Lost Profits Damages Not Available on Fraudulent Inducement Claim

On January 6, 2014, Justice Bransten of the New York County Commercial Division issued a decision in Maesa LLC v. Jouer Cosmetics LLC, 2014 NY Slip Op. 30026(U), dismissing a counterclaim for fraudulent inducement to the extent it sought lost profits damages.

In Maesa, the parties entered into a contract under which the plaintiff manufactured vials in which the defendant packaged lip gloss. A dispute arose over the quality of the vials. In response to the plaintiff's claims, the defendant asserted counterclaims, including a counterclaim for fraudulent inducement for which it sought lost profits damages. In response to the plaintiff's motion to dismiss, the court dismissed the defendant's counterclaim for fraudulent inducement to the extent it sought lost profits damages, explaining:

[The plaintiff] contends that New York's "out-of-pocket" damages rule forecloses [the defendant's] attempt to recover lost profits on its fraudulent inducement counterclaim. For a fraud claim, the true measure of damage is indemnity for the actual pecuniary loss sustained as the direct result of the wrong or what is known as the out-of-pocket rule. Under the rule, damages are to be calculated to compensate plaintiffs for what they lost because of the fraud, not to compensate them for what they might have gained.

. . . [R]ecovery of potential profits from these cancelled orders is squarely prohibited under the rule. The recovery of consequential damages naturally flowing from a fraud is limited to that which is necessary to restore a party to the position occupied before commission of the fraud. Thus, [the defendant's] potential recovery is limited to damages that would restore to it to the position it occupied before [the plaintiff's] purported misrepresentations, rendering lost profits inapplicable.

(Internal quotations and citations omitted).

Lawyers often plead fraud and contract claims simultaneously to cover all bases (such as, for example, the court finding that there was no contract or that it was not breached). They should remember, though, that the measure of damages is different for contract claims and fraud claims.