Biotronik A.G., Appellant,v.Conor Medsystems Ireland, Ltd., et al., Respondents.BriefN.Y.January 7, 2014To be argued by: HAROLD P. WEINBERGER (30 Minutes Requested) New York County Clerk's Index No. 603751/07 Court of appeato of the State of Beth pork • • • BIOTRONIK, A.G, Plaintiff-Appellant, - against - CONOR MEDSYSTEMS IRELAND, LTD., CONOR MEDSYSTEMS IRELAND LIMITED, CONOR MEDSYSTEMS, INC., CONOR MEDSYSTEMS, INC., as successor by merger of CONOR MEDSYSTEMS, INC. and CONOR MEDSYSTEMS LLC, Defendants-Respondents. BRIEF FOR DEFENDANTS-RESPONDENTS HAROLD P. WEINBERGER KERRI ANN LAW JARED I. HELLER KRAMER LEVIN NAFTALIS & FRANKEL LLP 1177 Avenue of the Americas New York, New York 10036 (212) 715-9100 hweinberger@krarnerlevin.corn klaw@krarnerlevin.corn jheller@krarnerlevin.corn Attorneys for Defendants- Respondents APL-2012-00291 Disclosure Statement Pursuant to Rule 500.1(0 Respondent Conor Medsystems LLC is a wholly owned subsidiary of GUH Corporation, which is a wholly owned subsidiary of Johnson & Johnson. Respondent Conor Medsystems International Limited is a wholly owned subsidiary of Respondent Conor Medsystems LLC. Respondent Conor Medsystems Ireland Limited is a wholly owned subsidiary of Conor Medsystems International Limited. In March 2007, Respondent Conor Medsystem, Inc. merged with Respondent Conor Medsystems LLC and is now known as Conor Medsystems LLC. Although named as a respondent, there is no corporation named Conor Medsystems Ireland, Ltd. Table of Contents Page Disclosure Statement Pursuant to Rule 500.1(f) Table of Authorities iv Counter-Statement of Questions Presented 1 Preliminary Statement 3 Counter-Statement of Relevant Facts 6 A. The Agreement 6 B. The COSTAR II Trial Commences 11 C. Conor Obtains Regulatory Approval to Sell CoStar Outside of the United States 12 D. Johnson & Johnson Acquires Conor 13 E. The COSTAR II Trial Results 14 F. The CoStar Recall 15 G. Post-Recall Events 18 H. Biotronik's Lawsuit 20 I. The Trial Court's Judgment Dismissing Biotronik's Complaint 22 J. The Order 23 Argument 24 Point I THE ORDER SHOULD BE AFFIRMED BECAUSE BIOTRONIK'S CLAIM FOR LOST PROFITS IS BARRED UNDER THE AGREEMENT 24 A. The Lost Profits Biotronik Seeks Are Consequential Damages Under this Court's Precedent 25 B. The Lost Profits Biotronik Seeks Are Consequential Damages Under the U.C.C. 31 C. The Order Properly Determined that Biotronik's Lost Profits are Consequential Damages as a Matter of Law 37 Point II BIOTRONIK CANNOT RECOVER ITS LOST PROFITS FROM AFTER APRIL 2008 38 Point III IF THE COURT DETERMINES THAT BIOTRONIK'S LOST PROFITS ARE NOT BARRED UNDER THE AGREEMENT, THIS MATTER SHOULD BE REMITTED TO THE APPELLATE DIVISION FOR CONSIDERATION OF CONOR'S CROSS-APPEAL 40 Conclusion 41 Table of Authorities Page Cases: Airlink Commc'ns., Inc. v Owl Wireless, LLC, No. 3:10 CV 2296, 2011 WL 4376123 (N.D. Ohio Sept. 20, 2011) 34-35 Am. Electric Power Co. v. Westinghouse Electric Corp., 418 F. Supp. 435 (S.D.N.Y. 1976) 38 Am. Tel. & Tel. Co. v. New York City Human Res. Admin., 833 F. Supp. 962 (S.D.N.Y. 1993) 37 American List Corp. v. US. News & World Report, Inc., 75 N.Y.2d 38 (1989) 25, 29, 33 Appliance Giant, Inc., v. Columbia 90 Assocs., LLC, 8 A.D.3d 932, 779 N.Y.S.2d 611 (3d Dep't 2004) 30, 35 Biovail Pharm., Inc. v. Eli Lilly & Co., No. 5:01-CV-532-B0(3), 2003 WL 25901513 (E.D.N.C. Feb. 28, 2003) 35 Callisto Corp. v. Inter-Studio & Publ'g Co., No. 05-11953-GAO, 2006 WL 1240711 (D. Mass. May 4, 2006) 36 Canusa Corp. v. A&R Lobosco, Inc., 986 F. Supp. 723 (E.D.N.Y. 1997) 32 Cherokee Cnty. Cogeneration Partners, LP v. Dynegy Mktg. & Trade, 305 S.W.3d 309 (Tex. App. 2009) 36 Cnty. Asphalt, Inc. v. Lewis Welding & Eng'g Corp., 444 F.2d 372 (2d Cir. 1971) 32 Compania Embotelladora Del Pacifico, S.A. v. Pepsi Cola Co., 650 F. Supp. 2d 314 (S.D.N.Y. 2009) 26-27 Deutsch v. Health Ins. Plan of Greater N.Y , 751 F.2d 59 (2d Cir. 1984) 39 Garner v. N.Y State Dep't of Corr. Serv., 10 N.Y.3d 358 (2008) 24 n.8 iv In Re CCT Commc'ns, 464 B.R. 97 (Bankr. S.D.N.Y. 2011) 26 Intl Gateway Exch., LLC v. W. Union Fin. Servs., Inc., 333 F. Supp. 2d 131 (S.D.N.Y. 2004) 26 Long Island Lighting Co. v. Transamerica Delaval, Inc. 646 F. Supp. 1442 (S.D.N.Y. 1986) 38 Metro. Life Ins. Co. v. Noble Lowndes Intl, Inc., 84 N.Y.2d 430 (1994) 30-31 Morgenthau v. Citisource, Inc., 68 N.Y.2d 211 (1986) 40 NY. City Transit Auth. v. State ofNY , 89 N.Y.2d 79 (1996) 40 Niagara Mohawk Power Corp. v. Stone & Webster Eng'g Corp., No. 88-CV-819, 1992 WL 121726 (N.D.N.Y May 23, 1992) 38 Orester v. Dayton Rubber Mfg., 228 N.Y. 134 (1920) 32-33 Severstal Wheeling Inc. v. WPN Corp., 809 F. Supp. 2d 245 (S.D.N.Y. 2011) Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89 (2d Cir. 2007) V.S. Intl, S.A. v. Boyden World Corp., 862 F. Supp. 1188 (S.D.N.Y. 1994) Woods v. MONY Legacy Life Ins. Co., 84 N.Y.2d 280 (1994) Statutes: 26, 37 29 39 33 34 33 33 N.Y. Constr. & Interpretation Law § 262(a) (McKinney 1971) N.Y. U.C.C. § 2-102 N.Y. U.C.C. § 2-105 N.Y. U.C.C. § 2-719(3) 32 N.Y. U.C.C. § 2-713(1) 31 N.Y. U.C.C. § 2-715 31 Authorities: 1 James J. White, Robert S. Summers & Robert A. Hillman, Uniforrn Commercial Code § 7:21 (6th ed. 2012) 32 n.11 vi Defendants-respondents Conor Medsystems Ireland, Ltd., Conor Medsystems Ireland Limited, Conor Medsystems, Inc., and Conor Medsystems, LLC (collectively, "Conor") respectfully submit this brief in opposition to the appeal of plaintiff-appellant Biotronik A.G. ("Biotronik") from the unanimous Decision and Order of the Appellate Division, First Department (the "Order"), which held that the lost profits Biotronik seeks to recover are consequential damages that are barred under the parties' contract and, for that reason, affirmed the trial court judgment dismissing Biotronik's complaint. Counter-Statement of Questions Presented 1. In the context of a distribution agreement that expressly bars recovery of consequential damages and under which no monies flow from the product's manufacturer to the distributor, are the lost profits that the distributor would have earned by reselling the product to third-parties through separate agreements with those parties consequential damages and therefore unrecoverable? The Appellate Division correctly held that the lost profits sought by the distributor are consequential damages that may not be recovered under the distribution agreement because lost profits constitute general damages only where the non-breaching party seeks to recover money owed directly by the breaching party under the parties ' agreement. 1 2. Where a contract contains an unambiguous limitation of liability provision that bars recovery of consequential damages and the lost profits damages sought by a plaintiff are entirely derived from collateral agreements with independent third-parties, may a court determine that such damages are not recoverable under the contract as a matter of law? The Appellate Division appropriately determined, as matter of law, that the lost profits sought are consequential damages and are not recoverable under the parties ' agreement. 3. May a plaintiff distributor claim damages for an extended term of an agreement where the agreement was terminable by the manufacturer after the initial term, was timely terminated by the manufacturer, and the manufacturer advised the distributor that it would no longer supply product for resale? While the Appellate Division did not have a reason to reach this issue, the trial court properly held that even if lost profit damages were recoverable they could not be recovered for the extended term. 2 Preliminary Statement The Distribution Agreement at issue in this case (the "Agreement") expressly bars recovery of consequential damages. The only damages sought by Biotronik in this action are lost profits Biotronik claims it would have earned by reselling to third parties a coronary stent that Conor was supplying to it. In unanimously affirming the judgment that dismissed Biotronik's complaint, the Appellate Division applied the well-established principle — articulated by this Court, followed in a long line of cases decided under New York law and codified in New York's Uniform Commercial Code ("U.C.C.") — that lost profits "only constitute general damages where the non-breaching party seeks to recover money owed directly by the breaching party under the parties' contract." (R. 6a). Thus, as the Order correctly held, "a plaintiff suing to recover profits that it would have made by reselling the defendant's goods to third parties, as is the case here, is seeking consequential damages." (R. 5a-6a). As it did in both the Appellate Division and the trial court, Biotronik attempts to avoid this bedrock principle by grossly mischaracterizing the Agreement in order to create the impression that (a) the lost profits it seeks to recover are derived from the Agreement itself, rather than from Biotronik's independent agreements with third parties, and (b) the Agreement required Conor to make certain payments to Biotronik based on Biotronik's net sales of the stent. 3 In particular, Biotronik wrongly asserts that the Agreement "specifically provided" for "Biotronik's lost profits on resales," required Biotronik to "resell [the stent] at a higher price," "built[-in] Biotronik's profit margin," and provided "for the creation of a pool of funds and for the sharing of the pool by the parties." (Biotronik Br. at 3, 5, 24). In actuality, the Agreement did not obligate Biotronik to resell any specific quantities of the stent nor did it set a price at which Biotronik was required to resell the stent. The provision on which Biotronik relies for the proposition that the parties somehow shared a "pool of funds" is simply a formula to determine the price that Biotronik would pay to Conor to purchase the stents. It could in no event result in payment of any monies by Conor to Biotronik and is not the source of the lost profits Biotronik is claiming, which consist entirely of monies Biotronik claims it would have earned by reselling the stents to third parties. Biotronik also argues that the Appellate Division erred by not applying a nearly one-hundred year old decision, but that case was decided decades before the U.C.C. was adopted and is contrary to the modern rule set forth by this Court. In addition, Biotronik contends the Order should be reversed because the Appellate Division did not adequately consider cases decided by courts in other states, but those cases fundamentally misapply the U.C.C. and are contrary to cases applying New York law and other cases interpreting the U.C.C. 4 Moreover, contrary to Biotronik's assertion, it was entirely appropriate for the courts below to determine, as a matter of law, that the lost profits Biotronik seeks are consequential damages. The prohibition against recovery of consequential damages in the Agreement is clear and unambiguous, and the term "consequential damages" has a well-defined legal meaning. Finally, Biotronik's contention that in the event it is not barred from recovering lost profits it should be allowed to do so for a period including an additional year beyond the date as to which Conor had a right of termination — a claim rejected by the trial court and not addressed by the Appellate Division — is without merit. Conor gave timely notice that it would not extend the Agreement beyond its expiration date. Even if it had not, a party is not required to formally notify a counter-party that it will not be exercising its right to extend a contract where the party has stopped its performance. For these reasons, the Appellate Division's sound application of this State's current law should not be disturbed and the Order should be affirmed. In the event the Court grants Biotronik's appeal, however, this matter should be remitted to the Appellate Division for consideration of Conor's cross-appeal on the issue of liability, which the Appellate Division also did not reach. 5 Counter-Statement of Relevant Facts A. The Agreement Conor and Biotronik entered into the Agreement on May 25, 2004. Pursuant to the Agreement, which is governed by New York law, Biotronik was given the exclusive right to distribute CoStar, Conor's drug-eluting coronary stent, in European and other countries, but not in the United States. (R. 198; R. 200). Drug eluting stents are medical devices that are inserted into diseased coronary arteries during angioplasty and then elute a drug, in the case of CoStar, paclitaxel, to minimize the risk of restenosis, or the recurrence of narrowing of the affected artery. (R. 1559, 1562, 1566). The Agreement provided that it would expire on December 31, 2007, but "the term [would] automatically be extended by one (1) year unless one Party gives notice to the other Party prior to July 1, 2007 of its desire not to have this Agreement extended." (R. 192, at § 16.1). It also gave Biotronik a non-exclusive four month period after termination to sell-off its inventory. (R. 194, at § 16.5). Like most distributors, Biotronik agreed to use "commercially reasonable efforts to promote, market, and distribute [CoStar] in the Territory." (R. 177, at § 2.5(i)). But while the Agreement specified a minimum number of stents that Biotronik was required to purchase from Conor (R. 179, at § 3.5), Biotronik was not contractually obligated to resell any specific quantities. Nor did the 6 Agreement specify a price at which Biotronik was required to resell CoStar to its customers. Biotronik's contention that it was "required . . . to resell at a higher price" is simply not accurate. (Biotronik Br. at 24). The Agreement did not provide Conor with any control over how much product Biotronik sold or how much profit Biotronik made from its resale of the stents. Biotronik's assertion that "[t]he Agreement, by requiring resales and providing for a percentage split of the proceeds, provides in effect for the creation of a pool of funds and for the sharing of the pool by the parties" (id. at 5) and similar statements sprinkled throughout its brief (see id. at 3, 21, 24, 33, 34), are also palpably erroneous and based on an egregious mischaracterization of Exhibit C to the Agreement. Exhibit C is nothing more than a mechanism to determine the price Biotronik would pay Conor to purchase CoStar stents. (R. 180, at § 5.1 ("BIOTRONIK shall pay CONOR the price for [CoStar] as provided in Exhibit C hereto"); R. 201-02). Exhibit C provides that the "Transfer Price" Biotronik is to pay Conor for the CoStar stents it purchased would be based on a percentage of Biotronik's average sales price per unit, on a country-by-country basis, in the calendar quarter in which the stents Biotronik purchased were shipped to it. (R. 201, at § II. A.). In countries where Biotronik resold CoStar directly to end users, Biotronik would pay 61% of the average sales price per unit; in countries where it resold through sub- 7 distributors, it would pay 75% of the average sales price per unit. (R. 201, at § I. A.). Since it was impossible for the parties to know what Biotronik's average sales price per unit would be before the calendar quarter concluded, Exhibit C provides that the parties would agree to a minimum transfer price prior to the beginning of each quarter. (R. 201, at § II. A.). At the end of each quarter, a calculation would be performed to determine Biotronik's actual average sales price per unit, apply that average price to the units Biotronik purchased from Conor in that quarter, and multiply the result by the applicable percentage in each country. If, but only if, the calculated transfer price was greater than the agreed upon minimum price, Biotronik would pay the difference to Conor. 1 (R. 201-02, at § C). Under no circumstances would any money be paid by Conor to Biotronik pursuant to this provision. Moreover, since the formula for adjusting the minimum transfer price was based on Biotronik's average sales price per unit — not as Biotronik asserts, a percentage of its net sales (Biotronik Br. at 8) — it made no difference whether Biotronik had $1,000 in net sales divided by 2 units or $100,000 in net sales divided by 200 units; the average price per unit in each case would be the same For this reason, Biotronik's assertions that "resales were necessary to determine the price that Biotronik was to pay for CoStar stents" and that Biotronik's resales were "required" "so that Conor could be paid" are inaccurate. (Biotronik Br. at 8-9). Even if Biotronik did not make any resales during a particular quarter, Conor would still be paid the minimum transfer price for the stents it sold to Biotronik; there simply would not be any upward price adjustment from Biotronik. 8 ($500, in this example). Accordingly, the volume of Biotronik's sales and the total amount of any profits Biotronik might or might not have made on its resale of CoStar pursuant to separate contracts with its customers was totally irrelevant to this calculation. Sections 10.6 and 10.7 of the Agreement addressed the issue of product recalls and similar actions. In relevant part, Section 10.6 of the Agreement provides: If either Party believes that a recall of any Products in the Territory is desirable or required by law in the Territory or elsewhere, it shall immediately notify the other Party. The Parties shall then discuss reasonably and in good faith whether such recall is appropriate or required and the manner in which any mutually agreed recall should be handled. (R. 186, at § 10.6). Pursuant to Section 10.7 of the Agreement, however, Conor was given the "exclusive right and obligation to issue recalls, safety alerts, advisory notices or similar remedial actions on [CoStar]," and "[i]n such case BIOTRONIK will support and fully cooperate with CONOR to comply with the applicable laws and regulations." (R 186, at § 10.7). 2 Conor was to "bear all direct costs and expenses of any recall, including, without limitation, expenses or obligations to third parties, the costs of notifying customers and costs associated 2 Biotronik's Chief Executive Officer at the time confirmed that Conor had "the right to take a final decision" with respect to recalls, safety alerts, advisory notices, and similar remedial actions, even if Biotronik disagreed with Conor's decision. (R. 701-02; R. 752; see also R. 666- 67). 9 with the shipment of recalled Product from customer to BIOTRONIK or CONOR, and replacement of such Products . . . ." (R. 186, at § 10.7). Section 7 of the Agreement is titled "Assurance of Supply" and provides that "[W. CONOR decides to discontinue the manufacturing of the Product, CONOR shall notify BIOTRONIK at least 12 (twelve) months in advance." (R. 182, at § 7). Section 7 further states, in relevant part, that "[w]here possible, the Parties shall agree on a replacement of such discontinued Product" and "[i]f no such replacement product is agreed, BIOTRONIK shall have the right to terminate the Agreement upon 30 (thirty) days written notice to CONOR . . . ." (R. 182, at § 7). This is reiterated in Section 16.3(iii), which provides that "BIOTRONIK shall have the right to terminate the Agreement upon 30 (thirty) days written notice to CONOR if CONOR discontinues the manufacturing of the Product and both Parties are unable to agree on a replacement product under Article 7." (R. 193, at § 16.3(iii)). Biotronik employees involvea in the drafting and negotiation of the Agreement acknowledged that Section 7 does not apply to recalls. (R. 663, 672; R. 694, 745). Finally, the Agreement contained a limitation of liability provision applicable to both parties. Section 14.5 of the Agreement provides: NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL, INCIDENTAL OR PUNITIVE DAMAGE WITH RESPECT TO ANY CLAIM ARISING OUT OF THIS AGREEMENT (INCLUDING WITHOUT 10 LIMITATION ITS PERFORMANCE OR BREACH OF THIS AGREEMENT) FOR ANY REASON . . . . (R. 190, at § 14.5). B. The COSTAR II Trial Commences At the time the parties entered into the Agreement, CoStar was not approved for sale or distribution in the territories covered by the Agreement or in the United States. (R. 673-74). In May 2005, Conor started to enroll patients in a pivotal clinical trial, called COSTAR II, to support its application to the Food and Drug Administration (the "FDA") for regulatory approval of CoStar in the United States. (R. 1656). The COSTAR II trial was the first randomized, head-to-head trial comparing CoStar with another drug eluting stent, specifically a paclitaxel drug eluting stent called Taxus that was approved for sale and sold in the United States by Boston Scientific Corporation. (R. 1569-70). COSTAR II was designed to demonstrate that CoStar was not inferior to Taxus. (R. 1656-57). The primary clinical endpoint for the COSTAR II trial was major adverse coronary events, known as "MACE", which was defined as the composite of three events: death, myocardial infarction (heart attack), and target vessel revascularization ("TVR"). (R. 1569). A TVR was recorded when a patient required a repeat procedure because of restenosis of the previously treated vessel. (R. 1569). Of the three components comprising MACE in the trial, death and myocardial infarction have traditionally been considered to be related to "safety," 11 while TVR has been regarded as relevant to "efficacy." (R. 805-06). A secondary endpoint in the trial was a comparison of angiographic measurements of the stented vessel nine months post-procedure with a pre-procedure measurement. (R. 1569-70). The analysis plan also included an "imputed placebo calculation" to compare the performance of CoStar with that of a bare metal stent (a stent that does not elute any drug) based on data from separate clinical trials of bare metal stents. (R. 1596-97). C. Conor Obtains Regulatory Approval to Sell CoStar Outside of the United States Meanwhile, in February 2006, based on the results of clinical trials conducted prior to completion of the COSTAR II trial, Conor obtained the CE mark for CoStar, the equivalent of regulatory approval in the European Union and certain other countries, where the approval process is less rigorous than in the United States. (R. 285; R. 289-91). Unlike COSTAR II, the studies used to obtain the CE mark — one of which was called EuroStar — were not randomized clinical trials comparing CoStar to another drug eluting stent and were designed primarily to test the safety, rather than the efficacy, of the CoStar stent. (R. 606-07, 646; R. 653-54, 655-57, 658, 659-60; R. 676; R. 732-34; R. 798, 799-800, 803; R. 293- 312). After Conor obtained the CE mark, Biotronik began distributing CoStar in the territories provided in the Agreement. (R. 652; R. 704-05, 707). 12 D. Johnson & Johnson Acquires Conor On November 16, 2006, Johnson & Johnson ("J&J") announced its agreement to acquire Conor for approximately $1.4 billion (the "Acquisition"). (R. 411-14). The Acquisition closed on February 1, 2007. (R. 416). Conor remained a separate corporate entity but operated in conjunction with Cordis Corporation ("Cordis"), a J&J company, which at the time was selling Cypher, another stent for the treatment of coronary artery disease that eluted a drug called sirolimus. (R. 412). Although the primary value of the Acquisition for J&J was the novel platform technology used by Conor (R. 836-37), J&J intended to continue marketing CoStar outside of the United States until 2013, and to market CoStar in the United States starting in 2008. (R. 421, 425, 440; R. 451; see also R. 522 (forecasting $85 million in sales of CoStar outside the United States; R. 840-41)). After the Acquisition closed, Biotronik and J&J engaged in negotiations to see if they could agree on an early termination of the Agreement so that J&J could "start commercialization of the CoStar stent themselves." (R. 722- 23). Biotronik understood from these negotiations that "[J&J] wanted to sell CoStar . . . [a]s soon as possible," that J&J "might not be willing to extend the distribution agreement" and "had no obligation to do that," and that obtaining an extension of the Agreement was "not an option" for Biotronik following the 13 Acquisition. (R. 721, 724; R. 611-12, 613-14; R. 1700-05). 3 Ultimately, no agreement on this issue was reached and, as of mid-2007, Biotronik understood that "the parties were going to simply perform the [A]greement as it was written." (R. 615-16; R. 675; R. 725-26, 726-27). E. The COSTAR II Trial Results On April 18, 2007, the results of the COSTAR II trial were unblinded to Conor. Unfortunately, CoStar failed to meet its primary endpoint of non- inferiority to Taxus with respect to MACE at eight months because the MACE rate for CoStar was significantly higher than for Taxus. (R. 274-83; R. 530). With respect to the individual components of MACE, the results of the trial showed statistically similar rates of death and heart attack between patients implanted with CoStar and those implanted with Taxus, but patients receiving the CoStar stent had nearly double the rate of TVR and thus suffered restenosis nearly twice as often as those treated with Taxus. (R. 274, 280). In addition, the secondary endpoint results "were all significantly better in the Taxus group compared with the CoStar group." (R. 279-80). With respect to the imputed placebo calculation, the trial results "implie[d] that the CoStar stent is not superior to bare-metal stents, which 3 That was the context of the testimony cited by Biotronik to the effect that J&J planned to "fire all the distributors." (Biotronik Br. at 13). 14 have been shown to have significantly higher in-stent restenosis rates than the Taxus stent in randomized controlled clinical trials." (R. 281). F. The CoStar Recall Following the unblinding of the COSTAR II trial results, a multifunctional group from J&J was charged with deciding what to do in light of this data. (R. 775-76; R. 825-27, 828-29). Members of this team consulted with Conor personnel and reviewed the initial data summaries. (R.532; 624-28; R. 637- 63; R. 688-91; R. 777, 780-85; R. 770-71, 772). When the complete COSTAR II database became available on May 1, 2007 (R. 534), clinical personnel at J&J and Conor began to assess the implication of the results on Conor's application to the FDA and the continued marketing of CoStar outside of the United States. (R. 639- 40, 641-42; R. 770-71, 772; R. 775, 780-82). On May 4, 2007, J&J and Biotronik participated in a lengthy conference call to discuss the results, which were not yet public, and the clinical and commercial viability of CoStar going forward. (R. 728-31; R. 676-84). Over the weekend of Friday, May 4 to Sunday, May 6, 2007, members of the J&J team, as well as Conor personnel, engaged in a number of meetings and conference calls to further discuss the trial results. (R. 629-30; R. 778-79). During this period, J&J also continued to discuss the trial results with Biotronik. (R. 737-38). 15 On the basis of these deliberations, J&J made the decision to withdraw and retrieve CoStar from the marketplace. (R. 778-79, 785-86, 789; R. 830-32). The decision "focused on the . . . potential impact . . . for patients that were going to receive the product." (R. 833). Because patients with drug-eluting stents are prescribed anti-platelet drugs for 12 months, as contrasted with one month for bare metal stents, and those drugs pose risks of bleeding and allergic reaction and may require delaying other medical procedures, "there was no upside to patients [implanted with CoStar] to weigh against that downside." (R. 785-88; R. 834-35). Additionally, because patients receiving CoStar had significantly higher rates of restenosis than those treated with Taxus, these patients had to "have an intervention . . . they wouldn't need to have if [CoStar] performed as the industry standards performed" and were exposed to the "unnecessary risk" of "anesthesia [and] the risks of bleeding" associated with the repeat procedure. (R. 838-39). 4 4 • Biotronik's own expert in this case confirmed that extended antiplatelet therapy puts patients at "an increased risk of bleeding" and should not be prescribed if it does not confer any additional benefit, and that the risks associated with implanting another drug eluting stent in a patient who has suffered restenosis include "major bleeding from puncture site," stroke, heart attack, and death. (R. 792-93, 794-95, 811, 812-13). Biotronik's expert further acknowledged that although the COSTAR II trial results did not show increased rates of death or heart attack in patients who were implanted with CoStar — and thus no "safety" impact as commonly defined — patients in the clinical trial were "monitored continuously" while they were in the study, and that, outside of the clinical trial setting, untreated restenosis "goes beyond efficacy" and "relates to the patient's health" because it can result in a heart attack or death. (R. 804, 807-809). 16 On May 6, 2007, Biotronik was notified that the decision had been made to recall CoStar because the COSTAR II trial results demonstrated that "the efficacy of CoStar did not reach the noninferiority end point compared to Taxus." (R. 739-40; R. 1707-09). The following day, Conor issued a press release announcing that CoStar had failed to meet its primary endpoint in the COSTAR II trial, that "this product did not meet the high standards for efficacy that our product portfolio represents" and that, as a result, Conor would terminate clinical trials, no longer pursue regulatory approval in the United States and discontinue CoStar's sale. (R. 536-37). Conor then issued an "Urgent Field Advisory and Corrective Action" withdrawing CoStar from the market, and advised Biotronik that it was "initiating remedial action with respect to [CoStar], pursuant to Section 10.7 of [the Agreement] . . . . " (R. 541-42). Thereafter, Conor paid Biotronik 8,320,000 Euros, plus a 20% handling charge, to satisfy its financial obligations relating to the recall under Section 10.7 of the Agreement. This amount represented all of Biotronik's costs associated with the recall, including returned product. (R. 763; R. 552-53). Conor also proposed to Biotronik that Conor would, through Cordis, supply Biotronik's end-user customers with Cypher. (R. 748; R. 549-50). This offer was refused by Biotronik. (R. 744, 749, 754; R. 1725-26). 17 On June 6, 2007, pursuant to Section 16.1 of the Agreement, Conor gave notice to Biotronik that it would not extend the term of the Agreement past December 31, 2007, and that the Agreement would expire on that date (plus the four month sell-off period). (R. 555). Biotronik's former CEO acknowledged that, per Section 16.1, "[t]he agreement expired by the end of 2007." (R. 703). G. Post-Recall Events Following the CoStar recall, Conor undertook a root cause investigation to understand "the observed difference in clinical study outcomes between the COSTAR II U.S. pivotal study and the previously conducted EuroStar clinical study, which was the basis for Outside U.S. (OUS) approval." (R. 1729). The investigation was completed in September 2007, and determined, inter alia, that: The in vitro release curves for the EuroStar clinical trial lots showed an initial drug release, or burst, of about 10%-30%, and it was believed that this initial burst occurred in vivo as well. It is known that high dose of paclitaxel could cause tissue toxicity. Therefore, the Conor management team decided that CoStar stents manufactured for the COSTAR II trial should have an initial drug burst at the low end of the EuroStar in vitro release kinetic specifications. . . . In order to lower the initial in vitro burst, several process changes, along with two formulation changes, were implemented. (R. 1728, 1731). These manufacturing and formulation changes applied to all CoStar stents manufactured from that point forward, including the CoStar stents 18 used in the COSTAR II trial and all of the CoStar stents sold by Biotronik. (R. 631-33; R. 819-20). Contrary to Biotronik's assertions about improper changes to CoStar, so-called "Altered CoStar," and supposed violations of European law (Biotronik Br. at 11-12), the CoStar stent used in the COSTAR II trial and distributed by Biotronik was within the specifications submitted in connection with CE certification. As Conor specifically explained, the "values were used to ensure that the release kinetics of the COSTAR II devices were representative of those implanted in the COSTAR I/EuroSTAR I clinical trials." (R. 1932). Similarly, in the Root Cause Analysis Report, Conor explicitly noted that the stents used in the COSTAR II trial were within the approved specifications. (R. 2029). 5 The report hypothesized that "[d]espite the product being within specifications, the changes implemented for the manufacture of COSTAR II study product to lower the initial burst may have impacted the release kinetics of paclitaxel under circumstances where the clinical effect of these differences were magnified." (R. 1734). But it also examined differences between the patient populations in CoStar and EuroStar and other potential causes. (R. 1737, 1740, 5 Biotronik's own expert acknowledged that, while the CoStar stents used in the COSTAR II trial had an initial drug burst "at the low end of the Eurostar I release kinetic specifications," because "Nile release kinetic specifications submitted by Conor for CE-mark approval were broad, . . . Conor had the ability to lower the elution rate for paclitaxel and still remain within the approved specifications." (R. 1326; R. 1269-70; see also R. 1750). 19 1744). Ultimately, the report concluded that "no single change or factor can be identified to account for the worse-than-expected outcome of the COSTAR II vs the EuroStar. . . . trial." (R. 1745). H. Biotronik' s Lawsuit In November 2007, Biotronik filed the complaint in this action, which it amended on August 17, 2009, asserting three breach of contract claims against Conor. (R. 146-157). The two principal claims in the amended complaint are predicated on Biotronik's allegations that Conor's decision to withdraw CoStar from the market violated the Agreement. (R. 146-157). 6 In its first cause of action, Biotronik alleged that the withdrawal of Costar from the market was "wholly unnecessary," and that "[i]n breach of Sections 10.6 and 10.7 of [the Agreement], Conor employed the guise of a sham 'corrective action' and/or 'recall' to justify its wrongful actions, although Conor had no legitimate health or safety reason to recall the Costar stent, which had proven to be a safe and effective product." (R. 154, at TT 41, 42). Specifically Biotronik alleged that "the withdrawal of [the] Costar stent from the Territory was based upon a commercial decision by J&J — and not by Conor — concerning J&J's short-term business strategy to avoid competition with its own Cypher stent and its 6 The third cause of action related to a claim under a guaranty issued by one of the defendants and is not relevant here (R. 156, at I 52). 20 long-term business strategy for developing and marketing stents, without regard for, and in breach of, Conor's obligations to Biotronik under [the Agreement]." (R. 153-54, at II 38). 7 Biotronik further alleged that "J&J acted to bolster its own line-up of coronary stent products by temporarily removing the Costar stent from the market with the intent of re-introducing it in some modified form in the future" (R. 154, at ¶ 43) and that "Conor unilaterally initiated [the] purported 'corrective action' and 'recall' without consulting Biotronik as required by Section 10.6 of the Distribution Agreement." (R. 152, at ¶ 30). Biotronik's second cause of action alleged that Conor's actions constituted a breach of Section 7 of the Agreement in that "Conor never provided Biotronik with any notice that it was discontinuing the manufacture of the Costar stent and never offered Biotronik a substitute product for the Costar stent as required by [Section] 7." (R. 153, 155, at TT 34, 49). Biotronik claimed that as a result of these alleged breaches, it sustained damages in excess of $100 million, which it acknowledges are comprised solely of profits it alleges it lost as a result of its inability to resell Costar to third parties through April 2009, which includes the initial term, the extended term and 7 The implausibility of these allegations is best illustrated by the fact that Conor had the right under the Agreement to send a notice to Biotronik that would end Biotronik's ability to distribute CoStar eight months after the supposed "sham" recall, with no payment to Biotronik and without the negative publicity attendant to withdrawing a product from the market. 21 the four month sell-off period. (R. 155-56, at TT 47, 50, 53; R. 133-37, 1339-40; R. 51-52). I. The Trial Court's Judgment Dismissing Biotronik's Complaint On March 23, 2011, after the close of discovery, Conor moved for summary judgment on the grounds that it was entitled to judgment as a matter of law with respect to both liability and damages. (R. 167-68). On October 21, 2011, the trial court (Fried, J.) issued a Memorandum Decision holding that Biotronik could not recover its lost profits because they are consequential damages that the parties agreed, under Section 14.5 of the Agreement, could not be awarded to either of them for any breach. (R. 49). The trial court also held that even if Biotronik could recover its lost profits, there can be no recovery for any period after April 2008. (R. 44 n.5). With respect to liability, however, the trial court denied Conor's motion for summary judgment because it determined that factual issues exist regarding: the meaning of the term "recall" as used in the Agreement and whether a recall can be based on concerns regarding Costar's efficacy; whether the results of COSTAR II raised concerns about patient safety that justified the withdrawal of CoStar from the market; whether Conor supplied Biotronik with stents that were materially different from the sent it contracted to sell; whether Conor breached Article 7 of the Agreement by not offering a replacement for CoStar; and whether 22 the Agreement gave Conor the exclusive right to withdraw CoStar in the absence of patient safety concerns. (R. 39-40, 42-43). Since it was not claiming any damages other than those relating to its purported lost profits on sales to third parties, Biotronik agreed to the entry of final judgment in Conor's favor dismissing the Amended Complaint. (R. 51-52). Final judgment was entered on November 21, 2011 (R. 52) and, that same day, Biotronik filed a Notice of Appeal from the final judgment and the trial court's decision. (R. 8). On November 30, 2011, Conor filed a Notice of Cross-Appeal from the trial court's decision insofar as it denied Conor's motion for summary judgment on the issue of liability. (R. 19-20). J. The Order On May 29, 2012, the Appellate Division entered the Order, which unanimously held that the lost profits Biotronik seeks to recover are consequential damages that are barred under the parties' contract and thus affirmed the trial court judgment dismissing Biotronik's complaint. (R. 4a-7a). The Appellate Division first correctly articulated the general rule, set down by this Court, that lost profits "only constitute general damages where the non-breaching party seeks to recover money owed directly by the breaching party under the parties' contract." (R. 6a). Applying that rule, the Court determined that "[c]ontrary to [Biotronik's] contention that its lost profits constitute general damages falling outside [of the 23 Agreement's limitation on liability provision], a plaintiff suing to recover profits that it would have made by reselling the defendant's goods to third parties, as is the case here, is seeking consequential damages." (R. 5a-6a). 8 Having determined that Biotronik could not recover any lost profits, the only damages it seeks, the Appellate Division did not reach the issue of the appropriate cutoff date from which to measure Biotronik's alleged damages. The Appellate Division also did not reach the issues raised by Conor's cross-appeal regarding whether the trial court had properly denied Conor's motion for summary judgment on the issue of liability. Argument Point I THE ORDER SHOULD BE AFFIRMED BECAUSE BIOTRONIK'S CLAIM FOR LOST PROFITS IS BARRED UNDER THE AGREEMENT The Appellate Division's holding that Biotronik's lost profits are consequential damages, the recovery of which is barred by the Agreement's limitation on liability provision, should be affirmed because it is fully in accord 8 In addition, the Appellate Division rejected Biotronik's contention that the Agreement's limitation was unenforceable because Conor allegedly breached the Agreement in bad faith. The Appellate Division found that Biotronik had improperly raised the issue for the first time on appeal and, that, in any event, "at most, the record supports a finding that Conor's breach was motivated by economic self-interest instead of a willful intent to harm plaintiff." (R. 7a). Citing Metro. Life Ins. Co. v. Noble Lowndes Intl, Inc., 84 N.Y.2d 430, 438-39 (1994), the Appellate Division held that "[t]hose acts do not constitute the type of behavior that would nullify the damages exclusion . . . ." (Id.). Biotronik's brief does not address this point and it has thus been abandoned on this appeal. See Garner v. NY. State Dep't of Corr. Serv., 10 N.Y.3d 358, 361 (2008). 24 with this Court's modern decisions, the cases applying those decisions and the U.C.C. A. The Lost Profits Biotronik Seeks Are Consequential Damages Under this Court's Precedent In finding that Biotronik's lost profits are consequential damages because it is "suing to recover profits that it would have made by reselling the defendant's goods to third parties" and that lost profits "only constitute general damages where the non-breaching party seeks to recover money owed directly by the breaching party under the parties' contract" (R. 5a-6a), the Appellate Division was correctly applying this Court's decision in American List Corp. v. U.S. News & World Report, Inc., 75 N.Y.2d 38 (1989) and the line of cases applying that decision under New York law. In American List, this Court held that damages characterized as general as opposed to consequential are comprised of "moneys which defendant undertook to pay under the contract . . . ." 75 N.Y.2d at 43. Citing to American List, the United States Court of Appeals for the Second Circuit has stated that under New York law: Lost profits are consequential damages when, as a result of the breach, the non-breaching party suffers loss of profits on collateral business arrangements. In the typical case, the ability of the non-breaching party to operate his business, and thereby generate profits on collateral transactions, is contingent on the performance of the primary contract. When the breaching party does not perform, the non-breaching party's business is in some way hindered, and the profits from potential 25 collateral exchanges are "lost." . . . By contrast, when the non- breaching party seeks only to recover money that the breaching party agreed to pay under the contract, the damages sought are general damages. The damages may still be characterized as lost profits since, had the contract been performed, the non-breaching party would have profited to the extent that his cost of performance was less than the total value of the breaching party's promised payments. But, in this case, the lost profits are the direct and probable consequence of the breach. Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89, 109 (2d Cir. 2007) (internal citations omitted). Applying this line of New York case law, courts consistently hold that where a "plaintiff sues to recover the profits he would have earned by reselling the defendant's goods or services to a third party, he is seeking consequential damages." In Re CCT Commc'ns, 464 B.R. 97, 117 (Bankr. S.D.N.Y. 2011) (citing 3 Dan B. Dobbs, Law Of Remedies: Damages-Equity- Restitution § 12.2(3), at 42-43 (2d ed. 1993)). See also Intl Gateway Exch., LLC v. W Union Fin. Servs., Inc., 333 F. Supp. 2d 131, 150 (S.D.N.Y. 2004) ("[t]he fruits of [plaintiff's] separate contract with [a third party] — which was not a party to the [parties1 contract — do not flow as a natural and probable cause of [defendant's] alleged breach of a wholly separate contract between [plaintiff] and [defendant]. Therefore, they qualify as consequential or special damages . . . ."). In Coinpania Embotelladora Del Pacifico, S.A. v. Pepsi Cola Co., 650 F. Supp. 2d 314 (S.D.N.Y. 2009), a case directly on point here and upon which the Appellate Division appropriately relied (R. 6a), this principle was applied to a 26 distribution agreement that granted plaintiff the exclusive right to bottle, sell and distribute defendant's products in certain territories in Peru. 650 F. Supp. 2d at 318. Plaintiff claimed that defendant breached the agreement by failing to prevent third parties from selling defendant's products in plaintiff's territory and sought to recover the profits it would have earned on resale of those products to third parties. Id. In granting summary judgment in defendant's favor, the court, applying New York law, found that plaintiff's lost profits were consequential damages because plaintiff was plainly not seeking to recover money that [defendant] agreed to pay under the [agreement]. Instead, [plaintiff was] seeking to recover lost profits from lost sales to third-parties that are not governed [by] the [agreement]. Such damages are properly characterized as consequential damages, because, as a result of [defendant's] alleged breach, [plaintiff] suffered lost profits on collateral business arrangements (i.e., sales of [defendant's] products to its customers throughout its exclusive territory). Id. at 322 (internal citations omitted). 9 Notwithstanding that Pepsi Cola involved an exclusive distribution agreement, like the Agreement here, Biotronik attempts to distinguish it and the other cases cited in the Order on the ground that they did not involve a breach of a manufacturer's supply obligation. (Biotronik Br. at 26, 28). This is a meaningless 9 The issue of whether the lost profits were consequential in that case was relevant to whether plaintiff had to prove foreseeability and other more stringent requirements for recovery, rather than whether they were barred by a clause precluding recovery of consequential damages, but the test for whether the damages are consequential or general is the same. 27 distinction; the manner in which a party claims a contract was breached is irrelevant to the analysis of whether the lost profits it seeks are monies payable by the defendant under the contract at issue. Regardless of what contractual obligation is alleged to have been breached, Biotronik is still seeking to recover lost profits on collateral business arrangements, which are consequential damages under New York law. 1° In an attempt to overcome this unequivocal body of New York law, Biotronik distorts the Agreement to make it seem like the lost profits it seeks arise directly from the Agreement. As discussed earlier (at p. 6-9), this is demonstrably incorrect. The Agreement did not obligate Biotronik to resell any specific quantities of CoStar and did not specify a price at which Biotronik was required to resell CoStar to its customers. Nor did the parties share in a "pool of funds" derived from Biotronik's net sales of CoStar, as Biotronik repeatedly contends. (Biotronik Br. at 5, 24). Exhibit C to the Agreement simply provides that a minimum transfer price at which Biotronik purchases CoStar from Conor is subject to an upward adjustment at the end of each quarter if Biotronik's average sales price for CoStar is higher than the minimum, and cannot result in any additional 10 • Biotronik's attempt to dismiss Pepsi Cola because it is a federal decision (see Biotronik Br. at 28) is curious, particularly since the cases upon which Biotronik principally relies are also federal cases. (Id. at 30). In contrast to the federal decisions cited by Biotronik, all of which were decided by courts outside of New York and applied the laws of other jurisdictions, Pepsi Cola was decided under New York law by a federal court in New York. 28 payment by Conor to Biotronik under any circumstances. The lost profits Biotronik is seeking are not derived from this provision; nor are they "moneys which [Conor] undertook to pay under the contract." American List, 75 N.Y.2d at 43. Instead, they are a result of what Biotronik claims it would have made from collateral business arrangements, specifically reselling to third parties the products supplied by Conor, and are thus squarely within the rationale of American List. Biotronik also seeks to shift the focus of the inquiry to whether its lost profits were foreseeable. (See Biotronik Br. at 24 ("Biotronik's loss of these profits was thus not only the probable — but the inevitable — consequence of Conor's breach"); id at 32 ("Biotronik's profits were foreseeable to Conor")). Such an inquiry, however, has no bearing on the issue in this case. Foreseeability is relevant only to the question of whether a party can prove that it is entitled to recover lost profits that have been deemed consequential damages, because such damages are normally recoverable only when they are foreseeable and non- speculative. See Tractebel Energy, 487 F.3d at 109 (citing Kenford Co. v. Cnty. of Erie, 67 N.Y.2d 257, 261 (1986)) (a party seeking to recover lost profits that are deemed to be consequential damages must establish, among other things, that the "damages were fairly within the contemplation of the parties"). In this case, however, even if Biotronik's lost profits were foreseeable they are not recoverable because Section 14.5 of the Agreement specifically precludes the recovery of 29 consequential damages. See Appliance Giant, Inc., v. Columbia 90 Assocs., LLC, 8 A.D.3d 932, 934, 779 N.Y.S.2d 611, 613 (3d Dep't 2004) ("Lost profits, even if shown to be foreseeable and caused by defendant's breach, are an item of consequential damages . . . and, thus, are excluded by the terms of the sublease," which barred the recovery of consequential damages). Finally, and notwithstanding the fact that Conor paid Biotronik almost ten million euros to satisfy Conor's financial obligations under the Agreement relating to the recall of CoStar (R. 763, 552-53), Biotronik asserts that the Appellate Division rendered the Agreement illusory by deeming Biotronik's purported lost profits to be consequential damages. (Biotronik Br. at 25). In effect, Biotronik is saying that the Agreement's limitation on liability should not be enforced as written even though, as the Appellate Division found, both parties are sophisticated business entities that specifically agreed to limit the damages they could each recover in the event of a breach of the Agreement. (R. 7a). This argument directly conflicts with this Court's decisions. As this Court has made clear, "[a] limitation on liability provision in a contract represents the parties' Agreement on the allocation of the risk of economic loss in the event that the contemplated transaction is not fully executed, which the courts should honor." Metro. Life Ins. Co. v. Noble Lowndes Intl, Inc., 84 N.Y.2d 430, 436 (1994). 30 While a party may "later regret their assumption of the risks of non-performance in this manner . . . courts let them lie on the bed they made." Id. B. The Lost Profits Biotronik Seeks Are Consequential Damages Under the U.C.C. Consistent with New York common law, the lost resale profits that Biotronik seeks to recover are also consequential damages under the U.C.C., as both the Appellate Division and the trial court properly found. (R. 6a; R. 49 (The U.C.C. "squarely places a buyer's lost profits from a seller's breach of an agreement to supply those goods within the realm of consequential damages.")). Section 2-713(1) of the U.C.C. states: [T]he measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages provided in this Article (Section 2-715), but less expenses saved in consequence of the seller's breach. N.Y. U.C.C. § 2-713(1). Section 2-715, in turn, provides that "[c]onsequential damages resulting from the seller's breach include . . . any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise." Id. § 2-715(2)(a). The Official Comments to Section 2-715 add that "[i]n the case of sale of wares to one in the business of reselling them, resale is one of the requirements of which the seller has reason to know. . . . ." Id. § 2-715, cmt. 6. Thus, Section 2-715 simply says that the lost profits of a buyer in 31 the resale business are consequential damages and are normally recoverable as such because they are foreseeable to the seller. See Canusa Corp. v. A&R Lobosco, Inc., 986 F. Supp. 723, 732 (E.D.N.Y. 1997) (Under Section 2-715(2)(a), "consequential damages for lost profits are recoverable where the buyer is a reseller or a broker"). But if the contract precludes recovery of consequential damages, it will be enforced unless it is unconscionable. N.Y. U.C.C. § 2-719(3) ("Consequential damages may be limited or excluded, unless the limitation or exclusion is unconscionable."); see Cnty. Asphalt, Inc. v. Lewis Welding & Eng'g Corp., 444 F.2d 372, 378-79 (2d Cir. 1971) (relying on U.C.C. § 2-719(3) to dismiss claim for consequential damages, including lost profits, based on limitation of liability provision). 11 Biotronik argues that the Appellate Division erred by not applying Orester v. Dayton Rubber Mfg., 228 N.Y. 134 (1920), which predates New York's 11 Biotronik cites the outdated Fourth Edition of the treatise entitled Uniform Commercial Code to attempt to support its position that its lost profits are general damages under the U.C.C. (Biotronik Br. at 33-34). The Sixth Edition of that treatise, which was published in 2012, is entirely consistent with Conor's arguments here. Specifically, the treatise states: [C]onsequential damages are those which do not flow in ordinary course from the seller's breach, and they are not recoverable if, as per 2-715(2), they do not result from general or particular requirements and needs of the buyer which the seller had reason to know of at time of contracting. Nor are they recoverable if the buyer could have prevented them by cover or otherwise. Nor are they recoverable if a 'no consequential damages' clause excludes them. 1 James J. White, Robert S. Summers & Robert A. Hillman, Uniform Commercial Code § 7:21, at 589-90 (6th ed. 2012). 32 adoption of the U.C.C. by decades and American List, Tractebel, Pepsi Cola and the other cases upon which the Appellate Division relied by even longer. If Orester is read to hold that lost profits from resales are direct damages — and it should be noted that the Court held that the plaintiff could recover its lost profits "only . . . upon the facts presented" in that case, 228 N.Y. at 139 — it is plainly incompatible with Section 2-715 of the U.C.C. That statute certainly would have applied had it existed because Orester involved the sale of automobile tires, id. at 136, which are indisputably "goods" under the U.C.C. See N.Y. U.C.C. §§ 2-102, 2-105. Any such holding would also be inconsistent with this Court's decision in American List that damages characterized as general as opposed to consequential are comprised of "moneys which defendant undertook to pay under the contract." 75 N.Y.2d at 43. Biotronik's contention that the Order should be reversed because the Appellate Division strayed from this Court's precedent by not adequately considering other states' courts' interpretation of the U.C.C. is also without merit. (Biotronik Br. at 29). As an initial matter, Woods v. MONY Legacy Life Ins. Co., 84 N.Y.2d 280 (1994), the only case upon which Biotronik relies for this point, does not support the proposition that courts must consider foreign decisions when interpreting the U.C.C. Rather, Woods merely states that "ffloreign decisions may be entitled to considerable weight." 84 N.Y.2d at 285. Indeed, the very same 33 section of the Constmction and Interpretation Law quoted in Woods makes clear that courts in New York should consider others states' interpretation of the U.C.C. only where they are faced with a novel question under New York law. See N.Y. Constr. & Interpretation Law § 262(a) (McKinney 1971) (When "a question arises under [a uniform statute] and the courts of this state have not passed upon it, it is thought to be the duty of the courts to adopt and follow the interpretation announced by the courts of other commonwealths"). In this case, it was unnecessary for the Appellate Division to examine foreign case law because, as discussed above, there is a substantial body of New York law that is directly on point. In any event, courts outside of New York have applied the U.C.C. in a manner that is entirely consistent with the Order. For example, in Airlink Cornmc'ns., Inc. v Owl Wireless, LLC, No. 3:10 CV 2296, 2011 WL 4376123 (N.D. Ohio Sept. 20, 2011), the court addressed a claim for breach of a distribution agreement for prepaid cellular phone service that contained a provision excluding recovery of consequential damages. The plaintiff sought to recover the profits it claimed it would have earned as the defendant's distributor on resale of the service to third parties. Citing to a treatise on the U.C.C., and a host of cases from various jurisdictions, the court held that "consequential damages usually encompass lost profits expected under contracts between the aggrieved party and third parties" and 34 that "when the damages claimed by a plaintiff are contingent on collateral third- party agreements — as is the case here — those damages are consequential, not direct." Id. at *3. Two of the foreign cases that Biotronik claims the Appellate Division should have considered fundamentally misapply Section 2-715 of the U.C.C., as the trial court correctly pointed out. (R. 58-49). Biotronik's principal authority is Biovail Pharm., Inc. v. Eli Lilly & Co., No. 5:01-CV-532-B0(3), 2003 WL 25901513 (E.D.N.C. Feb. 28, 2003), which was decided under Indiana law. As Biotronik acknowledges, however, the court in Biovail focused on "how probable it is that the damages will result from a breach." Biotronik Br. at 30; see Biovail, 2003 WL 25901513, at *3 ("given the nature of the contract, lost profits were not only highly probable, but an inevitable consequence of the breach"). As discussed earlier, however, the determination of whether damages are consequential does not depend on whether they are foreseeable; rather, foreseeability is relevant to whether consequential damages are recoverable in the absence of a limitation of liability. Under Section 2-715, where, as here, the plaintiff is in the business of resale, profits lost from an inability to resell are foreseeable to the seller, and are therefore recoverable where not limited by contract. But they are still consequential, not general damages. See Appliance Giant, 8 A.D.3d at 934, 779 N.Y.S.2d at 613 ("Lost profits, even if shown to be foreseeable and caused by 35 defendant's breach, are an item of consequential damages"). The reasoning in ViaStar Energy, LLC v. Motorola, Inc., another case upon which Biotronik relies that was also decided under Indiana law, is similarly flawed because it too improperly focuses on foreseeability. No. 1:05-cv-1095 (DFH)(WTL), 2006 WL 3075864, at *2 (S.D. Ind. Oct. 26, 2006) (The "key" to determining whether damages are direct or consequential "is the degree to which the breaching party could foresee that the other party's lost profits would be a result of its breach"). The other cases cited by Biotronik actually rebut its argument. In both Callisto Corp. v. Inter-Studio & Publ'g Co., No. 05-11953-GAO, 2006 WL 1240711 (D. Mass. May 4, 2006) and Cherokee Cnty. Cogeneration Partners, LP v. Dynegy Mktg. & Trade, 305 S.W.3d 309 (Tex. App. 2009), the lost profits sought were specifically provided for in the parties' agreement as payments to be made by the defendants to the plaintiffs. In Callisto, the Court found that the royalty payments at issue were not consequential damages because they were "expressly required by the Agreement and constituted [defendant's] primary consideration for the license it obtained." 2006 WL 1240711 at *2. Similarly, in Cherokee, the Court found that "the damages [plaintiff] seeks to recover represent built-in profits lost on the Agreement itself." 305 S.W.3d at 315. 36 C. The Order Properly Determined that Biotronik's Lost Profits are Consequential Damages as a Matter of Law As a fallback, Biotronik argues that there is a fact question regarding the meaning of the term "consequential damages" as used in the Agreement and therefore a jury should have determined whether Biotronik's lost profits were consequential or general damages. (Biotronik Br at 36). The question of whether lost profits are consequential damages, however, should be determined by a court as a matter of law when there is sufficient undisputed evidence in the record to conclude that the damages sought are not general or direct. See Severstal Wheeling Inc. v. WPN Corp., 809 F. Supp. 2d 245, 256 (S.D.N.Y. 2011) (finding, as a matter of law, that the damages sought were consequential because the non-breaching party was not seeking to recover money that the breaching party agreed to pay under the contract); Am. Tel. & Tel. Co. v. New York City Human Res. Admin., 833 F. Supp. 962, 991 n.22 (S.D.N.Y. 1993) ("the undisputed facts . . . require the Court to find, as a matter of law, that the damages sought by the City . . . constitute consequential damages, rather than direct damages"). Since the term "consequential damages" has a well-defined legal meaning, Section 14.5 is otherwise unambiguous and the facts indisputably show that the lost profits Biotronik seeks are derived from its collateral agreements with third parties, it was entirely appropriate for the courts below to determine, as a matter of law, that Biotronik's lost profits are consequential damages. None of the 37 cases cited by Biotronik hold otherwise. See Niagara Mohawk Power Corp. v. Stone & Webster Eng'g Corp., No. 88-CV-819, 1992 WL 121726, at *29 (N.D.N.Y May 23, 1992) (whether the particular type of damages sought, which were not lost profits, were consequential was "most likely" one of fact and indicating that the issue could have been resolved as a matter of law if the proof was sufficient); Am. Electric Power Co. v. Westinghouse Electric Corp., 418 F. Supp. 435, 459-60 (S.D.N.Y. 1976) ("it is impossible . . . on the present record, to determine precisely which elements of damages sought by the plaintiffs fall into the category of 'consequential' as opposed to 'direct' damages"); Long Island Lighting Co. v. Transamerica Delaval, Inc. 646 F. Supp. 1442, 1459 n.30 (S.D.N.Y. 1986) (citing Am. Electric in a footnote but providing no explanation for why the question of whether plaintiff was seeking consequential damages should be reserved for trial). Point II BIOTRONIK CANNOT RECOVER ITS LOST PROFITS FROM AFTER APRIL 2008 Even if Biotronik's lost profits were recoverable as general damages, they would be limited to the time period through the end of the Agreement's initial term, December, 2007, plus the four month sell-off period. While the Appellate Division did not reach this issue because it determined that Biotronik could not recover lost profits, the trial court correctly held that, under Section 16.1 of the 38 Agreement, "Conor always had the right, which it exercised, not to extend into 2008, meaning that, but for the alleged breach, the [Agreement] would have terminated on December 31, 2007. Thus, at most, Biotronik would have had the right to sell CoStar through the first quarter of 2008." (R. 44 n.5). As the trial court noted, Conor gave timely notice that it would not extend the Agreement beyond its expiration date of December 31, 2007. (R. 555). This could not have been a surprise to anyone given that the parties had unsuccessfully attempted to negotiate an extension prior to the recall. (R. 608, 609-10; R. 706-20). Biotronik's contention that Conor's cancelation notice was somehow ineffective because it was sent after the CoStar recall is without merit because Biotronik never terminated the Agreement and it thus remained in effect. See VS. Int'l, S.A. v. Boyden World Corp., 862 F. Supp. 1188, 1196 (S.D.N.Y. 1994) ("plaintiffs never attempted to terminate the agreement, either by exercising the default provision . . . or by terminating the Agreement based on defendant's breach. Accordingly, the agreement remained in effect until defendant terminated it by giving plaintiffs written notice . . . as provided in the termination clause"). Even if Biotronik were correct that Conor's cancellation notice was ineffective because it came after the alleged breach, it is black letter law that where a party stops performing a contract, there is no need to formally notify the counter- party that it will not be exercising its right to extend it. Deutsch v. Health Ins. Plan 39 of Greater N.Y, 751 F.2d 59, 64 (2d Cir. 1984) ("in the face of actual knowledge by plaintiff of the defendant's breach of the contract or intent to exercise its option not to renew, automatic renewal is not triggered . .. .") (citing Custen v. Robinson, 180 A.D 384, 387, 167 N.Y.S. 1013, 1016 (1st Dep't 1917)). Either way, the Agreement terminated on December 31, 2007. The trial court therefore correctly held that even if the lost profits Biotronik seeks are not deemed to be consequential damages, there can be no recovery for any period after April 2008. Point III IF THE COURT DETERMINES THAT BIOTRONIK'S LOST PROFITS ARE NOT BARRED UNDER THE AGREEMENT, THIS MATTER SHOULD BE REMITTED TO THE APPELLATE DIVISION FOR CONSIDERATION OF CONOR'S CROSS-APPEAL Since it found that Biotronik's lost profits, the only damages it seeks in this litigation, were barred under the Agreement, the Appellate Division affirmed the trial court judgment dismissing Biotronik's complaint without reaching Conor's cross-appeal on the issue of liability. In the event this Court determines that Biotronik's lost profits are not barred under the Agreement, this matter should be remitted to the Appellate Division for consideration of Conor's cross-appeal. See, e.g., N.Y. City Transit Auth. v. State of N. Y, 89 N.Y.2d 79, 91 (1996) (reversing Appellate Division's order and "remitt[ing] to that Court for consideration of issues raised but not considered on the appeal to that Court"); Morgenthau v. Citisource, Inc., 68 N.Y.2d 211, 223-24 (1986) (finding that the 40 Appellate Division applied an improper rule of law and "remitt[ing] to the Appellate Division to consider the facts and the issues not reached on the appeal and cross appeal to that Court"). Conclusion For the foregoing reasons, Conor respectfully requests that the Court deny Biotronik's appeal and affirm the Order. If, however, the Court grants Biotronik's appeal, Conor respectfully requests that the matter be remitted to the Appellate Division for consideration of Conor's cross-appeal. Dated: New York, New York July 9, 2013 Kramer Levin Naftalis & Frankel LLP By: Harold P. Weinberger Kerri Ann Law Jared I. Heller 1177 Avenue of the Americas New York, New York 10036 (212) 715-9100 Attorneys for Defendants-Respondents 41 KL3 2932396.1