## Facts

- Russ and Les Hilliard formed International News Network, Inc. (INN) to secure U.S. distribution rights for a 24-hour British news channel.
- Reese Schonfeld, a founder and former president of CNN, joined the venture first as a consultant and later as a one-third shareholder.
- A written shareholders’ agreement made Schonfeld and the Hilliards equal owners; the Hilliards agreed to provide certain loans to INN, while Schonfeld contributed services.
- INN obtained an exclusive long-term programming license from the BBC, with the ability to assign the license to a future operating entity subject to BBC consent.
- Schonfeld alleged the Hilliards made oral funding promises, induced INN to restructure its BBC arrangements, and then failed to provide the promised funds, leading to default and collapse of the venture.
- Schonfeld sued the Hilliards individually and derivatively on INN’s behalf, seeking lost profits, the market value of the lost BBC contract rights, and punitive damages.
- To support lost asset value, Schonfeld relied largely on an arm’s-length agreement involving a competitor (the “Cox Agreement”) as evidence of market value for comparable BBC-related rights.

## Issues

1. Whether projected lost profits from an unlaunched start-up channel could be proven with reasonable certainty under New York law.
2. Whether the market value of lost contract rights (the BBC supply agreements) could be recovered as damages even if lost profits were too speculative.
3. Whether the alleged fraudulent conduct supported punitive damages in a private commercial dispute under New York law.

## Decision

- The court affirmed summary judgment denying recovery of lost profits because the projections depended on layered assumptions and lacked the reasonable certainty required by New York law.
- The court reversed summary judgment dismissing the lost asset value theory, holding that evidence including the Cox Agreement could allow a factfinder to determine market value with reasonable certainty.
- The court affirmed dismissal of punitive damages because the alleged misconduct did not satisfy New York’s standards requiring egregious conduct with a public-directed character.
- The case was affirmed in part, reversed in part, and remanded for further proceedings on the lost asset value claim.

## Legal Principles

- Under New York law, lost profits must be proved with reasonable certainty and cannot rest on speculation, particularly for a start-up with no operating history.
- A plaintiff may recover the market value of lost contract rights as an alternative measure of expectation damages when that value can be established through competent market evidence, even if future profits are uncertain.
- Comparable arm’s-length transactions may provide a reliable benchmark for determining the market value of unique or specialized contract rights.
- Punitive damages in New York commercial fraud cases are generally unavailable absent morally culpable, egregious conduct aimed at the public or otherwise transcending a private business dispute.

## Conclusion

The Second Circuit barred recovery of speculative start-up lost profits and punitive damages, but allowed the plaintiff to pursue damages measured by the market value of the lost BBC contract rights where supported by competent comparable-market evidence.


Schonfeld v. Hilliard, 218 F.3d 164 (2d Cir. 2000)