Opinion ID: 684071
Heading Depth: 2
Heading Rank: 3

Heading: Availability of Lost Profits Damages

Text: 33 TWA challenges the award of lost profits damages on the grounds (a) that such damages were not a foreseeable or contemplated remedy when TWA renewed its contract with Travellers in 1984; (b) that Travellers failed to prove the amount of such damages with sufficient certainty; and (c) that there was insufficient showing of causation. 34 Under New York law, the recovery of lost profits as damages for breach of contract is subject to the following stringent requirements: 35 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.... In addition, there must be a showing that the particular damages were fairly within the contemplation of the parties to the contract at the time it was made. 36 Kenford Co. v. County of Erie, 67 N.Y.2d 257, 502 N.Y.S.2d 131, 132, 493 N.E.2d 234, 235 (1986) (per curiam) (citations omitted) (Kenford I ); Trademark Research Corp. v. Maxwell Online, Inc., 995 F.2d 326, 332-34 (2d Cir.1993). In a later decision in the same case the Court of Appeals emphasized that damages which may be recovered by a party for breach of contract are restricted to those damages which were reasonably foreseen or contemplated by the parties during their negotiations or at the time the contract was executed. Kenford Co. v. County of Erie, 73 N.Y.2d 312, 540 N.Y.S.2d 1, 5, 537 N.E.2d 176, 180 (1989) (Kenford II ); Trademark, 995 F.2d at 332. 37 Applying these rules to the present appeal, we find that Travellers met its burden of proving damages for lost profits.
38 An award of damages for lost profits will stand only if liability for such damages was contemplated by the parties at the time of contracting. That contemplation may be recited expressly; otherwise: 39 [i]n determining the reasonable contemplation of the parties, the nature, purpose and particular circumstances of the contract known by the parties should be considered ... as well as 'what liability the defendant fairly may be supposed to have assumed consciously, or to have warranted the plaintiff reasonably to suppose that it assumed, when the contract was made.' 40 Kenford II, 540 N.Y.S.2d at 4, 537 N.E.2d at 179 (citation omitted). 41 After reviewing the parties' 20 year relationship, the district court concluded that Travellers was in essence a captive supplier of tours for TWA. Travellers furnished land arrangements for Getaway tours on a virtually exclusive basis. But TWA exercised control over the demand for Getaway tours in the highly elastic and competitive leisure tour industry by: (a) determining the ultimate level of advertising and marketing, and the number of brochures that would be produced and distributed to promote Getaway tours for each tour season; (b) designating the number of transatlantic seats it would set aside for Getaway passengers; and (c) controlling the distribution channels for Getaway tours through its direct sales force, its relationships with independent travel agents, and its central reservation and booking systems. 42 The district court properly looked to the nature, purpose and particular circumstances of the contract known by the parties. Kenford II, 540 N.Y.S.2d at 4, 537 N.E.2d at 179. Giving full consideration to the fact that Travellers was in the position of making land arrangements for an anticipated flow of tourists, and that the flow did not materialize because TWA (exercising near exclusive control over the demand for the Getaway program) curbed its promotional expenditures without regard to the effect on the flow of Getaway passengers, we conclude that the district court properly applied the test of Kenford II. Because of the particular procedural history of this case, we are not called upon to decide what damages the parties contemplated would become payable if one side wrongfully terminated the agreement. That was attempted, but did not happen. As a result of the injunctive relief granted by the district court (relief that is not the subject of this appeal), Travellers and TWA undertook continued performance for the life of the contract. We believe that it was reasonably foreseeable at the time that Travellers and TWA renewed their joint venture agreement that Travellers would suffer lost profits--and claim lost profits as damages--if Travellers devoted substantially all its efforts over a period of years to accommodating a flow of Getaway tourists that is curtailed by TWA's failure to promote the tours. Under these circumstances, TWA fairly may be supposed to have assumed consciously that lost profits damages would be an appropriate remedy or to have warranted [Travellers] reasonably to suppose that TWA assumed such liability. 1 Id. 540 N.Y.S.2d at 4, 537 N.E.2d at 179. 43
44 Damages for lost profits are not recoverable unless the plaintiff proves with a reasonable degree of certainty the amount of lost profits traceable to the breach. Kenford I, 502 N.Y.S.2d at 132, 493 N.E.2d at 235. The extensive record contains ample evidence to support Judge Ward's factual conclusions. Furthermore, Judge Ward took great care to adopt a formula for assessing damages based on lost profits which was tailored to the particular industry at issue, relied exclusively on historical data and actual operating statistics of a kind relied on by the parties in the conduct of their business. It is on this basis that we conclude that Judge Ward's determination of damages for lost profits was of sufficient certainty to satisfy the rigorous standard set forth in Kenford and its progeny. 45 Courts distinguish between established businesses and new or fledgling enterprises in fixing the level of proof needed to achieve reasonable certainty as to the amount of damages. See Merlite Indus., Inc. v. Valassis Inserts, Inc., 12 F.3d 373, 376 (2d Cir.1993); Trademark Research, 995 F.2d at 332-34. Established businesses have a record of past performance that may offer a reliable statistical basis for prediction. See Merlite, 12 F.3d at 376. TWA and Travellers were joint venturers for over 20 years. Judge Ward set forth in detail the pricing structure for Getaway tours, which he found to be typical for the escorted tour industry. Travellers would design the tour packages to which it would add a fixed margin to the cost of the land arrangements. To this figure, TWA would add a 14% commission for the travel agents, the price of the air arrangements, and TWA's fixed margin for the land-based tours. Prior to 1988, TWA's margin was 6%, but in 1988 TWA increased its margin to 10%. Here, an established long-term course of dealings between the parties, demonstrable profit margins, and a verifiable pricing structure permits lost profits to be calculated with reasonable certainty. See generally, Care Travel Co. v. Pan American World Airways, Inc., 944 F.2d 983 (2d Cir.1991). 46 Fixing lost profits damages with reasonable certainty requires careful examination of the nature and reliability of the statistical proof. See Merlite, 12 F.3d at 375. Any calculation of damages based on lost profits always entails a degree of uncertainty caused by the need to rely on assumptions and estimates. The mere fact that [a party] disagrees with the methodology utilized ... or [a particular] assumption ... does not render ... proof speculative. Care Travel, 944 F.2d at 994-95. In both Merlite and Care Travel, we emphasized that the statistical evidence was derived from historical operating statistics between the parties and was of the kind used by the parties in conducting their own business. In Merlite the plaintiff presented statistics based on established, provable figures of past performance derived from a virtually identical distribution agreement between the parties for the prior year. Merlite, 12 F.3d at 375. In Care Travel, the plaintiff relied on a track record of actual transactions between the parties, derived from the reports and documents of the other party, in support of its lost profits claim. Care Travel, 944 F.2d at 994, 994 n. 8. 47 In this case, the statistical evidence presented at trial to establish damages was of the same type used and relied upon by the parties in conducting their own businesses. Judge Ward employed a ratio analysis to calculate Travellers' lost profits. The ratio analysis relied on figures derived from the historical relationship between TWA and Travellers to determine the average percentage of TWA's transatlantic traffic that Getaway tours represented and applied the resulting ratio to TWA's actual operating data for each tour seasons at issue to project the expected demand for Getaway tours during that period. As Judge Ward found, TWA had used such a ratio analysis in the past to project the expected demand for Getaway tours for each tour season. The planning meeting for the 1988 tour season is instructive. In forecasting the expected demand for Getaway tours, T.G. Brier, TWA's representative in charge of Getaway tours, first estimated the total TWA international eastbound originating passenger traffic. Brier then used Travellers' historical volumes to estimate the percentage of TWA traffic attributable to Getaway. Finally, Brier used this historical average to project the 1988 tour season's expected passengers. Thus, the ratio analysis adopted by Judge Ward was a technique recognized and used in the industry, was integral to projecting the expected demand for Getaway tours at each annual planning meeting, and was of the same type of data relied on by both TWA and Travellers in conducting their businesses. 48 TWA argues that the decline in Getaway business was entirely due to intervening circumstances beyond its control. In support of its position, TWA offers a list of factors that potentially had an adverse impact on leisure passenger traffic abroad, including fear of terrorism, fluctuation in exchange rates, shifting demand for types of pre-packaged tours, a flight attendants' strike and changes in management. Judge Ward recognized that the leisure travel industry is highly elastic and sensitive to such external factors. In rejecting TWA's argument that the reduction in the number of Getaway passengers was attributable entirely to external circumstances, Judge Ward made the following findings. First, TWA's international traffic grew significantly during the period in which TWA claims that general economic factors depressed Getaway business. Second, TWA's position that internal factors (such as TWA's change in management or labor problems) account for the decline in Getaway's business is undermined by the performance of Travellers' direct competitors with which TWA also conducted business. Over the same period and facing the same conditions, Travellers' competitors dramatically increased their market shares as well as the aggregate number of their European tours. Judge Ward was also careful to normalize the figures to factor in and account for potential anomalies caused by such external factors. 49 In calculating the historical average percentage of TWA's transatlantic traffic accounted for by Getaway, Judge Ward carefully reviewed the entire 20 year relationship between the parties and selected 1978 through 1982 as benchmark years representative of normal business relations and industry conditions. He then applied this ratio to TWA's actual number of transatlantic passengers. The resulting estimate of Getaway passengers thus accounts for external factors specific to TWA because it utilizes TWA's actual passenger statistics. Furthermore, Judge Ward recognized that the anomalies of the 1986 tour season had a lingering effect on European leisure travel. Given this, and the fact that the relationship between Travellers and TWA did not dramatically deteriorate until after the 1987 planning meeting had been completed, Judge Ward decided not to award any damages for the 1987 tour season.