Lost Profits May Constitute General Rather than Consequential Damages in New York Agreement Breach Claims

Biotronik A.G. v. Conor Medsystems Ireland, Ltd., et al., 2014 NY Slip Op 02101
Court of Appeals of New York: Decided March 27, 2014

In May 2004, plaintiff Biotronik, A.G. (“Biotronik”), a manufacturer and distributor of medical devices, and defendant Conor Medsystems Ireland, Ltd. (“Conor”), the developer and manufacturer of CoStar, a drug-eluting coronary stent (“CoStar”), entered into an agreement designating Biotronik as the exclusive distributor of CoStar for a worldwide market territory, which excluded certain countries. The geographic territory covered by the agreement included countries in which Biotronik had an existing direct sales business.

Under the agreement, Biotronik was required to pay Conor a transfer price calculated as a percentage of Biotronik’s net sales of CoStar. Specifically, the transfer price was 61% of Biotronik’s direct sales of CoStar and 75% of its indirect sales. Thus, as described by the New York Court of Appeals, “the contract would only operate if [Biotronik] sold stents, and the payment [Conor] received bore a direct relationship to the market price [Biotronik] could obtain.”

The parties’ agreement required Biotronik to make a minimum monthly order of CoStar. However, Conor could limit Biotonik’s maximum order per month to 130% of the most recently forecasted quantity.

Their agreement also included a damages limitation provision restricting recovery to general damages and precluding indirect, special, consequential, incidental, and punitive damages with respect to any claim arising out of the agreement.

When the agreement was entered, Conor had not received regulatory approval for CoStar from either the European authorities or the Food and Drug Administration (“FDA”). The agreement anticipated that CoStar would pass regulatory hurdles following ongoing tests. In February 2006, after Conor obtained European regulatory approval, Biotronik began distributing CoStar.

However, in May 2007, Conor announced that FDA trials could not establish that CoStar was equivalent to “Taxus,” a widely marketed stent manufactured by Boston Scientific. Based on those results, Conor terminated its FDA application and notified Biotronik that it was recalling CoStar and removing it from the worldwide market. Conor paid Biotronik 8.32 million Euros and a 20% handling fee to satisfy its recall obligations under the agreement.

In November 2007, Biotronik sued Conor for breach of contract seeking damages for lost profits relating to its resale of CoStar. Biotronik argued that its claim for lost profits on the resale of CoStar constituted general damages, falling outside the scope of the damages limitation provision.

Although the Supreme Court of New York denied Conor’s motion for summary judgment on the question of liability, it concluded that the lost profits sought by Biotronik were consequential damages subject to the agreement’s damages limitation provision. By denying Biotronik lost profits, the Supreme Court effectively ended the lawsuit and judgment was entered dismissing the action.

On appeal, the Appellate Division affirmed the Supreme Court’s judgment agreeing that Biotronik’s claim for lost profits was barred by the agreement’s limitation on consequential damages. Biotronik was granted leave to appeal that question before the New York Court of Appeals.

In a majority decision, the New York Court of Appeals reversed the Appellate Division’s ruling and held that damages “must be evaluated within the context of the agreement, and that, under the parties’ exclusive distribution agreement, the lost profits constitute general, not consequential damages.”

In its ruling, the Court relied on its decision in American List Corp. v. U.S. News & World Report, 75 NY2d 38 (1989), as its “principal case addressing the dividing line separating lost profits that are general or direct damages . . . from those that were consequential.” In American List Corp., the Court of Appeals defined general damages as those “which are the natural and probable consequence of the breach,” and consequential damages as those which are “extraordinary in that they do not so directly flow from the breach.”

However, adopting a case-specific approach, the Court held that in determining whether lost profits are general or consequential damages the “damages must be evaluated within the context of the agreement” requiring “a careful look at the underlying agreement . . . .” Although the Court acknowledged that the distinction has often been made based on “whether the lost profits flowed directly from the contract itself or were, instead, the result of a separate agreement with a nonparty,” it rejected such a bright-line rule approach.

Reasoning that since the purpose of the parties’ agreement was for Biotronik to resell the CoStar stents, the Court found that Biotronik’s lost profits were general, not consequential, damages. The Court described the agreement as “not simply one between a seller and buyer who is in the business of reselling . . . [but] much closer to the ‘joint venture’ identified in American List Corp., 75 NY2d at 43.” The Court described the nature of the parties’ agreement as follows: “The parties negotiated a pricing formula and target volume based on the resale of CoStar. The agreement reflects [Conor’s] anticipation and dependence on the resale, and, as such, the agreement reflects an arrangement significantly different from a situation where the buyer’s resale to a third party is independent of the underlying agreement.”

The Court also noted in its decision that the parties’ damages limitation provision “does not specifically preclude recovery for lost profits, nor does it explicitly define lost profits as consequential damages,” thus emphasizing the importance for drafters to expressly identify lost profits as precluded damages in such limitation provisions. Although the Court rejected a bright-line rule approach, and instead requires an examination of the nature of the agreement at issue to determine whether lost profits constitute consequential or general damages, the Court’s decision is instructive in that it cautions parties who fail to identify the types of damages precluded by a limitation provision.

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