Biotronik A.G. v. Conor Medsystems Ireland, Ltd.

• Decision Date: 27 March 2014
• Citation: Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 2014 NY Slip Op 2101, 22 N.Y.3d 799, 11 N.E.3d 676, 988 N.Y.S.2d 527 (N.Y. 2014)
• Parties: BIOTRONIK A.G., Appellant, v. CONOR MEDSYSTEMS IRELAND, LTD., et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

22 N.Y.3d 799

11 N.E.3d 676

988 N.Y.S.2d 527

2014 N.Y. Slip Op. 02101

BIOTRONIK A.G., Appellant,

v.CONOR MEDSYSTEMS IRELAND, LTD., et al., Respondents.

Court of Appeals of New York.

March 27, 2014.

Proskauer Rose LLP, New York City (Ronald S. Rauchberg and Anna G. Kaminska of counsel), and Vandenberg & Feliu LLP (Bertrand C. Sellier of counsel) for appellant.

Kramer Levin Naftalis & Frankel LLP, New York City (Harold P. Weinberger, Kerri Ann Law and Jared I. Heller of counsel), for respondents.

OPINION OF THE COURT

RIVERA, J.

In this breach of contract action, plaintiff sought lost profits from an exclusive distribution agreement as general damages. We hold that lost profits were the direct and probable result of a breach of the parties' agreement and thus constitute general damages.

I.

In May 2004, plaintiff Biotronik A.G., a manufacturer and distributor of medical devices, and defendant Conor Medsystems Ireland, Ltd., the developer and manufacturer of CoStar, a drug-eluting coronary stent, entered an agreement designating plaintiff as the exclusive distributor of CoStar for a worldwide market territory excluding the United States and certain other countries.¹ The geographic territory covered by the agreement included countries in which plaintiff had an existing direct sales business.² The agreement allowed defendant to take advantage of plaintiff's distribution business and sales force in order to penetrate the market.

Under the agreement, plaintiff served as defendant's “distributor ... with respect to [CoStar] for sale to any purchasers for use (or for re-sale in the case of [plaintiff]'s sub-distributors)” in the designated territory. The agreement required plaintiff “[t]o use commercially reasonable efforts to promote, market, and distribute [the stents]” in the territory. Plaintiff agreed to supply defendant with “all reasonably required support to comply with any local regulatory law and requirement” and to assist defendant with the registration of its trademarks. Thus, defendant relied on plaintiffs expertise in handling a wide range of regulatory matters in order to make sales of CoStar possible.

Nonetheless, defendant maintained direct involvement in the marketing and sale of CoStar. For example, the agreement required that plaintiff use only defendant's sales and technical literature, which had to display references to defendant and plaintiffin equal prominence. Plaintiff's translations of these materials were subject to defendant's final approval. Defendant would supply training support and sales samples, including free initial training, and would provide additional sales training, for a fee, as requested by plaintiff. Thus, defendant retained considerable influence over the quality and nature of CoStar's sales and marketing.

The agreement was not a simple resale contract, where one party buys a product at a set price to sell at whatever the market may bear. Rather, the price plaintiff paid defendant reflected the actual sales, and sales price, of CoStar stents. The agreement required plaintiff to pay defendant a transfer price calculated as a percentage of plaintiff's net sales of CoStar: 61% for direct sales and 75% for indirect sales.³ Each quarter, the parties would calculate a minimum price based on net sales during the preceding quarter. Plaintiff remained obligated to pay defendant the full transfer price for its sales, even when the actual sales price exceeded the minimum price. Thus, the contract would only operate if plaintiff sold stents, and the payment defendant received bore a direct relationship to the market price plaintiff could obtain.

The agreement further required plaintiff to provide defendant with a forecast, updated monthly, which predicted plaintiff's intended purchases for the upcoming 12–month period. The purpose of the forecast was to facilitate plaintiff's “marketing plans” and permit defendant and its suppliers “to meet their lead times” for CoStar. The agreement required plaintiff to make a minimum monthly order, but defendant could limit the maximum order to 130% of the most recently forecasted quantity. Thus, the agreement guaranteed defendant a set number of sales each month, but defendant could cap the number of orders it filled even when plaintiff was ready, willing, and able to sell more stents.

The agreement allowed defendant to terminate immediately in the event of a change of control of plaintiff “that has, or in the reasonable opinion of [defendant] could have, a material adverse effect on the distribution” of CoStar.

The agreement included a damages limitation provision restricting the parties to general damages:

“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 agreement was to be governed by New York law. Its term was through December 31, 2007, and it provided for an automatic one year renewal, absent a timely termination notice from either party.

When the parties entered the agreement, defendant had not received regulatory approval for CoStar from either the European authorities or the United States Food and Drug Administration (FDA). However, the agreement anticipated that CoStar would pass regulatory hurdles following ongoing tests in certain European countries. In February 2006, after defendant obtained European regulatory approval, plaintiff began distributing CoStar.

In February 2007, Johnson & Johnson acquired defendant. At the time of the acquisition, Johnson & Johnson marketed another drug-eluting stent, known as Cypher, which was directly competitive with CoStar. Also at this time, defendant was engaged in a drug trial to secure FDA approval to distribute CoStar in the United States. According to plaintiff, defendant used a substantially different product during this trial than it had in its European trials.

In May 2007, defendant announced that the FDA trials could not establish that CoStar was equivalent to Taxus, a widely marketed stent manufactured by Boston Scientific. Based on these results, defendant terminated its FDA application and notified plaintiff that it was recalling CoStar and removing it from the worldwide market. Defendant paid plaintiff 8,320,000 Euros and a 20% handling fee to satisfy its recall obligations under the agreement.

II.

In November 2007, plaintiff sued defendant for breach of contract and sought damages for lost profits related to its resale of the stents. Plaintiff argued that its claim for lost profits on the resale of CoStar constituted general damages, falling outside the scope of the agreement's limitation on recovery.

Defendant moved for summary judgment on both liability and damages. Supreme Court denied summary judgment on the question of liability, concluding that disputed issues of fact remained as to whether defendant breached the agreement (Biotronik, A.G. v. Conor Medsystems Ireland, Ltd., 33 Misc.3d 1219[A], 2011 N.Y. Slip Op. 51980[U] [2011] ). However, Supreme Court also concluded that the lost profits sought by plaintiff were consequential damages and subject to the agreement's damages limitation provision, leaving plaintiff with claims for only nominal and other damages. By denying plaintiff lost profits as a remedy, Supreme Court effectively ended the lawsuit, and the court entered a judgment dismissing the complaint.

Plaintiff appealed to the Appellate Division, which affirmed the judgment, concluding that plaintiff's claim for lost profits was barred by the agreement's limitation on consequential damages (Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 95 A.D.3d 724, 725, 945 N.Y.S.2d 258 [1st Dept.2012] ). The Appellate Division granted plaintiff leave to appeal to this Court and certified a question asking whether its order was “properly made” (2012 N.Y. Slip Op. 85229[U] [2012] ).

We agree with plaintiff that damages must be evaluated within the context of the agreement, and that, under the parties' exclusive distribution agreement, the lost profits constitute general, not consequential, damages.

III.

Based on the damages limitation provision of the agreement, plaintiff may only recover lost profits if they are general damages.⁴ The limitations provision does not specifically preclude recovery for lost profits, nor does it explicitly define lost profits as consequential damages. We thus turn to our precedent for guiding principles to assist in determining whether, under this agreement, plaintiffs lost profits are general damages and therefore recoverable.

General damages “are the natural and probable consequence of the breach” of a contract ( American List Corp. v. U.S. News & World Report, 75 N.Y.2d 38, 43, 550 N.Y.S.2d 590, 549 N.E.2d 1161 [1989];Kenford Co. v. County of Erie, 73 N.Y.2d 312, 319, 540 N.Y.S.2d 1, 537 N.E.2d 176 [1989] ). They include “money that the breaching party agreed to pay under the contract” ( Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89, 109 [2d Cir.2007], citing American List Corp., 75 N.Y.2d at 44, 550 N.Y.S.2d 590, 549 N.E.2d 1161). By contrast, consequential, or special, damages do not “directly flow from the breach” ( American List Corp., 75 N.Y.2d at 43, 550 N.Y.S.2d 590, 549 N.E.2d 1161).

“The distinction between general and special contract damages is well defined but its application to specific contracts and controversies is usually more elusive” ( id.). Lost profits may be either general or consequential damages, depending on whether the non-breaching party bargained for such profits and they are “the direct and immediate fruits of the contract” ( see Tractebel, 487 F.3d at 109 n. 20, citing Masterton & Smith v. Mayor of Brooklyn, 7 Hill 61, 68–69 [1845] ). Otherwise, where the damages reflect a “loss of profits on collateral business arrangements,” they are only recoverable when “(1) it is...