## Facts

- Hydrosphere developed software and CD-ROM products that provided public hydrological and meteorological data in a usable format under several contracts with US West.
- The contracts vested ownership and intellectual property rights in US West, required Hydrosphere to provide technical support, and required US West to package, market, and prepare manuals.
- Hydrosphere was paid hourly development fees plus royalties tied to net sales for “inventive product ideas.”
- US West assigned its contractual interests to EarthInfo, which agreed to assume US West’s obligations, including continuing royalty payments.
- EarthInfo continued selling the products but stopped paying royalties (allegedly after June 30, 1990), while paying additional development fees after the assignment.
- Hydrosphere sued seeking rescission based on material breach and restitution measured by EarthInfo’s profits from continued sales.

## Issues

1. After partial rescission for material breach, may restitution properly be measured by disgorgement of the breaching party’s net profits earned from the transaction?
2. If disgorgement is permissible, must the court apportion profits to credit the breaching party for profits attributable to its own post-breach efforts and investment?

## Decision

- The Colorado Supreme Court affirmed that rescission was available based on EarthInfo’s material breach for nonpayment of royalties.
- The court held that net-profit disgorgement can be an appropriate restitutionary measure to prevent unjust enrichment from continued exploitation of the nonbreaching party’s contributions.
- The court reversed the award to the extent it required EarthInfo to disgorge all net profits without separating profits attributable to Hydrosphere’s contributions from those attributable to EarthInfo’s efforts and investment.
- The court remanded for determination and apportionment of net profits, awarding Hydrosphere only those profits not attributable to EarthInfo’s own legitimate efforts.

## Legal Principles

- Rescission is an equitable remedy intended to restore the parties, as nearly as possible, to their pre-contract positions.
- Restitution following rescission is governed by unjust enrichment and requires return of benefits unjustly retained.
- Disgorgement of net profits may be ordered where a breaching party profited from continued use of benefits traceable to the nonbreaching party’s work without providing agreed compensation.
- Restitution must avoid unjust deprivation; profits attributable to the breaching party’s own efforts and investment must be credited through apportionment.

## Conclusion

Rescission for EarthInfo’s nonpayment of royalties permitted restitution measured by net profits, but equity required limiting recovery to the portion of profits reflecting unjust enrichment and remanding for apportionment to credit EarthInfo’s own contributions.


EarthInfo, Inc. v. Hydrosphere Res. Consultants, Inc., 900 P.2d 113 (Colo. 1995)