Tag: lost profits

Actuarial Firm Owes No Independent Legal Duty to Health Plan; Lost Profits Claim Lopped Off – 2nd Cir.

The Second Circuit appeals court recently examined the contours of New York’s economic loss rule in a dispute involving faulty actuarial services.

The plaintiff health care plan provider in MVP Health Plan, Inc. v. Optuminsight, Inc., 2019 WL 1504346 (2nd Cir. 2019) sued an actuary contractor for breach of contract and negligence when the actuary fell short of professional practice standards resulting in the health plan losing Medicare revenue.

The plaintiff appealed the district court’s bench trial verdict that limited plaintiff’s damages to the amounts it paid the actuary in 2013 (the year of the breach) and denied the plaintiff’s request for lost revenue.

The plaintiff also appealed the district court’s dismissal of its negligence count on the basis that it was duplicative of the breach of contract claim and the actuary owed the plaintiff no legal duty outside the scope of the contract.

Affirming, the Second Circuit first addressed the dismissal of plaintiff’s negligence claim. In New York, a breach of contract claim is not an independent tort (like negligence) unless the breaching party owes a legal duty to the non-breaching party independent of the contract. However, merely alleging a defendant’s breach of duty of care isn’t enough to bootstrap a garden variety contract claim into a tort.

Under New York law, an actuary is not deemed a “professional” for purposes of a malpractice cause of action and no case authorities saddle an actuary with a legal duty to its client extraneous to a contract. In addition, the court found the alleged breach did not involve “catastrophic consequences,” a “cataclysmic occurrence” or a “significant public interest” – all established bases for a finding of an extra-contractual duty.

Next, and while tacitly invoking Hadley v. Baxendale, [1854] EWHC Exch J70, the seminal 19th Century British court case involving consequential damages, the appeals court jettisoned the plaintiff’s lost revenues claim.

Breach of contract damages aim to put the plaintiff in the same financial position he would have occupied had the breaching party performed. “General” contract damages are those that are the “natural and probable consequence of” a breach of contract. Lost profits are unrecoverable consequential damages where the losses stem from collateral business arrangements.

To recover lost revenues as consequential damages, the plaintiff must establish (1) that damages were caused by the breach, (2) the extent of those damages with reasonable certainty, and (3) the damages were within the contemplation of the parties during contract formation.

To determine whether consequential damages were within the parties’ reasonable contemplation, the court looks to the nature, purpose and peculiar circumstances of the contract known by the parties and what liability the defendant may be supposed to have assumed consciously.

The court found that plaintiffs lost revenues were not damages naturally arising from defects in actuarial performance. Instead, it held those claimed damages were twice removed from the breach: they stemmed from plaintiff’s contracts with its member insureds. And since there was no evidence the parties contemplated the defendant would be responsible for the plaintiff’s lost revenues if the defendant breached the actuarial services agreement, the plaintiff’s lost profits damage claim was properly dismissed.

Afterwords:

MVP provides a useful primer on breach of contract damages, when lost profits are recoverable as general damages and the economic loss rule.
The case cements the proposition that where there is nothing inherent in the contract terms or the parties’ relationship that gives rise to a legal duty, the non-breaching party likely cannot augment its breach of contract action with additional tort claims.

Limitation of Damages Clause Doesn’t Bar Trade Secrets, Copyright Claims – IL ND

A Federal district court in Illinois recently addressed the scope of a limitation of damages provision in a dispute over automotive marketing software. The  developer plaintiff in Aculocity, LLC v. Force Marketing Holdings, LLC, 2019 WL 764040 (N.D. Ill. 2019), sued the marketing company defendant for breach of contract – based on the defendant’s failure to pay for plaintiff’s software – and joined statutory copyright and trade secrets claims – based on the allegation that the defendant disclosed plaintiff’s software source code to third parties.

The defendant moved for partial summary judgment that plaintiff’s claimed damages were foreclosed by the contract’s damage limitation provision. The court denied as premature since no discovery had been taken on plaintiff’s claimed damages.

The agreement limited plaintiff’s damages to the total amount the software developer plaintiff was to be paid under the contract and broadly excluded recovery of any “consequential, incidental, indirect, punitive or special damages (including loss of profits, data, business or goodwill).”  The contractual damage limitation broadly applied to all contract, tort, strict liability, breach of warranty and failure of essential purpose claims.

In Illinois, parties can limit remedies and damages for a contractual breach if the agreement provision is unambiguous and doesn’t violate public policy.

Illinois law recognizes a distinction between direct damages and consequential damages. The former, also known as “general damages” are damages that the law presumes flow from the type of wrong complained of.

Consequential damages, by contrast, are losses that do not flow directly and immediately from a defendant’s wrongful act but result indirectly from the act. Whether lost profits are considered direct damages depends on their (the lost profits) degree of foreseeability. In one oft-cited case, Midland Hotel Corp. v. Reuben H. Donnelley Corp., 515 N.E.2d 61, 67 (Ill.1987), the Illinois Supreme Court held that a plaintiff’s lost profits were direct damages where the publisher defendant failed to include plaintiff’s advertisement in a newly published directory.

The District Court in Aculocity found that whether the plaintiff’s lost profits claims were direct damages (and therefore outside the scope of the consequential damages disclaimer) couldn’t be answered at the case’s pleading stage.  And while the contract specifically listed lost profits as an example of barred consequential damages, this disclaimer did not apply to direct lost profits. As a result, the Court denied the defendant’s motion for partial summary judgment on this point. [*3]

The Court also held that the plaintiff’s statutory trade secrets and copyright claims survived summary judgment. The Court noted that the contract’s damage limitation clause spoke only to tort claims and contractual duties. It was silent on whether the limitation applied to statutory claims – claims the court recognized as independent of the contract. [*4] Since the clause didn’t specifically mention statutory causes of action, the Court refused to expand the limitation’s reach to plaintiff’s copyright and trade secrets Complaint counts.

Take-aways:

Aculocity and cases like it provide an interesting discussion of the scope of consequential damage limitations in the context of a lost profits damages claim. While lost profits are often quintessential consequential damages (and therefore defeated by a damage limitation provision), where a plaintiff’s lost profits are foreseeable and arise naturally from a breach of contract, the damages will be considered general, direct damages that can survive a limitation of damages provision.

Pontiac GTO Buyer Gets Only Paltry Damage Award Where He Can’t Prove Lost Profits Against Repair Shop – IL Court

Spagnoli v. Collision Centers of America, Inc., 2017 IL App (2d) 160606-U portrays a plaintiff’s Pyrrhic victory in a valuation dispute involving a 1966 Pontiac GTO.  

The plaintiff car enthusiast brought a flurry of tort claims against the repair shop defendant when it allegedly lost the car’s guts after plaintiff bought it on-line.

The trial court directed a verdict for the defendant on the bulk of plaintiff’s claims and awarded the plaintiff only $10,000 on its breach of contract claim – a mere fraction of what the plaintiff sought.

The Court first rejected plaintiff’s lost profits claim based on the amounts he expected to earn through the sale of car once it was repaired.

A plaintiff in a breach of contract action can recover lost profits where (1) it proves the loss with a reasonable degree of certainty; (2) the defendant’s wrongful act resulted in the loss, and (3) the profits were reasonably within the contemplation of the defendant at the time the contract was entered into.

Because lost profits are naturally prospective, they will always be uncertain to some extent and impossible to gauge with mathematical precision.  Still, a plaintiff’s damages evidence must afford a reasonable basis for the computation of damages and the defendant’s breach must be traceable to specific damages sustained by the plaintiff.  Where lost profits result from several causes, the plaintiff must show the defendant’s breach caused a specific (measurable) portion of the lost profits. [¶¶ 17-20]

Agreeing with the trial court, the appeals Court found the plaintiff failed to present sufficient proof of lost profits.  The court noted that the litigants’ competing experts both valued the GTO at $80,000 to $115,000 if fully restored to mint condition.  However, this required the VIN numbers on the vehicle motor and firewall to match and the engine to be intact.  Since the car in question lacked matching VIN numbers and its engine missing, the car could never be restored to a six-figures value range.

The Court also affirmed the directed verdict for defendant on plaintiff’s consumer fraud claim.  To make out  valid Consumer Fraud Act (CFA) claim under the Consumer Fraud Act a plaintiff must prove: (1) a deceptive act or unfair practice occurred, (2) the defendant intended for the plaintiff to rely on the deception, (3) the deception occurred in the course of conduct involving trade or commerce, (4) the plaintiff sustained actual damages, and (5) the damages were proximately cause by the defendant’s deceptive act or unfair conduct. A CFA violation can be based on an innocent or negligent misrepresentation.

Since the plaintiff presented no evidence that the repair shop made a misrepresentation or that defendant intended that plaintiff rely on any misrepresentation, plaintiff did not offer a viable CFA claim.

Bullet-points:

  • A plaintiff in a breach of contract case is the burdened party: it must show that it is more likely than not that the parties entered into an enforceable contract – one that contains an offer, acceptance and consideration – that plaintiff substantially performed its obligations, that defendant breached and that plaintiff suffered money damages flowing from the defendant’s breach.
  • In the context of lost profits damages, this case amply illustrates the evidentiary hurdles faced by a plaintiff.  Not only must the plaintiff prove that the lost profits were within the reasonable contemplation of the parties, he must also establish which profits he lost specifically attributable to the defendant’s conduct.
  • In consumer fraud litigation, the plaintiff typically must prove a defendant’s factual misstatement.  Without evidence of a defendant’s misrepresentation, the plaintiff likely won’t be able to meet its burden of proof on the CFA’s deceptive act or unfair practice element.