Prejudgment Interest on Lost Profits under New York Law

Washington, et al. v. Kellwood Co., Civil Action No. 05-CV-10034 (SN)

United States District Court, S.D. New York: Decided March 4, 2016

In an exclusive licensing contract entered on November 25, 2003, Kellwood Company (“Kellwood”), a clothing manufacturer, agreed to manufacture, promote, and sell performance athletic apparel under the plaintiffs’ brand name “Sunday Players”.  In exchange, the plaintiffs were to receive 5% of the net sales.  The term of
the licensing contract was from November 25, 2003 through January 31, 2007, and it excluded a mechanism by which the parties could earlier terminate the contract.

After failing to sell any “Sunday Players” merchandise, Kellwood unilaterally terminated the contract on March 14, 2005, almost two years prior to the end of the term.  On summary judgment, the Southern District of New York (the “Court”) held that Kellwood breached the contract by terminating it early, and by failing to provide free product samples as required.  A jury trial was held on the plaintiffs’ claim that Kellwood failed to use reasonable efforts to promote the “Sunday Players” brand, and on damages.

On February 11, 2016, the jury returned a verdict finding that Kellwood failed to use reasonable efforts to promote the “Sunday Players” brand causing damages to the plaintiffs.  The jury determined that there was pre-termination lost profits from November 25, 2003 through March 14, 2005 of $250,000; post-termination lost profits from March 14, 2005 through January 31, 2007, the end of the contract’s stated term, of $4.1 million; and $500,000 in lost market value as of March 14, 2005; totaling $4.85 million in damages.  The jury rejected Kellwood’s defense that the plaintiffs failed to mitigate damages.

Prior to trial, the Court ruled that the plaintiffs cannot collect on both post-termination lost profits and lost market value, but nevertheless directed the jury to calculate both.  After trial, the plaintiffs moved for entry of judgment electing post-termination lost profits over lost market value, and claimed they were due statutory prejudgment interest at a rate of 9% compounded annually from the date of termination, seeking entry of judgment in the amount of $11.3 million.  The Court, however, rejected the plaintiffs’ use of compound rather than simple interest as well as the plaintiffs’ claim that prejudgment interest on the entire sum of lost profits should be calculated from the date of the termination, March 14, 2005.

The Court rejected the plaintiffs’ argument that the Court has the discretion to compound prejudgment interest.  In support of their argument, the plaintiffs relied on the Court’s decision in Fendi Adele SRL v. Burlington Coat Factory Warehouse Corp., 689 F. Supp. 2d 585 (S.D.N.Y. 2010), which held that “federal courts enjoy ‘wide discretion in fashioning an appropriate judgment with regards to the amount and method of calculation of prejudgment interest.’”  Id. at 606.  The Court ruled, however, that “that discretion dissipates when a federal court adjudicates a state law claim.”  (Citing Schipani v. McLeod, 541 F.3d 158, 164 (2d Cir. 2008) (“‘In a diversity case, state law governs the award of prejudgment interest,’ and the district court has no discretion to fashion its own interest rate or method of calculation.”).)  The Court concluded, therefore, that since the licensing contract was governed by New York law and under New York law “prejudgment interest must be calculated on a simple interest basis at the statutory rate of nine percent”, prejudgment interest was to be calculated at a simple annual rate of 9%.

As for the accrual date of prejudgment interest, the Court rejected the plaintiffs’ argument that the entire sum of lost profits should be calculated from the date of the termination, March 14, 2005.  Citing N.Y. CPLR §5001(b), the Court determined: (i) that prejudgment interest on the jury’s award of $250,000 for lost profits between November 25, 2003 and March 14, 2005, the date that Kellwood terminated and breached the contract, would be calculated from March 14, 2005, the date of the breach; and (ii) that prejudgment interest on the jury’s award of $4.1 million for lost profits between March 14, 2005 and January 31, 2007, the end of the contract’s term, would be calculated from a “reasonable intermediate date during the period in which payments due would have been made.”  Citing Esquire Radio & Elec., Inc. v. Montgomery Ward & Co., 804 F.2d 787, 796 (2d Cir. 1986).  The “reasonable intermediate date” applied by the Court for purposes of calculating prejudgment interest on the jury’s $4.1 million award for lost profits between March 14, 2005 and January 31, 2007 was February 20, 2006, the median date between March 14, 2005 and January 31, 2007.

N.Y. CPLR §5001(b) provides as follows:

Interest shall be computed from the earliest ascertainable date the cause of action existed, except that interest upon damages incurred thereafter shall be computed from the date incurred.  Where such damages were incurred at various times, interest shall be computed upon each item from the date it was incurred or upon all of the damages from a single reasonable intermediate date.

For the jury’s award of $250,000 for lost profits incurred between November 25, 2003 and March 14, 2005, pursuant to N.Y. CPLR §5001(b), the Court held that prejudgment interest was to be computed from March 14, 2005, the earliest ascertainable date the cause of action existed.

For the jury’s award of $4.1 million for lost profits incurred between March 14, 2005 and January 31, 2007, citing to N.Y. CPLR §5001(b), the Court held that since the plaintiffs’ lost profits after the breach on March 14, 2005 consisted of a stream of unrealized future profits that would have been incurred at various times, it was appropriate to calculate prejudgment interest from the “single reasonable intermediate date” of February 20, 2006, the median date between March 14, 2005 and January 31, 2007.

The Court did not identify the total dollar amount of prejudgment interest awarded to the plaintiffs.

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