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Tuesday, April 1, 2014

New York Court of Appeals Rules on Lost Profits as Direct Damages

StentsLast week, New York's Court of Appeals decided Biotronik A.G. v. Conor Medsystems Ireland, Ltd.  The case involved a distribution agreement that went wrong when Conor Medsystems (Conor) decided to cease worldwide distribution of a specialized stent for which Biotronik was to be its exclusive distributor in specified geographic areas.  Conor paid Biotronik 8,320,000 Euros plus a 20% handling fee to satisfy its obligations under the agreement.  Bitronik believed itself entitled to further damages for lost profits, despite the agreement's provision excluding "indirect, special, consequential, incidental, or punitive" damages.  

Both the New York Supreme Court and the Appellate Division ruled for Conor, finding that Biotronik's claims for lost profits were barred under the contractual limitation on damages.  The Court of Appeals reversed, holding that the lost profits at issue here "were the direct and probable result of a breach of the parties' agreement and thus constitute general damages."

Whether lost profits are direct or consequential damages turns on whether they "flowed directly from the contract itself or were, instead, the result of a separate agreement with a nonparty." However, the Court of Appeals noted, damages are not automatically consequential just because they involve a transaction with a third party.  Here, the very essence of the contract was that Biotronik would resell Conor's stents.  As a result, its lost profits arose directly from the breach and its lost profits damages arose as a "natural and probable consequence" of the breach.

Judge Read filed a lengthy dissent.  She argued that the parties had agreed to exclude consequential damages.  Since Biotronik's lost profits would have arisen from sales to third parties, they were consequential and not direct.  But the majority rejected this view as elevating form over substance.

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