Court Dismisses Claim for Lost Profits Damages

On October 9, 2019, Justice Sherwood of the New York County Commercial Division issued a decision in Electron Trading LLC v. Perkins Coie LLP, 2019 NY Slip Op. 33019(U), dismissing a claim for lost profits damages, explaining:

The law in New York is well settled that in order to obtain lost profits for breach of contract, plaintiff must prove the extent of such damages with a reasonable degree of certainty. However, as Electron argues, there is a distinction to be made between (1) lost profits that are general damages and (2) lost profits that are consequential or special damages. In the former case (which Electron claims is properly pleaded here), such damages may be recovered so long as plaintiff demonstrates a sable foundation for a reasonable estimate. In the latter case (which defendants assert applies), consequential damages must be demonstrated with reasonable certainty. Electron also argues that it has sufficiently pleaded that it could have recovered lost profits even as consequential damages.

A party may not recover damages for loss profits unless they were within the contemplation of the parties at the time the contract was entered into and are capable of measurement with reasonable certainty. The first requirement is a rule of foreseeability. The second requirement does not require absolute certainty. It requires only that damages be capable of measurement based upon known reliable factors without undue speculation. In the case of a new business seeking to recover loss of future profits as here, a stricter standard is imposed because there is no experience from which lost profits may be estimated with reasonable certainly and other methods of evaluation may be too speculative.

The complaint does not allege that the parties ever discussed lost profits damages in the event of breach of the License Agreement. Nor does the License Agreement show or infer any such understanding. Accordingly, the foreseeability branch of the applicable standard has not been alleged.

Electron maintains that its lost royalties flow directly from Morgan Stanley's breach of the License Agreement and are quintessential general damages. Quoting from Tactebel Energy Mktg, Inc. v AEP Power Mktg, Inc., 487 F 3d 89 .110 [2d Cir 207], Electron argues it is most certainly a claim for general damages where plaintiff seeks only what it bargained for the amount it would have profited on the payments breaching party promised to make. Electron continues, royalties are precisely what Electron bargained for, and only an award of damages equal to lost profits will put Electron in the same position it would have occupied had the contract been performed.

Although Electron bargained for royalties, neither the License Agreement nor the Consulting Services Agreement provide a guide for calculating the amount of royalties to be paid. This case is unlike Tractebal and Biotronik where there were stable foundations for estimating lost profits. Both involved supply contracts where prices and quantities at issue are ascertainable. Tractebel arose from an energy supply contract where the counterparty was obligated to take a minimum amount of product and to make associated payments at prices stipulated in the contract. In Biotronik, the parties' agreement provided for plaintiff to resell defendant's stents using complex pricing and guaranteed number of sales formulas. No comparable formula can be found in the parties' agreements here. There is no provision for any specific payments to be used in the Spread Trading System. Morgan Stanley was not required to pay Electron any fixed amount. There was no minimum volume of trades acquired or commission amounts provided. In fact, there were no metrics by which the parties could project future receivables and therefore on which lost profits might be calculated.

The License Agreement only required Morgan Stanley to provide Electron 25% of the Net Revenue generated by the Spread Trading System if the parties were successful in fully developing it. Thus, for Electron to receive any payment, third parties would have had to elect to use the system to execute spread trades; Morgan Stanley and Electron would then have to set a competitive amount of commissions to charge third parties for use of the system; and those commissions would have to generate revenues that exceed various expenses before Morgan Stanley would owe Electron the type of profit payments Electron might seek to recover. Of course, and as plaintiff states in the complaint, Electron had no prior track record with the Spread Trading System. There are no allegations that the system was ever tested. The system was never placed in operation and whether or how it would have been received is entirely speculative. Both, the Supreme Court and the Appellate Division reached the same conclusion.

(Internal quotations and citations omitted) (emphasis added).

A key element in commercial litigation is proving damages. As this decision shows, in some circumstances, those damages can include lost profits, but the standard for being entitled to such damages is high. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding proving damages.