Parties to an agreement may have a variety of remedies available to them in the event of a breach. These include specific performance, through which a party may be required to perform the agreement; injunctive relief, through which a party may be required to take or cease certain actions; and damages, through which a party may recover the lost value of the agreement. The recent decision in the TAS Distributing Company case illustrates the conditions to be satisfied if damages are sought, and the particular problems faced when a new business or product is involved.
TAS Distributing Company, Inc. (“TAS”) granted Cummins Engine Company, Inc. (“Cummins”) a co-exclusive license to use its idle-control technology for heavy-duty truck engines. Cummins was required by the license agreement to “make all reasonable efforts to market and sell” the licensed products in an effort to maximize royalties payable to TAS. Believing that Cummins was not making “all reasonable efforts,” TAS sued Cummins, asserting, among other things, claims for breach of contract and damages in the form of lost profits. The district court held that TAS could not prove damages, and TAS appealed.
The Appellate Court ruled against TAS. It noted that “to plead a cause of action for breach of contract, a plaintiff must allege: (1) the existence of a valid and enforceable contract; (2) substantial performance by the plaintiff; (3) a breach by the defendant; and (4) resultant damages.” The plaintiff bears the burden of proving that he or she sustained damages. Merely showing that a contract has been breached is not enough.
Damages for lost profits are prospective, inherently uncertain and incapable of precise calculation. As a result, courts do not require proof with absolute certainty and expert opinions are not necessarily required. However, there must be “a reasonable basis for the computation of damages which, with a reasonable degree of certainty, can be traced to defendant’s wrongful conduct.” When a new business or product is involved, claims generally are considered too uncertain, speculative and remote to permit recovery under the “new business rule.” This rule may be avoided where damages can be established by reference to comparable past profits in an established business or product line. Unfortunately for TAS, it was unable to present evidence to the courts’ satisfaction.
TAS attempted to establish damages in two ways. First, it presented evidence of past sales of its products by Cummins’ chief competitor, Detroit Diesel Company (“Detroit Diesel”). Second, it argued that Cummins should have achieved the level of sales projected by Cummins during negotiations with TAS.
Reference to Detroit Diesel sales was rejected by the Appellate Court. It noted that courts have sometimes recognized damages based on comparable businesses operated by the same or another party from comparable locations during comparable time periods, but such cases are exceptional. The new business rule has, however, barred comparison of different products offered by established businesses, or an established product or products offered by different parties in the same or different markets because past successes with similar products or businesses do not provide a reasonable basis upon which to calculate lost profits for a new product, a new business, or a new market. Moreover, the mix of facts often is too distinguishable to permit reliance upon another’s experience. Such was the case here, where the court acknowledged operational and circumstantial differences between Detroit Diesel and Cummins too significant to warrant reliance upon Detroit Diesel’s experience as a basis to establish TAS’ claimed losses with reasonable certainty. Merely stating that Cummins should have sold as many engines incorporating the TAS technology as did Detroit Diesel, without more, did not warrant reversal of the lower court’s judgment. Similarly, the Appellate Court rejected TAS’s argument that Cummins should be bound by the sales projections it forwarded during negotiations. The projections were not incorporated in the parties’ agreement. In fact, an integration clause in the agreement specifically precluded reliance upon any documentation or agreements between the parties to the extent not contained in the agreement. Therefore, Cummins’ pre-contractual sales projections introduced during negotiations could not be considered a basis upon which to establish damages with reasonable certainty. Claimants should be aware of the elements to be proven in order to recover for a lost profits claim, as well as those needed to prove damages with reasonable certainty. Careful evaluation is required before filing a lawsuit and, indeed, during the negotiation and preparation of the underlying agreement. Otherwise, a breach may simply be a breach, providing no basis for recovery.