Take Care When Drafting Limitations of Liability to Exclude Lost Profits Damages

Two weeks ago, I posted Carefully Craft Your Arbitration Clause if You Want Some, But not All, Disputes Arbitrated. The recent case of Biotronik A.G. v. Conor Medsystems Ireland, Ltd., is a reminder to in-house counsel that specificity also can be critical if you want to limit the company’s liability in the event of a breach.

In 2004 Biotronik and Conor Medsystems entered into an agreement that gave Biotronik the exclusive right to distribute the CoStar stent in a defined territory. Three years later, Conor Medsystems announced that FDA trials failed to establish that CoStar was equivalent to Taxus, a competing stent manufactured by Boston Scientific. As a result, Conor Medsystems recalled the CoStar stent and removed it from the worldwide marketplace.

Biotronik sued Conor Medsystems for breach of contract and sought damages, including its lost profits. Conor Medsystems moved for summary judgment on several grounds, one of which was that Biotronik could not be entitled to lost profits under any circumstances because any lost profits would fall into the category of consequential damages, and the agreement expressly stated that:

Neither party shall be liable to the other for any indirect, special, consequential, incidental, or punitive damage with respect to any claim arising out of this agreement (including without limitation its performance or breach of this agreement) for any reason.

The New York Supreme Court agreed with Conor Medsystems and ruled that Biotronik only could obtain nominal damages, and not lost profits. The Appellate Division affirmed, and the matter then went to the New York Court of Appeals. That Court noted that because the agreement did not define consequential damages to include lost profits, the plaintiff could recover lost profits if they were deemed to be “general damages.” Under New York law (which governed the agreement):

  • Lost profits damages are general damages when they are “the direct and immediate fruits of the contract.”
  • Lost profits damages are consequential damages when the “loss [of] profits [is] on collateral business relationships.”

While the Court of Appeals went through an analysis of a body of case law that is far from a model of clarity, it ultimately concluded that, in this instance, lost profits were general damages because:

The contract clearly contemplated that plaintiff would resell defendant’s stents. That was the very essence of the contract. Any lost profits resulting from a breach would be the ‘natural and probable consequence’ of that breach.

While Medsystems no doubt vehemently disputes the validity of the outcome (and may appear to many to have a legitimate right to do so), the bottom line is that it now must defend against a much larger damages claim. For in-house counsel, the lesson of Biotronik is obvious: If you want to be sure to exclude lost profits as damages for a potential breach, be clear and be specific when drafting the contract.  Failing to do so can lead to unforeseen and potentially devastating consequences.