New York Law Review

Tag: lost profits

  • Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 22 N.Y.3d 799 (2014): Distinguishing General and Consequential Damages for Lost Profits

    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.”

  • Heary Bros. Lightning Protection Co. v. Intertek Testing Services, 3 N.Y.3d 615 (2004): Limiting Lost Profit Damages to Foreseeable Period After Breach

    Heary Bros. Lightning Protection Co. v. Intertek Testing Services, 3 N.Y.3d 615 (2004)

    Lost profit damages for breach of contract are limited to the period during which the breached contractual duty would have had a commercial value to the plaintiff; damages are not recoverable for periods after the underlying value of the contractual obligation has ceased.

    Summary

    Heary Bros. sued Intertek for breach of contract after Intertek stopped certifying Heary Bros.’ lightning protection systems. Heary Bros. claimed lost profits through 2014. The New York Court of Appeals held that Heary Bros. could not recover lost profits after April 2000. The court reasoned that after the National Fire Protection Association definitively rejected the draft industry standard (NFPA 781) Heary Bros.’ products were tested against, Intertek’s certification of compliance with that standard would have no commercial value. Thus, Intertek’s breach could not have caused Heary Bros. to lose profits after that date.

    Facts

    Heary Bros. manufactured and distributed lightning protection systems. Intertek, a testing laboratory, agreed in 1994 to test and certify Heary Bros.’ “Early Streamer Emission” (ESE) products. These products were tested against the requirements of a draft industry standard, “Draft NFPA 781.” Heary Bros. unsuccessfully attempted to have this draft approved as the official industry standard by the National Fire Protection Association (NFPA). In 1998, Intertek stopped allowing Heary Bros. to use its certification mark on its products, leading Heary Bros. to sue for breach of contract. On April 28, 2000, the NFPA definitively rejected Draft NFPA 781.

    Procedural History

    Heary Bros. sued Intertek. The jury found Intertek breached the contract and awarded Heary Bros. $2,208,360 in lost profits through November 2000 (historical data) and through 2014 (projections). The Supreme Court upheld the liability verdict but ordered a new trial on damages unless Heary Bros. accepted a reduced amount. The Appellate Division modified, ordering a new trial on damages limited to the period between September 1998 and April 2000. Heary Bros. appealed to the Court of Appeals.

    Issue(s)

    Whether legally sufficient evidence supported an award of lost profit damages attributable to any time after April 2000, when the relevant draft industry standard was rejected.

    Holding

    No, because after the NFPA rejected Draft NFPA 781, Intertek’s certification of Heary Bros.’ products against that standard would have had no commercial value; therefore, Intertek’s breach could not have caused Heary Bros. to lose profits after that date.

    Court’s Reasoning

    The Court of Appeals agreed with the Appellate Division, finding no legally sufficient evidence to support lost profit damages after April 2000. The court emphasized the significance of the NFPA’s rejection of Draft NFPA 781 on April 28, 2000. Even though the contract did not explicitly require tests to be against an industry standard (“the published Standard or Standards, if any, applicable from time to time”), the court found no evidence suggesting that certification against a rejected standard would have had commercial value to Heary Bros., or that the absence of such certification could have caused Heary Bros. to lose profits. The court distinguished testing against customer-specific standards from testing against an abandoned industry standard. The court reasoned that no credible testing laboratory could certify products as complying with a rejected standard, and Heary Bros. was not entitled to, and could not benefit from, such a meaningless certification. The court concluded, “There was, in short, no evidence from which a jury could conclude that defendant’s breach of contract caused plaintiffs any damages after April 2000.” The key legal rule applied was that damages must be causally linked to the breach and reasonably foreseeable. In this case, the causal link between the breach and the lost profits was broken when the underlying standard became obsolete.

  • Ashland Management Inc. v. Janien, 82 N.Y.2d 395 (1993): Recovering Lost Profits and Defining Trade Secrets

    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.”

  • Goodstein Construction Corp. v. City of New York, 80 N.Y.2d 366 (1992): Damages for Breach of Agreement to Negotiate

    Goodstein Construction Corp. v. City of New York, 80 N.Y.2d 366 (1992)

    A party cannot recover lost profits for breach of an agreement to negotiate a contract when the final contract was contingent on discretionary approvals and the agreement to negotiate was terminable.

    Summary

    Goodstein Construction Corp. sued the City of New York for breach of contract and tortious interference, seeking damages including lost profits, after the City terminated Goodstein’s exclusive right to negotiate a land disposition agreement (LDA). The court held that Goodstein could not recover lost profits because the City’s obligation was only to negotiate in good faith, not to finalize an LDA, and any LDA required discretionary approval by the Board of Estimate. Awarding lost profits would transform an agreement to negotiate into a binding contract and would be speculative.

    Facts

    Goodstein and the City entered into letter agreements granting Goodstein the exclusive right to negotiate an LDA for two development sites. The agreements required Goodstein to incur costs for designs and financial projections. The City retained the right to terminate negotiations. Any LDA was contingent on approval by the Community Board, City Planning Commission, and the Board of Estimate. The City terminated Goodstein’s exclusive negotiator status, stating it was in the City’s best interest to reserve the sites for commercial development.

    Procedural History

    Goodstein sued, seeking damages including lost profits. The City’s motion to dismiss for facial insufficiency was initially denied, a decision affirmed by the Appellate Division and the Court of Appeals. The City then moved for summary judgment, which was granted in part by the IAS Court, dismissing the claims for lost profits. The Appellate Division reversed, allowing the lost profits claim. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether a party can recover lost profits for breach of an agreement to negotiate a land disposition agreement, when the final agreement required discretionary governmental approvals and the agreement to negotiate was terminable.

    Holding

    No, because the City’s sole obligation was to negotiate in good faith, not to guarantee the completion of an LDA, which was contingent on discretionary political approvals. Allowing lost profits would transform the agreement to negotiate into a binding contract, and such damages were not within the contemplation of the parties.

    Court’s Reasoning

    The court emphasized that the City’s obligation arose from the agreement to negotiate, not a finalized LDA. The Board of Estimate’s approval was a discretionary, political act, not a mere formality. Contract damages aim to put the injured party in as good a position as if the contract had been performed, but here, the City was only obligated to negotiate in good faith. Awarding lost profits would base damages on a nonexistent contract the City could reject. Quoting Goodstein Constr. Corp. v City of New York, 145 Misc 2d 870, 876, the court noted that “a party’s ‘alleged failure to bargain in good faith is not a but-for cause of [plaintiff’s] lost profits, since even with the best faith on both sides the deal might not have been closed [and] attributing [plaintiff’s] lost profits to [defendant’s] bad faith may be speculative at best’.” Furthermore, under Hadley v Baxendale, the damages must be within the contemplation of the parties when the contract was made. It was not reasonably contemplated that the City would guarantee profits from a project that required multiple approvals and that Goodstein never had to build. Citing Kenford Co. v County of Erie, 73 NY2d 312, the court found that awarding lost profits would be “irrational” where the claims were founded only on an agreement to negotiate.

  • Kenford Co. v. County of Erie, 67 N.Y.2d 266 (1986): Recovering Lost Profits for New Businesses

    67 N.Y.2d 266 (1986)

    A new business seeking to recover lost future profits faces a stricter standard of proof, as there is often no reasonable basis of experience to estimate profits with reasonable certainty.

    Summary

    Kenford Co. sued Erie County for breach of contract after the county failed to build a domed stadium. Kenford sought damages for lost profits it expected to earn over 20 years managing the stadium. The New York Court of Appeals held that Kenford’s proof of lost profits was too speculative, given the newness of the business and the lack of certainty that the stadium would be built and successfully operated as planned. The court emphasized the need for certainty and foreseeability in proving lost profits, particularly for new ventures.

    Facts

    Erie County contracted with Kenford and Dome Stadium, Inc. (DSI) to build and lease a domed stadium. The contract stipulated the County would start construction within 12 months and negotiate a 40-year lease with DSI. If a lease wasn’t agreed upon, a 20-year management contract appended to the agreement would take effect. The parties failed to agree on a lease, and the County never commenced construction, breaching the contract. DSI sought damages for lost profits it anticipated earning over the 20-year management period.

    Procedural History

    Kenford and DSI sued Erie County for breach of contract. The trial court granted summary judgment against the County on liability. A trial on damages resulted in a large jury verdict for the plaintiffs. The Appellate Division reversed the damages award for lost profits, finding the projections too speculative, and ordered a new trial on other issues. The Court of Appeals reviewed the Appellate Division’s decision regarding lost profits.

    Issue(s)

    Whether DSI presented sufficient evidence to recover lost profits for a 20-year period for a stadium that was never built or operated, considering the business was new and lacked an established earnings record.

    Holding

    No, because the damages were too speculative and not within the contemplation of the parties when the contract was formed. Furthermore, the multitude of assumptions required to establish projections of profitability over the life of the contract require speculation and conjecture, making it beyond the capability of even the most sophisticated procedures to satisfy the legal requirements of proof with reasonable certainty.

    Court’s Reasoning

    The court emphasized that loss of future profits must be proven with reasonable certainty and must have been within the contemplation of the parties at the time of the contract. The court acknowledged that DSI’s methodology was sound but, it found the economic model’s foundations undermined the certainty of the projections. The court stated, “If it is a new business seeking to recover for loss of future profits, a stricter standard is imposed for the obvious reason that there does not exist a reasonable basis of experience upon which to estimate lost profits with the requisite degree of reasonable certainty.”

    The court noted the speculative nature of projecting profits over 20 years for a facility that never existed, stating, “Quite simply, the multitude of assumptions required to establish projections of profitability over the life of this contract require speculation and conjecture, making it beyond the capability of even the most sophisticated procedures to satisfy the legal requirements of proof with reasonable certainty.”

    Furthermore, the court stated, “The economic facts of life, the whim of the general public and the fickle nature of popular support for professional athletic endeavors must be given great weight in attempting to ascertain damages 20 years in the future.”

    The court rejected the “rational basis” test used by the Appellate Division, reaffirming the stricter standard for proving lost profits for new businesses articulated in Cramer v Grand Rapids Show Case Co., 223 NY 63.

  • Coolite Corp. v. American Cyanamid Co., 52 A.D.2d 486 (1976): Limits on Damages in Negligent Misrepresentation Claims

    Coolite Corp. v. American Cyanamid Co., 52 A.D.2d 486 (1976)

    In a cause of action for negligent misrepresentation, a plaintiff cannot recover damages for lost profits.

    Summary

    Coolite Corp. sued American Cyanamid Co. for negligent misrepresentation. The court addressed whether the defendant’s representatives made statements of opinion or fact, whether the claims were time-barred, and if a special relationship existed to support the claim. Crucially, the court also considered whether Coolite could recover lost profits. The court held that questions of fact existed regarding the nature of the statements and the statute of limitations. Further, the existence of a “special relationship” should be determined by the fact-finder. However, the court definitively ruled that lost profits are not recoverable in actions based on negligent misrepresentation under New York law, thus modifying the lower court’s order.

    Facts

    Coolite Corp. claimed that American Cyanamid Co. made negligent misrepresentations. Specific details of the misrepresentations are not elaborated in the short opinion, but the issues on appeal suggest they involved statements that induced Coolite to act. Coolite presumably relied on these misrepresentations to their detriment, seeking damages including lost profits.

    Procedural History

    The case reached the Appellate Division, which addressed multiple issues raised on appeal from the lower court’s decision on summary judgment. The Appellate Division’s order was appealed to the New York Court of Appeals. The Court of Appeals modified the Appellate Division’s order by granting the defendant’s motion for summary judgment to the extent of dismissing the complaint regarding damages for lost profits. The Court of Appeals affirmed the order as modified.

    Issue(s)

    1. Whether questions of fact exist as to whether the defendant’s representatives intended their statements to be opinions or positive statements of present intention?

    2. Whether questions of fact exist as to whether the plaintiff’s claims are time-barred?

    3. Whether a “special relationship” exists sufficient to make out a cause of action for negligent misrepresentation?

    4. Whether the plaintiff can recover damages for loss of profit in an action grounded in negligent misrepresentation?

    Holding

    1. The question certified was answered in the negative, meaning that there were questions of fact as to the intention of the representatives’ statements.

    2. The question certified was answered in the negative, meaning that there were questions of fact as to whether the claims were time-barred.

    3. The existence of a special relationship should be left to the finder of fact.

    4. No, because “the rule in this State is that all elements of profit are excluded from a computation of damages in an action grounded in fraud.” The court applied this rule to negligent misrepresentation as well.

    Court’s Reasoning

    The Court of Appeals determined that genuine issues of material fact existed regarding the nature of the statements made by the defendant’s representatives (opinion vs. fact) and whether the statute of limitations barred the plaintiff’s claims. Further, the existence of a “special relationship,” a prerequisite for a negligent misrepresentation claim, was deemed a factual question for the fact-finder to resolve, citing White v Guarente, 43 NY2d 356; International Prods. Co. v Erie R. R. Co., 244 NY 331; and Coolite Corp. v American Cyan-amid Co., 52 AD2d 486; and referencing the Restatement (Second) of Torts § 552.

    However, the Court of Appeals definitively stated that New York law prohibits the recovery of lost profits in negligent misrepresentation cases, citing Reno v Bull, 226 NY 546, which concerns fraud. The court extended the rule regarding fraud to negligent misrepresentation, stating, “As for damages, the rule in this State is that all elements of profit are excluded from a computation of damages in an action grounded in fraud.” This bright-line rule limits the scope of recoverable damages in such actions, regardless of the specific circumstances or the foreseeability of such losses. This decision aligns with a more restrictive view of damages in cases lacking the element of intentional wrongdoing, as found in fraud cases.

  • Neri v. Retail Marine Corp., 30 N.Y.2d 393 (1972): Seller’s Damages for Buyer’s Breach of Contract Under UCC 2-708(2)

    Neri v. Retail Marine Corp., 30 N.Y.2d 393 (1972)

    Under UCC 2-708(2), a seller of standard-priced goods can recover lost profits and incidental damages when a buyer breaches a sales contract, even if the seller resells the goods at the same price, because the resale does not compensate for the lost sale.

    Summary

    Retail Marine Corp. (defendant) contracted to sell a boat to the Neris (plaintiffs). The Neris rescinded the contract, and Retail Marine resold the boat for the same price. Retail Marine refused to return the Neris’ deposit. The New York Court of Appeals held that Retail Marine was entitled to recover lost profits and incidental damages under UCC 2-708(2), despite reselling the boat at the original contract price, because as a dealer with an unlimited supply of standard-priced goods, the resale did not make them whole for the lost sale.

    Facts

    The Neris contracted to purchase a boat from Retail Marine for $12,587.40, making a $40 deposit, later increased to $4,250. Retail Marine agreed to arrange for immediate delivery. Six days later, the Neris’ lawyer sent a letter rescinding the contract due to Mr. Neri’s upcoming surgery, which would make payments impossible. Retail Marine had already ordered the boat, which was delivered to them. Retail Marine refused to refund the deposit.

    Procedural History

    The Neris sued Retail Marine to recover their deposit. Retail Marine counterclaimed for breach of contract, seeking $4,250 in damages. The court granted Retail Marine summary judgment on liability and ordered an assessment of damages. At trial, it was shown the boat was resold four months later for the same price. The trial court rejected Retail Marine’s claim for lost profits and limited damages to $500 under UCC 2-718(2)(b), ordering the balance of the deposit returned to the Neris. The Appellate Division affirmed. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether, under UCC 2-708(2), a seller can recover lost profits and incidental damages from a breaching buyer when the seller resells the goods at the original contract price?

    Holding

    Yes, because UCC 2-708(2) allows a seller to recover lost profits when the standard measure of damages (market price minus contract price) is inadequate to put the seller in as good a position as performance would have done; the resale of standard-priced goods does not compensate the seller for the lost volume.

    Court’s Reasoning

    The court found that UCC 2-718, which addresses the buyer’s right to restitution after breach, is subject to the seller’s right to recover damages under other provisions of the UCC, specifically UCC 2-708. UCC 2-708(1) provides a standard measure of damages, but UCC 2-708(2) allows for lost profits if the standard measure is inadequate. The court emphasized that UCC 2-708(2) was intended to change prior law, which often limited damages to the difference between contract price and market price. The court quoted the Official Comment to UCC 2-708, stating that the section “permits the recovery of lost profits in all appropriate cases, which would include all standard priced goods.”

    The court reasoned that Retail Marine, as a retail seller with an unlimited supply of standard-priced goods, was entitled to lost profits because the resale of the boat did not make them whole. The court cited Dean Hawkland’s example: “Thus, if an automobile dealer agrees to sell a car to a buyer at the standard price of $2000, a breach by the buyer injures the dealer, even though he is able to sell the automobile to another for $2000. If the dealer has an inexhaustible supply of cars, the resale to replace the breaching buyer costs the dealer a sale, because, had the breaching buyer performed, the dealer would have made two sales instead of one.”

    The court also held that Retail Marine was entitled to incidental damages (storage, upkeep, finance charges, and insurance) under UCC 2-710, but not attorney’s fees. The court stated, “From the language employed it is too clear to require discussion that the seller’s right to recover loss of profits is not exclusive and that he may recoup his ‘incidental’ expenses as well.”

    Therefore, the court modified the Appellate Division’s order, directing that the Neris were entitled to restitution of their deposit, less Retail Marine’s lost profit and incidental damages.