The Court of Appeals’ 4-3 decision in Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 22 N.Y.3d 799 (Mar. 27, 2014), raises new questions about pursuing lost profits in a breach of contract action. Biotronik held that, based on the contract at issue, lost profits were general damages, which are routinely available in breach of contract cases, rather than consequential damages, which are only available in specific circumstances. Biotronik’s conclusion was unusual and, as discussed in a dissent, controversial.
Plaintiff Biotronik, a distributor, and defendant Conor, a manufacturer, executed a contract governed by New York law. The contract included a limitation-of-liability provision which barred all claims for consequential damages.
Under the contract, Conor sold “CoStar” coronary stents to Biotronik. Biotronik had the exclusive right to resell the stents. The contract did not require Biotronik to resell any minimum number of stents, or set a resale price for the stents. Biotronik resold the stents in completely separate transactions with third-party purchasers, including sub-distributors.
Each quarter, Biotronik and Conor agreed to the price that Biotronik paid Conor for the stents. This amount was called the “minimum transfer price.” In addition, each quarter Biotronik calculated a “transfer price” based on its average resale price. If the transfer price exceeded the minimum transfer price, Biotronik paid Conor the difference as an adjustment to the stent purchase price. Therefore, Biotronik paid Conor the minimum transfer price to purchase the stents each quarter, but Biotronik could potentially pay more if its average resale price was high enough.
Three years after this arrangement began, Conor discontinued and recalled the CoStar stent. The contract had a provision addressing recalls, which was intended to compensate Biotronik for the stents it had purchased (but could no longer resell) and its costs from the recall. Under that provision, Conor paid Biotronik 8,320,000 euros, plus a 20 percent handling charge.
Biotronik sued Conor for breach of contract in New York County Supreme Court, alleging that Conor’s recall of the stent violated their agreement. Biotronik did not dispute that Conor had properly paid the contract’s recall fee. Instead, Biotronik alleged it had lost more than $100 million in profits because it could not resell CoStar stents for the full duration of the contract period.
Supreme Court found that Biotronik could not seek lost profits because they were a form of consequential damages, which the contract barred. Since Biotronik had not suffered any other form of damages, Supreme Court dismissed Biotronik’s complaint.
The Appellate Division affirmed, holding that “a plaintiff suing to recover profits that it would have made by reselling the defendant’s goods to third parties, as is the case here, is seeking consequential damages,” Biotronik A.G. v. Conor Medsys. Ire., Ltd., 95 A.D.3d 724, 725 (1st Dept. 2012). The Appellate Division cited Uniform Commercial Code § 2-715(2)(a), which states that consequential damages in a sale of goods include “any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know,” and is typically applied to claims for lost profits, see, e.g., Val Tech Holdings, Inc. v. Wilson Manifolds, Inc., 2014 N.Y. App. Div. LEXIS 4976, at *2-3 (4th Dept. July 3, 2014).
The Appellate Division also relied on Tractebel Energy Marketing, Inc. v. AEP Power Marketing, Inc., 487 F.3d 89, 109 (2d Cir. 2007), which held that “[l]ost profits are consequential damages when, as a result of the breach, the non-breaching party suffers loss of profits on collateral business arrangements” — such as Biotronik’s resale of stents to other entities. Thus, the Appellate Division found that Biotronik raised a routine lost profits claim that, under the New York UCC and New York caselaw, sought consequential damages.
The Court of Appeals reversed, finding that Biotronik’s lost profits were general damages. The court focused on the contract’s use of Biotronik’s “resale price as a benchmark for the transfer price” to conclude that “[a]ny lost profits resulting from a breach would be the natural and probable consequence of that breach,” and thus were general damages, Biotronik, 22 N.Y.3d at 808. The court also found that the Biotronik’s agreement was not “a simple resale contract,” where “the buyer’s resale to a third party is independent of the underlying agreement,” but rather resembled a “joint venture,” Id. at 803, 810 (internal quotation marks omitted).
The court also found that the UCC did not mandate that Biotroink’s lost profits were consequential damages — even though the UCC’s official comment described lost resale opportunities as consequential (not general) damages.
A three-judge dissent argued that the majority accepted Biotronik’s “creative” argument as “a way to circumvent the natural meaning of the limitation-of-liability provision,” Id. at 823. The dissent observed that the contract never required Conor to pay any money to Biotronik. The contract used Biotronik’s resale price to establish the amount Biotronik would pay Conor for stents, but left Biotronik free to negotiate resale prices with its customers. Therefore, Biotronik’s profits did not flow directly from the contract.
Instead, Biotronik profited when it sold stents to third-parties in transactions that were separate from Biotronik’s contract with Conor. The dissent saw no difference between Biotronik’s third-party stent resales and the “collateral business arrangements” discussed in Tractebel Energy, and concluded that Biotronik’s lost profits claim was barred under the contract as consequential damages.
The dissent asserted that the majority’s opinion undermined predictability in New York contract law, noting that the majority relied on an obscure decision, Orester v. Dayton Rubber Manufacturing Co., 228 N.Y. 134 (1920), that the Court of Appeals had not previously cited since 1951.
I agree with the dissent that the majority’s departure from the traditional view of lost profits being consequential damages yields uncertainty. As described in Tractebel Energy, if X contracts with Y, and then fails to pay Y in accordance with the contract, Y’s damages are general. If X contracts with Y, and X’s breach of the contract prohibits Y from making a separate sale to Z, then Y’s loss of profits from the failed deal with Z — a “collateral business arrangement” — should be consequential.
But Biotronik found an exception to this rule, and it is difficult to tell how broad the exception is. Do lost profits become general damages in any contract where the sale price of goods can vary based on the resale price? What is the difference between “a simple resale contract,” which treats lost profits as consequential damages, and the Biotronik-Conor contract, which treats lost profits as general damages? Biotronik, 22 N.Y.3d at 803. Until courts begin to interpret Biotronik, these questions are up for debate.
By disclaiming liability for consequential damages, Conor presumably attempted to protect itself from claims that its failure to provide stents caused Biotronik to lose profits from resales to third parties. Conor appeared to have the weight of New York authority on its side, but the Court of Appeals disagreed. If anything is clear from the Court of Appeals’ decision, it is that parties who want to disclaim liability for lost profits should include an express prohibition against lost profits claims in their contracts, rather than rely on blanket disclaimers of consequential damages.
Jeremy M. Sher is an associate with the law firm of Leclair Korona Giordano Cole LLP. He concentrates his practice in the areas of commercial, securities and employment litigation. He can be reached at email@example.com or through the firm’s website at www.leclairkorona.com.