22 N.Y.3d 799 (2014)
Lost profits can be considered general damages in a breach of contract case if they are the direct and probable result of the breach, particularly in exclusive distribution agreements where resale is the essence of the contract.
Summary
Biotronik A.G. sued Conor Medsystems Ireland, Ltd. for breach of an exclusive distribution agreement, seeking lost profits. The New York Court of Appeals held that Biotronik’s lost profits constituted general damages, not consequential damages, and were thus recoverable despite a contractual limitation on consequential damages. The court reasoned that the agreement’s structure, where Biotronik’s resale price directly influenced Conor’s transfer price, made the resale integral to the contract. The lost profits were therefore a direct and probable consequence of the breach.
Facts
In 2004, Biotronik and Conor entered an agreement granting Biotronik exclusive distribution rights for Conor’s CoStar stent in most of the world outside the US. Biotronik was to use commercial efforts to promote and sell the stents, and assist Conor with regulatory compliance. The price Biotronik paid Conor was a percentage of Biotronik’s net sales of the CoStar stent. Biotronik provided monthly sales forecasts, and Conor could limit the maximum order size. Johnson & Johnson acquired Conor in 2007. In May 2007, Conor recalled the CoStar stent after FDA trials failed. Biotronik sued for breach of contract, seeking lost profits.
Procedural History
The Supreme Court denied summary judgment on liability but concluded that the lost profits were consequential damages, limiting Biotronik’s recovery. The Appellate Division affirmed. The Court of Appeals granted leave to appeal.
Issue(s)
Whether lost profits from the breach of an exclusive distribution agreement constitute general or consequential damages when the agreement contains a limitation on consequential damages.
Holding
Yes, the lost profits constitute general damages because under the parties’ exclusive distribution agreement, the lost profits were the natural and probable consequence of the breach.
Court’s Reasoning
The Court of Appeals reversed, holding that the lost profits were general damages. General damages are the “natural and probable consequence of the breach.” Consequential damages do not “directly flow from the breach.” The court emphasized that lost profits are general damages when the non-breaching party bargained for such profits, and they are the “direct and immediate fruits of the contract.” Here, the resale of stents by Biotronik was the essence of the contract. The agreement calculated the transfer price based on Biotronik’s net sales, demonstrating that both parties depended on the product’s resale for their payments. The court distinguished this situation from cases where lost profits arise from “collateral business arrangements.” The court cited Orester v Dayton Rubber Mfg. Co., 228 NY 134 (1920), and American List Corp. v U.S. News & World Report, 75 NY2d 38 (1989), in which lost profits were treated as general damages. The court stated, “Although the lost profits sought by plaintiff are not specifically identified in the agreement, it cannot be said that defendant did not agree to pay them under the contract, as these profits flow directly from the pricing formula.” The court dismissed the defendant’s argument under UCC 2-715(2)(a) finding that the agreement was more akin to a joint venture than a simple sale. The court concluded that the agreement reflected the defendant’s anticipation and dependence on the resale, making this arrangement “significantly different from a situation where the buyer’s resale to a third party is independent of the underlying agreement.”