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Beware of the Boilerplate Series: Limitation of Liability

July 29, 2014

This is part of our ongoing "Beware of the Boilerplate" Series to provide you with practice tips and pitfalls in the licensing of intellectual property rights.

In many Agreements, there is a section that looks like this: "LIMITATION OF LIABILITY: IN NO EVENT SHALL LICENSOR BE LIABLE TO LICENSEE FOR SPECIAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES, INCLUDING LOST PROFITS, ARISING OUT OF OR RELATING TO THIS AGREEMENT. . ."

Be wary of giving up your rights for "lost profits." In most jurisdictions, there are two types of "lost profits": (1) those arising from general damages (recovery of money that a party agreed to pay under a contract); and (2) those arising from consequential damages (recovery of money lost based on other business arrangements). The first is generally easier to prove, but often a party in breach can be reasonably expected to pay the second.

Here is an example: A (ingredient supplier) signs an agreement with B (vaccine manufacturer) to provide an ingredient to B for B's upcoming launch of its flu vaccine in return for $100K. A breaches the contract and fails to deliver the ingredient. B finds C to supply the ingredient, but has to pay C $120K for a rush order. B is entitled to recover the $20K difference from A (these are the "general damages" type of lost profits).

If the product launch was scheduled for the start of flu season and now B misses out on massive sales of flu vaccine because of A's delay, can B recover what it would have made from its flu vaccine had the launch been timely? These would be the "consequential damages" type of lost profits. B can reasonably expect to prevail on this claim, assuming B meets the burden of proof. But if the agreement between A and B explicitly took away B's right for this type of lost profits, then B is out of luck. Some parties will attempt to limit even the "general damages" type of lost profits in agreements.

Practice Point: Be cognizant what you are giving up before you agree to give up a claim for "consequential damages" type of lost profits, or of any lost profits. If the obligations the other side must perform are time-sensitive or highly unique, think twice before giving up any rights to lost profits. At least make sure that the Agreement language distinguishes between the "general damages" type of lost profits and the "consequential damages" type of lost profits.

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Braginsky, Philip Partner Partner 212.216.8065 VCard
Dennehy, Matthew T. Associate Associate 212.216.1128 VCard
Goldsmith, Amy B. Partner Partner 212.216.1135 VCard
Lin, Rachel J. Counsel Counsel 212.216.1152 VCard
Lippert, Nels T. Counsel Counsel 212.216.1157 VCard
Rosenberg, Mark J. Partner Partner 212.216.1127 VCard
Shravah, Aasheesh Counsel Counsel 212.216.1132 VCard
Xia, Jing Counsel Counsel 212.216.1158 VCard