Schonfeld v. Hilliard

Under New York law, a contract plaintiff must establish both the existence and the amount of lost profits with reasonable certainty. A projection need not be mathematically exact, but it must rest on known and reliable factors rather than speculation. The rule is applied especially strictly to a new business with no operating history.

The proposed channel was a new business. Although the participants had cable-industry experience and the BBC had existing programming, the operating entity never existed, had no established U.S. subscriber base, and had no historical record from which to project its performance. The introduction of BBC programming into the American market therefore could not be treated as an established business expansion.

The INN Business Plan and Curtis's expert calculations depended on too many unproven assumptions: formation and 20-year operation of an entity, tens of millions of dollars in financing, carriage arrangements, sufficient subscribers, advertising at projected rates, accurate expenses, stable marketing costs, and an undetermined ownership structure. The projections also failed adequately to account for competition, technology, regulation, market changes, and consumer demand.

Comparisons to Cox and other existing channels did not cure the problem. Cox had established operations, management, resources, and distribution systems that INN lacked, while the asserted comparators were not shown to be sufficiently similar in management, investors, costs, or business structure.

The wrongdoer rule did not shift uncertainty to the Hilliards because that rule applies only after the existence of injury is certain and only the amount remains uncertain. Here, Schonfeld could not establish with adequate certainty that the venture would have earned profits at all.

Lost profits also were not within the parties' contemplation when the alleged oral funding promise was made. The promise concerned funding the Interim Agreement, whereas the claimed profits would have come from a future operating entity and an uncertain channel business. Unlike a party with near-exclusive control over the profits under the contract it breached, the Hilliards did not assume responsibility for roughly $269 million in speculative future channel profits.

A plaintiff may seek consequential damages for lost operating profits or, separately, damages for the market value of an income-producing asset lost because of the breach. The latter measure compensates for the value of the asset at the time of loss—the amount a buyer would pay for the opportunity to earn its uncertain future income—not for the asset's projected future profits themselves.

The market value of an income-producing asset is generally less speculative than a direct lost-profits calculation because the valuation occurs at one point in time. A purchaser's price already reflects discounts for delay, uncertainty, and business risk. Consequently, reasonable-certainty requirements apply more leniently to this hybrid form of consequential damages than to a claim for the entire stream of anticipated operating profits.

The supply agreements were recoverable assets. They granted INN a 20-year exclusive BBC programming license and were, apart from cash, INN's principal valuable assets. Testimony also supported the conclusion that the agreements were abandoned or lost because the Hilliards failed to provide the promised funding.

Liability for loss of the supply agreements was within the parties' contemplation. Russ Hilliard acknowledged that the BBC would not have entered the Interim and December agreements without the funding promise, and that INN lost the December agreement at least partly because the promised money was not provided.

For unique or intangible assets without a standardized trading market, New York uses a hypothetical-market inquiry: the price that a willing buyer and willing seller, both reasonably informed and neither compelled, would agree upon. A contract right may have recoverable market value even though it is not traded on an exchange.

A recent arm's-length sale price for the very asset is ordinarily the best evidence of market value. The Cox Agreement was negotiated at arm's length by knowledgeable cable-industry participants, was signed by INN, and stated the price at which Cox would buy and INN would sell the March Agreement's programming rights.

The fact that the Cox deal was never completed did not make it irrelevant. There was evidence that its remaining contingencies could have been satisfied if the Hilliards had granted Cox additional time. In any event, INN's agreement to sell at that price was admissible against the Hilliards as a party admission.

Cox's distinctive resources, existing cable operations, and relationship with the BBC affected the weight of the Cox Agreement, not its admissibility. Every buyer has individual circumstances, and the key fact was that a well-informed purchaser and seller agreed on a price despite knowing the agreement's obligations and limitations.

The Cox Agreement also could inform the value of the December Agreement. Both agreements conveyed the central feature that Cox sought—the 20-year right to exclusive BBC news programming. Differences in financial terms might require adjustments, but they were not so drastic that a jury could not use the Cox price, aided by expert testimony, as a benchmark.

The district court incorrectly adopted an all-or-nothing approach to the Cox purchase price. At minimum, the agreement supported a valuation of $700,000 plus the present value of the $1 million payable over ten years, approximately $1.39 million. The equity component could also potentially be valued from the agreement's buyout formula and incorporated Cox revenue projections. Once injury is certain, uncertainty concerning the amount falls on the wrongdoer.

New York's out-of-pocket rule for fraud protects a plaintiff's reliance interest, including loss caused by foregoing other business opportunities. It does not permit benefit-of-the-bargain recovery, but it can permit recovery for the value of an asset surrendered because of the fraud.

Schonfeld alleged that INN abandoned the March Supply Agreement in reliance on the Hilliards' false assurances that they would personally fund the new BBC arrangement. The market value of that lost agreement therefore could constitute a recoverable reliance loss, rather than an attempt to obtain the value of the Hilliards' unfulfilled promise.

New York requires especially culpable conduct for punitive damages. In contract-centered disputes, the Court of Appeals has also required an independent tort, egregious conduct, and conduct directed at the public generally, though the Second Circuit did not decide whether the public-harm requirement governs fraud or fiduciary-duty claims in this setting.

Even under the potentially more permissive standards applicable to ordinary fraud, the proof did not show the extraordinary moral culpability necessary for punitive damages. There was no evidence of self-dealing or malicious conduct, and the collapse of the BBC agreements caused the Hilliards themselves to lose nearly $800,000.

The Hilliards argued that the alleged promise lacked sufficiently definite terms to form a contract and was unenforceable because it was unwritten, either as an attempted modification of the Shareholders' Agreement or under the Statute of Frauds. Those arguments had been raised below, but the district court did not reach them.

Although the court of appeals could affirm on an alternative ground, it preferred remand because the enforceability issues had not been decided by the district court and were only cursorily argued on appeal. The remand left the district court to determine whether the claims survive those defenses.