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Thursday, October 5, 2006

Second Circuit Orders New Trial on Contract Damages

A former employee of an investment firm has successfully convinced a Second Circuit panel to order a new trial concerning contract damages in a case arising out of his enforcement of a stock option agreement. The Second Circuit ordered a new trial based on “erroneous evidentiary rulings and erroneous jury instructions by the district court.”

The Second Circuit held that the district court abused its discretion in excluding certain evidence of the stock's value.  (Notably, the valuation was complicated by the fact that the breach occurred as the stock was in the IPO process.).  The appellate panel held that the trial court erred by employing a bright-line rule to exclude all of the employee’s evidence concerning the value of the stock that was dated after the employer’s breach (i.e., the day the employer refused to honor the stock option).  The district court had excluded the post-breach evidence to avoid a valuation of the stock based on hindsight.  The Second Circuit noted:

The district judge’s [post-breach] “bright-line” ruling was too mechanical and, ultimately, deprived [the employee/plaintiff] of the full benefit of his bargain. This is problematic as the primary purpose of damages is to put the wronged party in as good a position as if the breach did not occur.

The Second Circuit also held that two aspects of the court's jury instructions constituted reversible error.  First, the employee was entitled to a “knowledgeable investor” instruction (“A damages award should be based on what knowledgeable investors anticipated the future conditions and performance what be at the time of the breach.”). Second, the district court confused the law when it delivered a “wrongdoer rule” instruction (“[T]he breaching party (read: “wrongdoer”). . . must shoulder the burden of uncertainty regarding the amount of damages.”)

The New York Law Journal has a slightly more detailed synopsis. The decision is here.

Boyce v. Soundview Technology Group, Inc. (2d Cir. Sept. 29, 2006).

[Meredith R. Miller]

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