Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Bankr. S.D.N.Y.: Limitation of liability clause barred terminated distributor’s consequential damages claim, (Feb 11, 2014)

By Jeffrey May, J.D.

In an action brought by sellers of prepaid calling cards against a terminated distributor, seeking payment of substantial outstanding invoices, the distributor’s counterclaim based on lost sales in its exclusive territory was dismissed without prejudice by a federal bankruptcy court in New York City in light of a limitation of liability clause contained in the parties’ distribution agreement (In re: Vivaro Corp., February 6, 2014, Glenn, M.).

The complaining card sellers filed for bankruptcy in 2012 and later brought an action against the distributor, alleging that the distributor owed them over $1 million. One of the complaining sellers, Kare Distribution, Inc., had entered into a distribution agreement with the distributor. Under that agreement, the distributor had an exclusive territory in the Chicago market, and Kare agreed not to sell calling cards directly to the distributor’s sub-distributors. Additionally, the distribution agreement limited Kare’s liability for any special, indirect, incidental, or consequential damages. The other seller, STi Prepaid, LLC, had also sold prepaid calling cards to the distributor but without a distribution agreement.

In its counterclaim, the distributor alleged that Kare breached their agreement by directly selling products to the distributor’s sub-distributors. The distributor contended that Kare caused it to suffer over $3.3 million in damages by wrongfully taking its customer base and sales breaching the terms of the distribution agreement’s exclusive territory provisions.

Kare successfully asserted that the distributor’s claim for lost profits was a claim for consequential damages and that it was protected from liability for consequential damages by a limitation of liability clause in their distribution agreement. The damages sought by the distributor were consequential damages under New York law, the court ruled. The distributor sought to recover lost profits from unmade sales to third-parties in collateral transactions and not money directly owed to it under the distribution agreement, the court explained.

Further, the distributor failed to meet its burden for setting aside the limitation of liability clause. In order to set aside the clause, there needed to be egregious intentional misbehavior evincing extreme culpability; malice, recklessness, deliberate or callous indifference to the rights of other, or an extensive pattern of wanton acts. The court suggested that the distributor’s allegations might support setting aside the limitation of liability clause if there was more detail about Kare’s alleged systematic breaches of their agreement. Therefore, the court dismissed the counterclaim without prejudice.

The case is 12-01928-mg.

Attorneys: Justin B. Singer (Herrick, Feinstein LLP) for Vivaro Corp. William F. Zieske for Raza Communication, Inc.

Companies: Vivaro Corp.; Kare Distribution, Inc.; STi Prepaid, LLC; Raza Communication, Inc.

Cases: FranchisingDistribution NewYorkNews