contract that is the subject of the lawsuit and not from "independent and collateral undertakings." Energy Capital Corp. v. United States, 302 F.3d 1314, 1328 (Fed. Cir. 2002); Wells Fargo Bank, N.A. v. United States, 88 F.3d 1012, 1023 (Fed. Cir. 1996); see also Consolidated Edison Co. of N.Y., Inc. v. United States, 67 Fed. Cl. 285, 290 (2005) ("Only if the damages naturally flow from the breach and are not realized from `independent and collateral undertakings,' are they recoverable."). As discussed at Section 3.A. of the Background section, supra, defendant argues that Precision Pine's timber sale contracts did not require or concern the manufacture of lumber, and that accordingly, any lost lumber profits arose from undertakings that are independent of and collateral to the contracts and are therefore unrecoverable. In Wells Fargo Bank, N.A. v. United States, the Federal Circuit set forth the following test for determining whether lost profits arose from an activity collateral to a contract: If the profits are such as would have accrued and grown out of the contract itself, as the direct and immediate results of its fulfillment, then they would form a just and proper item of damages, to be recovered against the delinquent party upon a breach of the agreement . . . . But if they are such as would have been realized by the party from other independent and collateral undertakings, although entered into in consequence and on the faith of the principal contract, then they are too uncertain and remote to be taken into consideration as a part of the damages occasioned by the breach of the contract in suit. 88 F.3d at 1022-23 (quoting Ramsey v. United States, 121 Ct. Cl. 426, 435, 101 F. Supp. 353, 357-58 (1951)). The relevant issue is whether the lost profits claimed "are too remote to be classified as a natural result" of the breach of a particular contract. Ramsey v. United States, 121 Ct. Cl. at 434, 101 F. Supp. at 353, 357. Collateral undertakings that are too remote to form the basis for expectancy damages are those that are not based directly on the subject of the contract, but instead, involve either the fruits of the contract or opportunities crowded out by breach of the contract. Mann v. United States, 68 Fed. Cl. 666, 669 (2005); see also Smokey Bear, Inc. v. United States, 31 Fed. Cl. 805, 808 (1994) ("[T]he court and its predecessor ha[ve] previously held that damages for the loss of future profits and lost profitable business opportunities arising -14-

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from potential contracts with others are per se unrecoverable."). Such independent and collateral undertakings involve a second step that is not inherent in the contract itself. Mann, 68 Fed. Cl. at 669. For example, in Olin Jones Sand Co. v. United States, the Court of Claims refused to award the plaintiff damages as a result of delayed payments on a contract with the Government that plaintiff alleged caused it to be unable to obtain bonding to enter into other, unrelated contracts. 225 Ct. Cl. 741, 742 (1980). The Court held that plaintiff could not recover such damages because they were "speculative" in nature and the receipt of prospective future contracts was "dependant on many factors not related to bonding." Id. at 744. Similarly, in Rumsfeld v. Freedom NY, Inc., 329 F.3d 1320, 1333 (Fed. Cir. 2003), the plaintiff sought to recover lost profits associated with future contracts that plaintiff alleged it would have been awarded absent harm to its business as a result of the Government's breach of an unrelated contract. The Court of Appeals for the Federal Circuit held that such lost profits were the result of independent and collateral undertakings, and were too "remote and uncertain" to be recoverable. Id. In Wells Fargo Bank, N.A. v. United States, the Court of Appeals for the Federal Circuit held that a plaintiff could not recover lost profits from prospective loans that it allegedly would have made to unspecified third parties but for the unavailability of capital occasioned by the defendant's breach of a loan guarantee. 88 F.3d at 1022-24. The Court of Appeals found that the lost profits on these prospective additional loans were "too uncertain and remote to be taken into consideration as part of the damages occasioned by the breach of the contract in suit" because the purpose of the breached contract was for plaintiff to make profits from the interest on the loan guaranteed by the Government, not on other unrelated loans. Id. at 1023 (quoting Ramsey, 121 Ct. Cl. at 435, 101 F. Supp. at 358). However, where lost profits directly relate to the subject of the contract, they are recoverable, even if they would have required a transaction with a third party. Mann, 68 Fed. Cl. at 670; see also Cal. Fed. Bank, F.S.B. v. United States, 245 F.3d 1342, 1349 (Fed. Cir. 2001) ("Profits on the use of the subject of the contract itself . . . are recoverable as damages."); Commercial Fed. Bank, F.S.B. v. United States, 59 Fed. Cl. 338, 345-46 (2004) ("Although that profit was to be made on `collateral undertakings,' such as mortgage loan activity, these profits were the result of the `use of the subject of the contract itself.'"). Lost profits directly relate to the subject matter of the contract where "the only purpose of the contract . . . was for the plaintiff to make profits on the subject of the contract . . . ." Wells Fargo, 88 F.3d 1023. For example, in Energy Capital Corp. v. United States, the plaintiff sought to recover lost profits based on loans that plaintiff would have made to third parties pursuant to an agreement with the Government to secure such loans. 302 F.3d at 1317. The Government breached the agreement before plaintiff originated a single loan. Id. at 1319. However, the Court of Appeals for the Federal Circuit held that the express purpose of plaintiff's agreement with the Government was to enable plaintiff to make loans to third parties, and that the resulting loss of profits from such loans flowed directly from the Government's breach. Id. at 1329.

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In Neely v. United States, the Court of Claims awarded plaintiff lost mining profits when the Government breached a contract to lease land for coal mining. 152 Ct. Cl. 137, 285 F.2d 438 (1961). In Wells Fargo, the court explained the holding in Neely as a result of the fact that "[t]he profits lost in Neely were profits on the use of the subject of the contract itself." 88 F.3d at 1023. Similarly, in Mann v. United States, the plaintiff sought to recover lost profits from the sale of energy to third parties as a result of the Government's breach of a geothermal lease agreement with the plaintiff. 68 Fed. Cl. at 666. The Government moved for summary judgment on plaintiff's claim for lost profits on the ground that profits from sales to third parties constituted activities that are independent of and collateral to the geothermal lease agreement that was breached. Id. The Court found that the evidence indicated that profits from the sale of energy from the leased property were contemplated by both parties. Id. at 670. The Court further held that the subject of the contract between plaintiff and the Government was geothermal energy, and that "[p]rofits on the use of the subject of the contract itself . . . are recoverable as damages." Id. at 670 (quoting California Federal Bank, FSB v. United States, 245 F.3d 1342, 1349 (Fed. Cir. 2001)). Determining whether lost profits relate to the subject matter of a contract is often a difficult, fact-specific inquiry. See e.g., Smokey Bear, Inc. v. United States, 31 Fed. Cl. at 809. The relevant inquiry is whether the lost profits claimed directly related to the breached contract and were within the contemplation of the parties at the time of contracting. Mann, 68 Fed. Cl. at 669; see also Smokey Bear, Inc., 31 Fed. Cl. at 809 ("The issue for this court is whether the damages plaintiff seeks are the `natural and probable consequences' of the alleged breach of the license agreement, i.e., whether the damages were within the contemplation of the parties at the time the contract was made."). For example, in Smokey Bear, Inc. v. United States, the Court of Federal Claims held that the plaintiff's lost profits based on the potential sales of licensed products to third parties were not unrecoverable as a matter of law because there was an issue of fact as to whether the lost profits claimed were within the contemplation of the parties at the time that the licensing contract was entered into. 31 Fed. Cl. 805, 809 (1994). Similarly, in Mann v. United States, the Court of Federal Claims held that the plaintiff's claim for lost profits on the sale of geothermal energy to third parties were not unrecoverable as a matter of law, because the parties not only contemplated that the plaintiff would sell the energy to third parties, but actively intended that result. 68 Fed. Cl. at 670. In the present case, the timber contracts themselves and the nature of the Forest Service timber sale program indicate that the manufacture and sale of lumber were within the contemplation of the parties at the time that the contracts were entered into. At all times relevant to this case, an objective of the Forest Service's commercial timber sale program as recognized by the Forest Service manual was to "provide a continuous flow of raw material to local forest industries." PX 132; PX 134. Mr. Ronald Lewis, who had worked for the Forest Service for 30 years, testified that he believed that the Forest Service was "absolutely" aware that sawmill owners were the primary customers for Forest Service timber sales. Trial Tr. at 3080. He testified that he believed that this was the case "[b]ecause we were in the business of selling -16-

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commercial timber to sawmills or to loggers who in turn sold them to sawmills." Id. In addition, the timber sale contracts and bid documents demonstrate that the purpose of the contracts was for Precision Pine to purchase timber to manufacture into lumber. Pursuant to contract clause CT8.212, the Forest Service provided purchasers with additional time to harvest the timber on a contract (known as a "Market-Related Contract Term Addition") if there was a significant downturn in the market for lumber products. See PX 170 at JRH-112; PX 171 at ODR-90; PX 172 at BRB-88. The stated purpose of the inclusion of such a contract provision was to avoid purchaser defaults in the event of a severe economic downturn because: [s]uch economic distress broadly affects community stability and threatens the ability of industry to supply construction lumber and other products for public use and threatens the maintenance of plant capacity necessary to meet future needs of the Nation for wood products from domestic sources. Accordingly, in order to insure the retention of a viable established industry capable of supplying the wood fiber needs of the public for housing and other products, the Chief of the Forest Service has determined that if there is a drastic reduction in wood product prices sufficient to trigger the market-related contract term addition being adopted by this rule, it would be in the substantial overriding public interest to extend the contract term . . . . PX 222; 55 Fed. Reg. 50643 (Dec. 7, 1990). The inclusion of CT8.212 demonstrates that the Forest Service clearly recognized that the timber harvested from Forest Service sales would ultimately be used to manufacture lumber, which would ultimately be sold. Furthermore, in bidding on Forest Service timber contracts, prospective purchasers were required to identify whether they were manufacturers of lumber products. See PX 44 at 2. As part of the standard Forest Service bid package, purchasers had to complete a "Certificate of Non-Substitution of Timber Purchased and Disposition of Timber Domestically Processed and Exported Timber," which required the purchaser to identify where it had processed other Forest Service timber during the previous calendar year as well as identify the mill at which the timber being bid on was to be processed. See e.g. PX 21; PX 24; PX 135, Trial Tr. at 201. Purchasers were subsequently required to notify the Forest Service if there was to be a change in the location to which the logs from the sale were to be delivered. Trial Tr. at 201. Contract clause CT8.641, which, like clause CT8.212, was incorporated in the contracts at issue, also required a purchaser to certify that timber removed under the contract would be processed domestically. See e.g. PX 170 at JRH-116. These provisions and obligations indicate that the production and sale of lumber were quite clearly contemplated by both the Forest Service and timber sale purchasers as the time the contracts were entered into. Despite this evidence, defendant argues that the manufacture and sale of lumber are independent and collateral undertakings because Forest Service timber and multi-product sales are "frequently" awarded to purchasers who do not own a sawmill or planer, or who do not have access to such manufacturing facilities. See Def.'s Post-Trial Brief at 12. The evidence in the -17-

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record does indicate that it was possible for a purchaser who did not own a sawmill or a planer to be awarded a Forest Service timber sale contract, and that occasionally such purchasers did enter into timber contracts with the Forest Service. For example, Mr. Stephen Reidhead, the president of Tri-Star Logging, testified that Tri-Star had never owned a planer or a sawmill, but had bid on, was awarded, and had performed several Forest Service timber sale contracts. Trial Tr. at 176263, 1765. Mr. Lewis testified that the Forest Service entered timber sale contracts with purchasers who did not own sawmills or planers, and that those purchasers were able to satisfy their obligations to harvest and remove timber. Id. at 3116-17. Mr. David Harris, who worked as a contracting officer in the Kaibab National Forest, testified that bidders on Forest Service timber and multi-product sale contracts did not need to own or have access to a sawmill or a planer. Id. at 3770. At the outset, the Court does not believe that the evidence cited by defendant supports the contention that purchasers who did not intend to manufacture lumber were "frequently" awarded Forest Service timber sale contracts. In light of the evidence regarding Forest Service timber contracts themselves and the nature of the timber sale program, such purchases would have been the exception rather than the rule. More importantly, the Government's evidence relates to isolated and hypothetical contracts between the Forest Service and purchasers other than Precision Pine. Precision Pine identified itself as a manufacturer of lumber in the bids that it submitted on Forest Service timber sales. Trial Tr. at 187-89; see also PX 44 at 2. As part of its bid packages, Precision Pine submitted documentation to the Forest Service identifying where it had processed other Forest Service timber during the previous calendar year as well as the mill where the timber from each sale was to be processed into lumber. Trial Tr. at 184-86, 201. Precision Pine submitted certificates to the Forest Service on an annual basis certifying where timber from each of its Forest Service timber sale contracts was processed. See PX 21-23, Trial Tr. at 185-86. Furthermore, eight of the contracts at issue in this case (Brookbank, Hay, Jersey Horse, Manaco, Mud, O.D. Ridge, Salt and U-Bar) were variably priced contracts pursuant to which the stumpage price escalated and de-escalated by reference to the Western Wood Products Association's ("WWPA's"), Inland Rocky Mountain Ponderosa Pine index.12 See PX169-72, PX174-75; PX177-78; March 11, 2005 Joint Stipulation ¶ 32. The Western Wood Products Association's Inland Rocky Mountain Ponderosa Pine index is a lumber market index. Trial Tr. at 262-63. It was impossible to determine the stumpage price to be paid to the Forest Service under these eight contracts without making a reference to prices in the lumber market. This evidence indicates that regardless of what may have happened in contracts between the Forest Service and other purchasers, the Forest Service was fully aware that Precision Pine was purchasing timber to process into lumber and sell. In fact, during trial, counsel for defendant stated:

The "stumpage price" refers to the price that a timber contract purchaser pays to the Forest Service for standing timber. Trial Tr. at 113. -18-

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Your Honor, it is a fair point that Precision Pine is in the lumber business, and we do not make any pretense that the Forest Service did not know that Precision Pine[] had sawmills. We'd certainly concede that fact. The Forest Service knew that Precision Pine had sawmills. Trial Tr. at 5416-17. However, counsel for defendant argued that despite this knowledge, "[t]he Forest Service did not know for sure one way or the other how Precision Pine was going to treat logs from the sale." Tr. at 5417. The sole examples that defendant provided in which Precision Pine used timber for any purpose other than the production and sale of lumber are the transfer of the Kettle sale to Stone Container and the sale of pulpwood to third parties. See Def.'s Post-Trial Brief at 12 n.7. The transfer of an entire sale to a third party is not analogous to a situation in which Precision Pine put sawlogs from a Forest Service sale to an alternate use. Similarly, Precision Pine's treatment of pulpwood is not relevant to its plans regarding lumber production because, as Mr. Porter testified, pulpwood is "not anything that can be sawed in the saw mill and made lumber out of." Trial Tr. at 112. Although a hypothetical purchaser might put timber to other uses, the evidence demonstrates that the Forest Service knew that Precision Pine was purchasing the timber at issue for the specific purpose of manufacturing lumber for sale to third parties. Relying on Mann v. United States, 68 Fed. Cl. 666, defendant argues the manufacture and sale of lumber involves a "second step" that is not inherent in timber sale contracts themselves, even if the Forest Service knew that Precision Pine intended to manufacture and sell lumber, such activity constituted independent and collateral undertakings. See February 17, 2006 Closing Argument Tr. at 134-35. It appears that defendant contends that simply because the timber that was the subject of the contract between Precision Pine and the Forest Service was manufactured prior to being sold, the lost profits from such sales necessarily arise from independent and collateral undertakings. Id., Def.'s Post-Trial Response Brief at 9-10. Defendant has cited no authority in support of this argument, and the Court is aware of none. Furthermore, as previously discussed, Mann also holds that "when the lost profits directly relate to the subject of the contract, they are recoverable, even if they would have required a transaction with a third party." 68 Fed. Cl. at 670. In Mann, the court held that the plaintiff was obviously not going to enter a geothermal lease to provide energy for his personal use ­ clearly, he intended to sell it to third parties. Id. Similarly, in this case, it was obvious to the Forest Service that Precision Pine did not intend to cut the sawlogs on the timber contracts at issue and use them as firewood or stack them and leave them unused ­ Precision Pine intended to manufacture the sawlogs into lumber and sell the lumber. Defendant further argues that the Federal Circuit's decision in First Heights Bank, F.S.B. v. United States, 422 F.3d 1311 (Fed. Cir. 2005), demonstrates that the fact that the Forest Service was aware that Precision Pine intended to manufacture lumber from the breached timber contracts standing alone is insufficient to demonstrate that the manufacture and sale of lumber did not constitute independent and collateral undertakings. Def.'s Post-Trial Response Brief at 7-8. First Heights Bank was a Winstar case in which the plaintiff sought lost profits from reinvestment in its homebuilding business of money that it would have realized in tax benefits if -19-

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the Government had not breached an assistance agreement. Id. at 1317-18. The plaintiff argued that the Government was aware that plaintiff was involved in homebuilding and that plaintiff intended to reinvest the money that it would have realized from the tax benefits. Id. at 1318. In upholding the decision of the Court of Federal Claims denying lost profits, the Federal Circuit stated: Although the government was aware of background information about [plaintiff] being a profitable homebuilder, no specific reference was made during negotiations to homebuilding projects for which the tax benefits were to be used. Nor did the Assistance Agreement inherently refer to the alleged additional homebuilding projects. The subject of the contract in this case was simply money. Id. at 1318. The present case differs from First Heights Bank in that the manufacture of lumber was specifically referenced in the contracts themselves. As previously discussed, contract clause CT8.212 provided a Market Related Contract Term Addition in the event of a downturn in the market for manufactured wood products. Eight of the contracts at issue specified that the contract stumpage price would vary with changes in a lumber market index. The contracts required Precision Pine to submit certificates to the Forest Service on an annual basis certifying where timber from each of its Forest Service timber sale contracts was processed. In this case, the contracts themselves demonstrate that the parties anticipated that lumber would be produced and that lost lumber profits are profits on "the use of the subject of the contract[s]". Mann, 68 Fed. Cl. at 671 (quoting Cal. Fed. Bank, 245 F.3d at 1349). For these reasons, plaintiff is not precluded from recovering lost lumber profits on the ground that they arose from independent and collateral undertakings. II. It Was Legally Foreseeable That Protracted Suspensions of Nearly All of Plaintiff's Timber Sale Contracts Would Result in Lost Lumber Profits to Plaintiff

As discussed in Section 3.B. of the Background section, supra, defendant argues that plaintiff cannot recover lost lumber profits because at the time of contracting, it was not foreseeable to defendant that lost lumber profits would occur as a probable result of the suspensions.13 To establish foreseeability, plaintiff must show that the