Schonfeld v. Hilliard

Court of Appeals for the Second Circuit
218 F.3d 164 (2000)

ELI5:

Rule of Law:

Under New York law, a plaintiff may recover damages for the lost market value of an income-producing asset (such as an exclusive contract) even if the business is a new venture for which future lost profits are too speculative to be proven with reasonable certainty.

Facts:

In 1988, brothers Russ and Les Hilliard formed International News Network, Inc. (INN), later bringing in Reese Schonfeld as a one-third shareholder.
On March 4, 1994, the British Broadcasting Corporation (BBC) granted INN a 20-year exclusive license to distribute its news programming in the United States (the 'March Supply Agreement').
Cox Cable Communications offered to purchase INN's license rights for $1.7 million in cash payments plus a 5% equity interest in two proposed channels, and INN accepted these terms in a letter agreement on June 2, 1994 (the 'Cox Agreement').
The Hilliards later decided to pursue the channel venture themselves and caused the deal with Cox to be aborted.
In December 1994, INN entered into a new 'Interim Agreement' with the BBC which required INN to make approximately $20 million in payments.
To induce Schonfeld and the BBC to abandon the March Supply Agreement and enter into the new agreements, Russ Hilliard orally promised that he and his brother would personally provide the necessary funding for the Interim Agreement.
The Hilliards failed to provide the promised funding, causing INN to default on its payment obligations to the BBC.
As a result of INN's default, the BBC terminated its agreements, and INN lost its exclusive 20-year programming license.

Procedural Posture:

Reese Schonfeld filed a diversity action against Russ and Les Hilliard in the United States District Court for the Southern District of New York.
Schonfeld alleged various derivative claims on behalf of INN and personal claims for fraud, breach of contract, promissory estoppel, and breach of fiduciary duty.
After discovery, the Hilliards moved for summary judgment on the grounds that Schonfeld could not establish any recoverable damages.
The district court granted the Hilliards' motion for summary judgment, dismissing all claims for lost profits and lost asset value as too speculative, leaving only a fraud claim limited to $15,000 in out-of-pocket damages.
Schonfeld, as plaintiff-appellant, appealed the district court's grant of summary judgment to the U.S. Court of Appeals for the Second Circuit.

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Issue:

Does New York law permit recovery of damages for the market value of a lost income-producing asset, such as an exclusive programming license, for a new business venture when damages for lost future profits from that venture are deemed too speculative to be proven with reasonable certainty?

Opinions:

Majority - McLaughlin, Circuit Judge

Yes. New York law distinguishes between speculative lost profits of a new business venture and recoverable damages for the market value of a lost income-producing asset. While lost profits from a new, untested business are generally not recoverable because they cannot be established with reasonable certainty, the market value of a lost asset can be. The market value represents what a willing buyer would pay for the chance to earn future profits and is determined at a single point in time, making it inherently less speculative. The best evidence of an asset's market value is a recent sale price or offer negotiated at arm's length. In this case, the Cox Agreement, which memorialized an offer by an informed industry leader that INN accepted, is competent and powerful evidence of the supply agreement's market value. The district court erred by conflating the two distinct categories of damages and improperly excluding evidence related to the asset's market value.

Analysis:

This decision provides a crucial clarification of damages law for new business ventures. By separating the concepts of speculative lost profits and ascertainable lost asset value, the court provides a viable path for recovery for new enterprises that are harmed by a breach of contract. It establishes that the failure to prove lost profits under the 'new business rule' is not a bar to recovering the market value of a tangible or intangible asset, such as a valuable contract right or intellectual property, that was lost as a direct result of the defendant's breach. This precedent prevents wrongdoers from escaping liability simply because the plaintiff's business was too new to have a track record of profitability, shifting the focus to the provable value of what was actually lost.

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