Naval Institute v. Charter Communications

United States Naval Institute v. Charter Communications and Berkley Publishing Group

Tom Clancy’s first novel, ‘Hunt for Red October’. Could not get published by any major publisher. Small publisher (US Naval Institute) publishes hardcover, contracts with Charter Communications and Berkley to publish paperback. Probably affiliated corporations (one control the other or common ownership).
• Contract calls for paperback to start being sold in 10/01/85, but books start selling 9/15/85. Naval Institute sues for copyright infringement and breach of contract.
• Since Berkley is licensee, cannot infringe on copyright, thus this count is dismissed.
• Plaintiff wants all of Berkley’s profits from period of breach a well as damages equal to loss of Naval’s profits. Berkley’s profits are much greater than Naval’s loss.
• Basic principle: court will enforce remedy of plaintiff’s loss, not defendant’s gain. Naval cannot get Berkley’s profits (if they did, this would be ‘restitution damages’–damages calculated by amount gained by promisor). Common exception to this is copyright infringement (but court had dismissed this claim).
• Contract law generally wants to put party in position they would have been had contract been performed. This would not be achieved by restitution or punitive damages. I.e., give party the ‘benefit of bargain’ or protect their expectation interest.

Another reason for not appyling punitive damages, economic efficiency. Three notions of efficiency:
• Pareto optimality: Could not make anyone in community better off without making someone else worse off. Rarely used in legal analysis; problems include that there can be more than one pareto optimal state depending on starting conditions.
• Pareto superior: Makes at least somebody better off without making someone else worse off. Quite relevant to contract law.
• Kaldor Hicks: Cost/benefit analysis. Gains of doing something exceed losses; something is least costly way of doing something.

• Phillips offers $100 for contracts book to student. Student agrees, both are better off. Contract is pareto superior move, since both parties are being made better off. This assumes no externalities.

If we assume that Naval’s lost profits $30K, Berkley’s profits are $100K. Berkley can pay Naval $30K, Berkley is still up $70K, thus someone has been made better off without making someone else worse off (absent transaction costs). Thus this is a pareto superior (efficient) resolution.

In torts and criminal law, conduct is all undesirable. In contracts, however, not all breach is undesireable; sometimes more efficient resolution involves breach.

Award in Naval Academy is profits; i.e., expectation damages (what they expected to make), rather than reliance damages (what their costs were from breach). Court accepts August profits as basis of damages, although early September sales were much lower. Court finds it reasonable to be generous to injured party in this case of uncertainty.



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