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The spreadsheet included information regarding bookings and loss from turnover churn for and The eventual dispute centered on five customers.
Chapter 13 - Bankruptcy Basics
Latisys initially identified them by code name but provided a key to the names in early January Zayo then performed a number of calculations, including a synergies analysis, which indicated significant cost saving as a result of the deal. The final SPA did not make representations or include warranties as to churn, churn rates, revenue, or expected revenue.
In late , Zayo sued Latisys in the Delaware Court of Chancery, demanding indemnification for damages resulting from breaches of representations, warranties, and covenants included in the SPA. Zayo claimed that Latisys failed to disclose that five customers had notified Latisys of their intent not to renew their contracts or renew the contract under different terms.
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Zayo contended Latisys had an obligation under the SPA to disclose this information. Latisys responded that, under the specific language of the SPA, it had no obligation to disclose the nonrenewals to Zayo. This language would make the seller liable to the buyer for undisclosed upcoming churn.
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According to the witness, Latisys purposefully did not include this language in the contract because it would impose on the company an unreasonable obligation to isolate and disclose potential nonrenewals. Latisys did not commit a breach of contract as to any of the five customers. There was no liability. Benefit-of-the-bargain method. The court explained that the standard was high: The plaintiff had to prove damages by a preponderance of the evidence.
It added that this case, in particular, required precise calculations because the contested SPA had an indemnification provision. Zayo would only qualify for damages exceeding the basket, i. It further noted that the benefit-of-the-bargain methodology is only appropriate if the alleged breach causes a permanent diminution in the value of the business lost revenues into perpetuity and the business has been permanently impaired. She recognized that, if Zayo knew that a contested contract was in the month-to-month phase, the maximum amount a customer would be liable for would be 30 days of revenue.
The court noted that Zayo made no attempt to prove diminution of value into perpetuity; nor did its expert, by her own admission, perform a post-closing valuation of Latisys. The contested contracts expired in less than a year from the time Zayo was considering an acquisition of Latisys. If the contracts were near expiration or in the month-to-month phase at the closing of the deal, Zayo was not in a position to claim expectancy damages beyond one month of monthly recurring revenue, the court pointed out.
The damages calculation lacked any foundation in the evidence, the court found. The court said it found most persuasive an out-of-pocket cost analysis for lost revenue through the remaining contract term of each of the contested contracts for the five customers. This defense calculation was based on the assumption that the customers would renegotiate contracts after the expiration of the existing contract based on the state of the market.
Not so, the court said. The Court of Chancery found that, even if the plaintiff had met its burden of proving liability, it would have been unable to prove damages. MY Imagination v. A contract case that was subject to New York law provides a helpful review of the test a plaintiff must meet to qualify for lost profits. On the record, the plaintiff initially conceded that it was a new business with no track record and that lost profits or lost opportunities damages would be speculative. Later efforts to walk back these statements were unsuccessful.
The expert seemed unaware of key facts and relied blindly on statements from the plaintiff as to possible sales and profit margins, the court noted. This case illustrates how a damages case falls apart when it lacks a consistent damages theory, the participants are not on the same page, and the expert is not fully informed of the facts and the record.
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Litigation history. The plaintiff, MY Imagination, was a new stationary company that wanted to enter the school supply market.
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For this purpose, it bought the assets of the defendant, M. Berger, a well-established consumer-goods wholesaler. Also, the plaintiff said, the defendant had promised to leave the stationary industry. The plaintiff obtained the LEGO license, the most lucrative license, but not the others. For example, the plaintiff twice turned down a licensing agreement with Nickelodeon. A Universal representative later testified that Universal decided on its own not to transfer the stationary license from the defendant to the plaintiff. In suing the defendant, the plaintiff brought contract and tort claims, alleging the defendant breached the asset purchase agreement.
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Regarding the contract claims, the court found the plaintiff failed to prove actual damages. The plaintiff appealed the findings with the 6th Circuit Court of Appeals, which affirmed the dismissal of the tort claims but reinstated the contract claims. Inconsistent damages theory.
Importantly, in a court brief, the plaintiff conceded:. Here, Plaintiff was a new business with no established history and approval of specific license transfers would be difficult to establish. On remand to the district court, the plaintiff suddenly asked for lost profits and presented expert testimony to support its position. In response, the defendant filed another summary judgment motion, arguing the plaintiff was unable to meet the legal requirements for lost profits and asking the court to limit the remedy to nominal damages.
The court explained that, under the applicable New York case law, the party seeking lost profits has to satisfy a three-part test. See Kenford Co. County of Erie, 67 N. In the controlling Kenford case, the New York high court said the plaintiff first has to show causation. Put differently, the plaintiff has to establish a causal connection between the alleged wrongdoing and the alleged harm to the plaintiff.
The court noted the defendant never guaranteed the licenses would be transferred. The court observed that the plaintiff failed to take discovery from any licensor other than Universal. The plaintiff failed to meet the causation requirement. Reasonable certainty. Hilliard , F. He also failed to consider that not every license would be transferred. In doing so, he contradicted the record, which showed that Universal, on its own, had declined to transfer its license to the plaintiff and that the plaintiff, on its own, twice had declined a license with Nickelodeon, the court said.
The expert also seemed unaware of actual sales data as to the important LEGO license, the court noted. Ultimately, his calculation assumed a series of transactions—all hypothetical—would occur. The court said the plaintiff never asked for actual sales figures from any licensee, including Universal, or any customer such as Target or Walmart.
Thirdly, the applicable test required the plaintiff to show that the parties contemplated lost profits as a remedy for breach of contract. Here, the parties disagreed over whether the asset purchase agreement provided lost profits.