Commercial Division Blog

Posted: September 2, 2022 / Written by: Jeffrey M. Eilender, Samuel L. Butt, Seth D. Allen, Joshua Wurtzel, Hillary S. Zilz / Category Commercial Division Justices

Claim for Lost Profits Must Be Dismissed Where Complaint Fails to Allege that Lost Profits Were Within the Contemplation of the Parties

On June 16, 2022, Justice Borrok of the New York County Commercial Division issued a decision in L'Oreal USA, Inc. v Wormser Corp., 2022 NY Slip Op 31931(U) holding that claims for lost profits should be dismissed where the complaint failed to allege that the parties contemplated lost profits when entering into an agreement, stating:

Process Tech argues that dismissal of L'Oreal's lost profits claim is required because the [*9] AC still fails to adequately alleged that lost profits were within the contemplation of the parties and, under the new business rule, prospective prospects of a new business are too remote and speculative to meet the standard of reasonable certainty for lost profits (RSB Laboratory Services, Inc. v BSI, Corp., 368 N.J. Super. 540, 556 [NJ App Div 2004]).

In their opposition papers, relying primarily on Perini Corp. v Greate Bay Hotel & Casino, Inc., 129 NJ 179 (NJ 1992) and Somerville Container Sales v General Metal Corp., 39 N.J. Super 348 (NJ App Div 1956), L'Oreal argues that the AC adequately states a claim for lost profits. In addition, on the record (6.15.22), counsel for L'Oreal argued that if this Court were to find that [**6] the AC was still deficient that discovery has shown sufficient  information such that L'Oreal should be given leave to replead. Their reliance on Perini and Somerville is misplaced.

Perini involved a construction management agreement, not the sale of goods governed by the Uniform Commercial Code (UCC). The conceit of the dispute was as to whether the parties had agreed to a substantial completion date of May 31, 1984, or June 1, 1984 because Sands sought to terminate the contract by letter dated December 21, 1984, notwithstanding a provision in the contract prohibiting termination after substantial completion (which had occurred on September 14, 1984). Perini sued and the matter went to arbitration. In the [*10] arbitration, the arbitrators awarded Sands over $14.5 million in damages for lost profits. Upon application for confirmation by Sands and Perini's application to have the award vacated, the trial court held that the arbitrators had not made the kind of gross mistake or clear disregard of applicable law required to overturn the award. This decision was affirmed by the appellate division and the New Jersey Supreme Court. This is simply not the issue in front of this Court. The Perini court was merely reviewing whether under the specific facts of that case whether the arbitrators had made a gross mistake or clearly disregarded applicable law such the setting aside the award was appropriate and held that under those facts, they did not.

Somerville involved the purchase of 1614 stainless steel barrels from General Metal. General Metal had purchased the barrels from Piel's Brewery, which had deemed them unfit for the storage and transportation of beer. Under the purchase agreement between General Metal and Piel's Brewery, the barrels were not to be resold to any brewery for use as beer containers. General Metal certified the barrels to be in excellent condition and sold them to Somerville, [**7] knowing that Somerville [*11] contemplated selling them for use by a European brewery. Somerville subsequently sold the barrels to Heineken's Brewery in Holland, which used them to send beer to the United States. The defects in the barrels were ultimately revealed, and Heineken made a claim against Somerville. Somerville then sued General Metal for its losses, alleging breach of warranty. After a jury trial, where the jury found in favor of Somerville, the trial court set aside the verdict and granted a new trial holding that (i) statements by General Metal to Somerville warranted a finding that there was an express warranty as to the fitness of the barrels, and (ii) General Metal was not responsible for any claim by Heineken against Somerville because the resale was unattended by any warranty. On appeal, ultimately, the New Jersey Appellate Division Court reinstated the jury's verdict that General Metal was liable to Somerville but ordered a new trial on damages because the jury should not have considered Heineken's claim against Somerville in determining the same. The case at nisi prius is very different than Somerville. There is no contract between Process Tech and L'Oreal. Somerville does not stand for the proposition that lost [*12] profits do not need to be within the contemplation of the parties. Lastly, Somerville did not involve a new product launch and, as such, was not subject to the new business rule.

In Bell Atlantic Network Services, Inc. v P.M Video Corp., 322 N.J. Super 74 (NJ App Div 1999), lv denied 162 NJ 130, the New Jersey Appellate Division made clear that Perini did not displace the new business rule (see Tretina Printing, Inc. v Fitzpatrick & Assocs., 135 NJ 349 [NJ 1994]). Accordingly, L'Oreal's claims for lost profits must be dismissed. Solely to the extent that L'Oreal can replead its claim (i) based on the newly discovered facts during discovery and (ii) to the extent that this product should not be considered a new business for L'Oreal as [**8] counsel for L'Oreal suggested at oral argument (which suggestion appears to be at odds with the prior submissions indicating that this was a new product launch), dismissal is without prejudice.

Contact our attorneys at commercialdivisionblog@schlamstone.com if you or a client have questions regarding these issues.

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