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The distinction between general and special contract damages is well defined, but its application to specific contracts and controversies is usually more elusive. 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." Otherwise, where the damages reflect a "loss of profits on collateral business arrangements," they are only recoverable when: (1) it is demonstrated with certainty that the damages have been caused by the breach; (2) the extent of the loss is capable of proof with reasonable certainty; and (3) it is established that the damages were fairly within the contemplation of the parties. Lost profits from the breach of a distribution contract are subject to these principles, and such profits have been recognized as general damages where the nature of the agreement support a conclusion that they flow directly from the breach.
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. The geographic territory covered by the agreement included countries in which plaintiff had an existing direct sales business. The agreement allowed defendant to take advantage of plaintiff's distribution business and sales force in order to penetrate the market. 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. 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. 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
Were Biotronik’s lost profits general damages and therefore recoverable?
The court held that Biotronik’s lost profits that were related to its resale of the stents constituted general damages because they were the direct and probable result of the agreement breach, such that they were outside the scope of the agreement's limitation on recovery. Conor’s assertion that lost profits failed under UCC 2-715(2)(a) lacked merit because § 2-715(2) followed the common law rule that the seller was liable for consequential damages of which the seller had "reason to know."