Ashland Management Inc. v. Janien, 82 N.Y.2d 395 (1993)

Lost profits are recoverable in breach of contract actions if they were contemplated by the parties at the time of contracting and are capable of measurement with reasonable certainty; a trade secret is a formula, pattern, device, or compilation of information providing a competitive advantage that is not generally known or readily ascertainable.

Summary

Ashland Management sued its former employee, Janien, alleging misappropriation of trade secrets after Janien unsuccessfully attempted to sell an investment model to Ashland. Janien counterclaimed for breach of contract, claiming Ashland improperly terminated an agreement to use his model. The New York Court of Appeals held that Janien was entitled to damages for lost profits because the parties contemplated such damages in the agreement and the amount was reasonably certain. It also affirmed the lower court’s finding that Ashland’s investment model was not a trade secret because its key components were publicly available.

Facts

Ashland, an investment advisory company, used a stock selection model called Alpha. Janien, Hickox’s (Ashland’s chairman) brother-in-law, developed a similar model called Eta. Ashland and Janien negotiated a contract (Proposal 6) for Ashland to use Eta, with Janien receiving royalties. Proposal 6 included projections of minimum assets under management. Before disclosing the details of Eta, Janien presented a nondisclosure agreement, which Hickox refused, leading to Janien’s termination. Ashland sought to enjoin Janien from using Eta, arguing it relied on Ashland’s trade secret Alpha, which Janien disputed, counter-claiming for breach of contract.

Procedural History

The trial court found a contract existed, Ashland breached it, and Janien was entitled to lost profits. It also held that Alpha was not a trade secret. The Appellate Division modified, finding no joint venture but upholding the breach of contract claim based on Ashland’s failure to act in good faith. Ashland appealed to the New York Court of Appeals.

Issue(s)

1. Whether Janien could recover lost profits for Ashland’s breach of contract.
2. Whether Ashland’s Alpha investment model constituted a trade secret.

Holding

1. Yes, because the parties contemplated lost profits as damages in the event of breach, and those profits were capable of being calculated with reasonable certainty.
2. No, because the key components of Alpha were publicly available, making it not a trade secret.

Court’s Reasoning

Regarding lost profits, the Court of Appeals emphasized that such damages are recoverable if they were within the contemplation of the parties when the contract was made and are capable of measurement with reasonable certainty. The court noted that Proposal 6 included projections of minimum funds under management and provided for Janien to receive 15% of gross revenues, indicating the parties contemplated lost profits. Distinguishing from Kenford Co. v. County of Erie, the court found the projections in Proposal 6 were based on careful analysis and not undue speculation. Regarding the trade secret claim, the court cited the Restatement of Torts definition of a trade secret: “any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.” The court deferred to the trial court’s finding that Alpha’s key financial criteria were public knowledge and the mathematical formulas were readily reproducible by financial analysts, making it not a trade secret. The court stated, “There was conflicting evidence on the point but the trial court chose to credit defendant’s expert who testified that a financial analyst could, based on the public disclosures made by Ashland, reproduce the calculations without access to the internal computer commands which constitute the Alpha software.”