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EarthInfo, Inc. v. Hydrosphere Res. Consultants - 900 P.2d 113 (Colo. 1995)

Rule:

Restitution measures the remedy by the defendant's gain and seeks to force disgorgement of that gain in order to prevent the defendant's unjust enrichment. 

Facts:

Between 1986 and 1988, respondent Hydrosphere entered into several contracts with U.S. West, Inc. (US West), a Delaware corporation, to develop a number of products that employ CD-ROM technology (the Contracts). Under the Contracts, Hydrosphere was to develop the CD-ROM units and create the software that enables end-users to access the otherwise public information on line from the CD-ROM units. On February 10, 1989, U.S. West assigned its interest in the contracts to Petitioner EarthInfo in a leveraged buy-out deal in which EarthInfo agreed to pay U.S. West $60,432. EarthInfo also entered into a separate agreement with Hydrosphere in which it agreed to honor U.S. West's obligations under the Contracts, including the continued payment of royalties on the products already developed by Hydrosphere. After some time, EarthInfo failed to make royalty payments. Thus, after strained negotiations, Hydrosphere notified EarthInfo by letter on December 12, 1990, that it was rescinding the Contracts. Hydrosphere then filed a breach of contract action against EarthInfo in the Boulder County District Court and sought to rescind the parties' software development contracts. The trial court determined that EarthInfo had breached its contracts with Hydrosphere, ordered the contracts rescinded, and ordered that EarthInfo repay to Hydrosphere all the net profits it realized as a result of its breach. The court of appeals affirmed the trial court. 

Issue:

Was the award for rescission of contract and restitution, as well as the disgorgement of profits, justified?

Answer:

Yes

Conclusion:

The Supreme Court of Colorado certiorari to determine (1) whether the court of appeals erred when it concluded that the proper measure of restitution for partial rescission of a contract was disgorgement of the petitioner's profits; and (2) whether the district court erred by not giving credit to the petitioner for that portion of the profits that are attributable to the petitioner's effort and investment. The Court held that the trial court's order represented a permissible exercise of its discretion. The Court affirmed the award of restitution and disgorgement of profits in favor of respondent consultant, but reversed the amount awarded. Because the record supports the trial court's findings that EarthInfo consciously and substantially breached its contracts with Hydrosphere, damages were difficult to assess, and the parties mutually agreed to rescission, retention of profits by EarthInfo would be an unjust enrichment. Accordingly, the Court found that the extraordinary remedy of restitution and disgorgement of profits is justified. The rescission of the contract was warranted because EarthInfo's breach was substantial and that damages were inadequate. The Court agreed that EarthInfo must be required to disgorge the profits it accrued as a result of its breach because its breach had been conscious and substantial. However, the court remanded the case for a determination of the relative contributions of the parties so that profits could be fairly apportioned.

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