Buyer of business strikes out after protracted litigation trying to recover lost profit damages from seller

Buyer wanted to enter the annual $5 billion revenue back-to-school season market for the sale of school supplies. Since Buyer needed inventory, licenses, and retailer relationships to get the ball rolling, it decided to buy the stationery division at Seller, a well-established consumer-goods wholesaler.

Seller’s assets were an attractive target. Seller held licensing agreements with entities like Lego, Universal Studios [Universal], and pop sensation One Direction. These popular brands would likely lead to large sales with school-age kids. And Seller agreed to help transfer these licenses to Buyer as part of the deal.

Things went awry shortly after the companies finalized the sale. According to Buyer, Seller failed to help transfer its licensing agreements. Buyer sued Seller in a Michigan federal district court to recover damages, including for lost profits arising out of Seller’s breach of the asset purchase agreement.

After a long drawn out litigation, Seller argued that Buyer was not entitled under applicable New York law to recover its lost profits from Seller’s alleged breach of the asset purchase agreement.

The court said that for Buyer to prove loss of future profits as damages for Seller’s breach of the asset purchase agreement under New York law, Buyer must have demonstrated, among other things, with certainty that the lost profits have been caused by Seller’s breach of the asset purchase agreement.

The court looked at the evidence to see if Seller caused Buyer lost profits. Under the asset purchase agreement Seller agreed to use “commercially reasonable efforts” to help Buyer obtain the transfer of each license from Seller to Buyer. Thus, the court said that Buyer must establish, on a license-by-license basis that, but for Seller’s alleged failure to use commercially reasonable efforts, Buyer would have obtained individual licenses — which Seller did not guarantee would be transferred.

The court found this evidence missing in action. The court noted there was no statement from any licensor to the effect that if Seller had done X, then Licensor A would have transferred the license to Buyer.

The court noted what the evidence showed. That beyond Buyer obtaining the Lego license, a dispute existed between Buyers’ principals as to whether to enter into any other licenses. This dispute resulted in Buyer twice rejecting a license from Nickelodeon and not contacting any licensor other than Universal after the initial request for transfer of the licenses were sent out. Further, Buyer admitted that Universal decided for its own reasons not to assign the license to it, but to instead another company in the industry.

The court concluded that there was simply no evidence in the record that, taken as true, would allow the conclusion that Universal (or any other licensor) would have offered Buyer a license even if Seller had provided the reasonable commercial efforts Buyer says it did not, or that, unlike with Nickelodeon, Buyer would have accepted the license.

This case is referred to as My Imagination, LLC v. MZ Berger & Co., Case No. 14-13321, United States District Court, E.D. Michigan, Southern Division (October 29, 2018).

Comment. An acquisition gone sour may get a buyer to look for ways of cutting its losses by looking for seller breaches of the purchase agreement.  However, finding a seller breach of the purchase agreement will probably not help the buyer unless the breach caused buyer to suffer provable damages.

In this case Buyer could not convince the court that Seller had breached the asset purchase agreement. That was the end of Buyer’s claim. However, the court also said that even if Seller had failed to use commercially reasonable efforts to assist Buyer in transferring its licenses to Buyer, Buyer failed to prove that such a breach caused Buyer lost profits.

And finally, the court noted that even if Buyer could prove that Seller’s breach caused Buyer lost profits; Buyer would still have to overcome a provision in the asset purchase agreement that may prevent Buyer from recovering lost profit damages from Seller.

By John McCauley: I help people start, grow, buy and sell their businesses.



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Posted in breach of contract, commercially reasonable efforts, Covenants, damages

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