Lost Profits Damages Not Available for New Business

On November 17, 2020, Justice Cohen of the New York County Commercial Division issued a decision in Evemeta, LLC v. Siemens Convergence Creators Corp., 2020 NY Slip Op. 33827(U), holding that lost profits damages are not available for a new business, explaining:

New York has a relatively demanding standard for an award of lost profits. As the Court of Appeals has observed: Loss of future profits as damages for breach of contract have been permitted in New York under long-established and precise rules of law. First, it must be demonstrated with certainty that such damages have been caused by the breach and, second, the alleged loss must be capable of proof with reasonable certainty. In other words, the damages may not be merely speculative, possible or imaginary, but must be reasonably certain and directly traceable to the breach, not remote or the result of other intervening causes.

Judicial skepticism is particularly acute with respect to claims for lost profits arising from a business venture or product with no prior track record to support claims of future success. If it is a new business seeking to recover for loss of future profits, a stricter standard is imposed for the obvious reason that there does not exist a reasonable basis of experience upon which to estimate lost profits with the requisite degree of reasonable certainty. Thus, it is not surprising that most of the leading cases which have decided on claims of future lost profits have ruled that they are not recoverable.

In Kenford, the parties entered into agreements with respect to the construction and operation of a domed sports stadium. Under a management contract between the parties, the plaintiff was to operate the stadium for 20 years. Construction of the stadium never began, and the plaintiff filed a lawsuit against the defendant for breach of contract, seeking compensation for the profits plaintiff claimed it would have received if the stadium had been built and it had been able to operate the stadium during the term of the contract. Although the plaintiff submitted the business and industry's most advanced and sophisticated method for predicting the probable results of contemplated projects, including historical data, obtained from the operation of similar businesses, the Court of Appeals reversed a multi-million dollar lost profits judgment and dismissed the plaintiffs inherently speculative claim, noting:

We of course recognize that any projection cannot be absolute, nor is there any such requirement, but it is axiomatic that the degree of certainty is dependent upon known or unknown factors which form the basis of the ultimate conclusion. Here, the foundations upon which the economic model was created undermine the certainty of the projections. Plaintiff assumed that the facility was completed, available for use and successfully operated by it for 20 years. Quite simply, the multitude of assumptions required to establish projections of profitability over the life of this contract require speculation and conjecture, making it beyond the capability of even the most sophisticated procedures to satisfy the legal requirements of proof with reasonable certainty. The economic facts of life, the whim of the general public and the fickle nature of popular support for professional athletic endeavors must be given great weight in attempting to ascertain damages 20 years in the future. New York has long recognized the inherent uncertainties of predicting profits in the entertainment field in general and, in this case, we are dealing, in large part, with a new facility furnishing entertainment for the public.

Since Kenford, New York courts routinely have rejected lost profits claims asserted with respect to unproven businesses or products when such profits cannot be predicted with reasonable certainty.

The undisputed facts in this case bring it squarely within the ambit of Kenford and its progeny. To summarize: Siemens, EVEMeta, and Synacor undertook a new business venture, to develop, integrate, and sell a new product, the Joint OTT Solution, into a new market (the U.S.). Neither the Joint OTT Solution nor the Siemens OTT Software were successfully sold in the U.S. despite sales efforts spanning from 2014 to 2017 put forth by Siemens, Synacor, EVEMeta, and Siemens' subsequent reseller, Imagine Communication Corp. The Joint OTT Solution was never placed in operation with or implemented by a customer. The Joint OTT Solution never generated any profit. The Joint OTT Solution never generated any revenue, and Siemens earned a total of $143,000 in revenue from sales of the Siemens OTT Software from January 2014 through December 2017.

As in Kenford, the efforts of EVEMeta' s expert witnesses cannot save EVEMeta's claims from dismissal. Cole opines that, but for the breakup of the trilateral arrangement, the Joint OTT Solution would have achieved substantial commercial sales success during the term of the Back-to-Back Agreements. In particular, she identifies the following four groups of potential customers for the Joint OTT Solution: Group 1: Synacor's existing MVPD customers; Group 2: Additional MVPDs that were not existing Synacor customers; Group 3: Cable TV channels (e.g., CNN and HBO); and Group 4: OTT Providers (e.g., Netflix).

For each group, Cole assumes that a certain number of customers within each group would have purchased the Joint OTT Software during the contract's five-year term (the adoption rate). She then estimated the percent of subscribers/users who would actually utilize the Joint OTT Solution during that five-year term (penetration rate). For example, with respect to Group 1 (Synacor's existing customers), Cole first estimated the adoption rate, opining that it is reasonable to assume that by the end of 2016, Synacor could have captured 15% of the total 5,479,770 subscribers belonging to this group, rising to 30% by the end of 2017, 45% by the end of 2018, 60% by the end of 2019, and 75% by the end of 2020. Thus, Cole opined that, ultimately, 75% of Group 1 could have purchased the Joint OTT Solution. The assumptions and estimates, however, did not end with the adoption rate. Because payment under the Synacor Agreement depended on the number of active subscribers per month, EVEMeta' s experts estimated the penetration rate, i.e., the number of cable customers/subscribers who would actually be utilizing the Siemens OTT Platform. Cole opined that it was reasonable to assume penetration rates of 18% of MVPD subscribers in 2016, 40% of MVPD subscribers by the end of 2017, 55% by the end of 2018, and that it will reach 60% by the end of 2019 and 65% by the end of 2020. The calculation of lost profits is even more speculative with respect to customer Groups 2, 3, and 4, which were not even existing Synacor Clients. Furthermore, EVEMeta' s experts did not analyze any purported comparable companies' profit history in opining that, but for the breakup of the parties' trilateral partnership, EVEMeta would have earned $44,091,477 in profit under the payment terms of the parties' agreements. Without any relevant or reliable data points in this regard, EVEMeta's market share and lost profit projections are built on nothing more than unverified and speculative assumptions. EVEMeta's reliance upon Wathne Imports, Ltd. v PRL USA, Inc. (101AD3d83 [1st Dept 2012]), is misplaced. In that case, the defendants filed a motion in limine seeking to exclude the testimony of the plaintiff's expert relating to lost profits arising from the discontinuance of trademarked Polo Sport brand handbags. As part of his analysis, the plaintiff's expert determined the average of the actual gross sales from Polo Sport handbags during the period 1998 to 2000, and then used data from other companies selling handbags after Polo Sport handbags were discontinued to estimate growth. Under the circumstances of that case, the court ruled that plaintiff's expert's analysis should not be excluded, but should be be challenged through cross-examination. However, unlike here, Wathne did not concern a new business venture with no track record of operations, profits, or experience akin to the governing line of cases cited above. In fact, Wathne explicitly recognized New York legal authority that requires dismissal of plaintiff's lost profits claim:

While both Ashland and Kenford were determinations made after trial, claims for lost profits have been dismissed by this Court upon a motion for summary judgment where the plaintiffs lost profits were said to arise from a new business endeavor with no track record, or a business in the development stage that had never generated any revenue.

Nor does the fact that two potential customers-Consolidated and GVTC-purportedly signed on to purchase the Joint OTT Solution save EVEMeta's claim from dismissal. The corporate representative for Consolidated testified that it ultimately did not and could not purchase or implement the Joint OTT Solution, or any OTT product, because the necessary OTT programming content was cost-prohibitive (deposition of Jaime Montes, Consolidated's director of product management. Consolidated further explained that, because it determined that it could not implement on OTT product, it never paid any fees related to the Joint OTT Solution. Nevertheless, EVEMeta' s experts include Consolidated on the list of 31 potential Group 1 customers without addressing Consolidated's unrefuted testimony. GVTC averred (in response to a subpoena) that we did not purchase or use the Siemens product in question. We are aware they offered the service, but chose not to purchase it. EVEMeta's expert, Malackowski, specifically excluded GVTC from his calculations.

Nor is it sufficient that EVEMeta claims that the Joint OTT Solution was unsuccessful precisely because of Defendants' purported conduct. In virtually every case cited above in which the court dismissed the lost profits claim arising from a new business venture, the plaintiff argued that the defendant's conduct prevented it from earning future profits. Nonetheless, the court still dismissed the plaintiffs' lost profit claims because, notwithstanding claims of liability or wrongdoing, the plaintiff must still establish lost profits with the requisite degree of reasonable certainty.

(Internal quotations and citations omitted).

A key element in commercial litigation is proving damages. As this decision shows, in some circumstances, those damages can include lost profits, but the standard for being entitled to such damages is high. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding proving damages.