Understanding Damages in Contract Law: A Closer Look at Special Damages and Breach Claims by@legalpdf

Understanding Damages in Contract Law: A Closer Look at Special Damages and Breach Claims

by Legal PDFMarch 30th, 2024
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The article delves into the intricacies of state contract law concerning damages in a breach of contract claim. It analyzes the concept of special damages, foreseeability, and recoverable losses, highlighting the challenges and legal nuances in determining damages in contractual disputes.
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X Corp. v. Center for Countering Digital Hate, INC. Court Filing, retrieved on March 25, 2024 is part of HackerNoon’s Legal PDF Series. You can jump to any part in this filing here. This part is 11 of 19.

1. State Contract Law

CCDH’s first argument about damages relies on state contract law. Under state contract law, when there is a breach, “the plaintiff is entitled to damages that are equivalent to the benefit of the plaintiff’s contractual bargain.” Lewis Jorge Constr. Mgmt., Inc. v. Pomona Unified Sch. Dist.. 34 Cal. 4th 960, 967–68 (2004). But a plaintiff’s damages “cannot . . . exceed what it would have received if the contract had been fully performed on both sides.” Id. at 968 (citing Cal. Civ. Code § 3358). “This limitation of damages for breach of contract ‘serves to encourage contractual relations and commercial activity by enabling parties to estimate in advance the financial risks of their enterprise.’” Id. (quoting Applied Equip. Corp. v. Litton Saudi Arabia Ltd., 7 Cal. 4th 503, 515 (1994)). While tort damages are intended to award a plaintiff for all injury suffered, “[c]ontract damages are generally limited to those within the contemplation of the parties when the contract was entered into or at least reasonably foreseeable by them at that time.” Erlich v. Menezes, 21 Cal. 4th 543, 550 (1999). This is a key “distinction between tort and contract.” Id.

There are two types of contractual damages: “general damages (sometimes called direct damages) and special damages (sometimes called consequential damages).” Lewis Jorge Constr. Mgmt., 34 Cal. 4th at 968. General damages “flow directly and necessarily from a breach of contract . . . or . . . are a natural result of a breach.” Id. (citing Cal. Civ. Code § 3300). X Corp.’s theory of damages—that CCDH violated the ToS by scraping the X platform, that CCDH used the data that it scraped to publish deliberately misleading publications criticizing X Corp., that those publications caused X Corp.’s advertisers to pause spending, and that the pause in spending caused X Corp. to lose “at least tens of millions of dollars” in revenue, see, e.g., FAC ¶¶ 70, 78[12]—do not flow directly and necessarily from CCDH’s breach of the ToS’s scraping provision. The question is whether they constitute special damages.

“[S]pecial damages are those losses that do not arise directly and inevitably from any similar breach of any similar agreement. Instead, they are secondary or derivative losses arising from circumstances that are particular to the contract or to the parties.” Lewis Jorge Constr. Mgmt., 34 Cal. 4th at 968. They “are recoverable if the special or particular circumstances from which they arise were actually communicated to or known by the breaching party (a subjective test) or were matters of which the breaching party should have been aware at the time of contracting (an objective test).” Id. at 968–69.[13]

X Corp. agreed at the motion hearing that its damages had to be foreseeable at the time of contracting. See Tr. of 2/29/24 Hearing at 10:7–14. But X Corp.’s complaint does not allege that CCDH knew at the time of contracting, or should have known at the time of contracting, that breach of the ToS’s scraping provision would result in damages of “at least tens of millions of dollars.” X Corp. alleges that “CCDH engaged in its unlawful scraping with the intent to improperly obtain data that would be used to cause X Corp. to lose significant advertising revenues.” FAC ¶ 78. It alleges nothing about CCDH’s intent or knowledge when it agreed to the ToS in 2019. This is a fatal flaw.

X Corp. argues that “the Motion . . . impermissibly demands that the Court engage in a fact-intensive analysis without the benefit of any discovery to determine what CCDH knew or could have known at the time of contracting and what CCDH knew or could have known would result from its actions.” Opp’n at 18. But cognizable damages are an element of a breach of contract claim, and either they have been plausibly pled or they have not. See King v. Facebook, Inc., 572 F. Supp. 3d 776, 790 (2021) (dismissing a claim for breach of contract in part because “much of the injury allegedly suffered . . . is injury to reputation” and “this kind of injury is generally not compensable for a breach of contract.”); Modden v. Ticketfly LLC, No. 18-cv-6450-RS, 2019 WL 4738237, at *3 (N.D. Cal. 2019) (“Nowhere has Modden alleged that Ticketfly knew or should have known about his special damages at the time of contracting. Regardless of whether he has shown the other elements, Modden has not sufficiently pled his damages. The breach of contract claim must therefore be dismissed.”) (emphasis in original). It is not facially plausible that “CCDH could have known, [when] it accepted the ToS [in 2019], that (for instance) the Twitter/X platform would abruptly change course to restore accounts that it had banned for spreading hate speech, misogyny, and conspiracy theories . . . ; that the CCDH Defendants would collect and review public posts on the platform to shed light on these issues . . . and that the CCDH Defendants’ subsequent reporting based on this data would allegedly affect advertiser revenue to the tune of ‘at least tens of millions of dollars.’” MTD&S at 16.

One might respond that CCDH—an organization that “prepare[s] and publish[es] what it refers to as ‘research’ reports and articles” about “organizations and individuals . . . who express viewpoints via social media platforms that differ from CCDH’s own views on widely debated topics including COVID-19 vaccinations, reproductive healthcare, and climate change,” FAC ¶ 17—could or should have known in 2019 that it was planning to report on objectionable posts on the X platform and encourage advertisers to flee. But when CCDH joined Twitter in 2019, id. ¶ 8, Twitter looked quite different. Elon Musk had not yet taken over and turned Twitter into the X platform. See Wile Timeline. The COVID pandemic (one of the subjects that the speech here concerned) had not yet occurred. See Derrick Bryson Taylor, “A Timeline of the Coronavirus Pandemic,” N.Y. Times, March 17, 2021, Twitter had “content-moderation policies . . . designed, among other things, to minimize the reach of harmful and misleading information.” See O’Handley v. Padilla, 579 F. Supp. 3d 1163, 1172 (N.D. Cal. 2022). As late as January of 2022, this Court was still fielding lawsuits from right-leaning users arguing that Twitter’s content-moderation policies discriminated against them. See, e.g., id., 579 F. Supp. 3d 1163.[14]

Indeed, the February 9, 2023 CCDH report that admitted scraping the X platform was about how Twitter had changed. The report states that Musk had declared a “general amnesty” for banned Twitter users in November of 2022, thereby reinstating “tens of thousands of accounts, including neo-Nazis, white supremacists, misogynists and spreaders of dangerous conspiracy theories.” Toxic Twitter at 3. And it claimed that Twitter was generating millions of dollars in advertising revenue from the previously banned accounts. See id. Musk was not at the helm of Twitter reinstating previously banned accounts in 2019. Nor was it foreseeable that he would be.

At the motion hearing, the Court observed that “it’s a very different thing to say” that CCDH understood the terms of the ToS in 2019 than it is to say that CCDH “understood that actually X Corporation would start allowing all of these people back on, which was different from the policy that was in place at the time that they entered the [ToS].” Tr. of 2/29/24 Hearing at 13:2–8. X Corp. responded that “the policies do say they’re subject to change, and users, when they stay on the platform, agree to the subsequent policy.” Id. at 14:24–15:1. This argument does not save the breach of contract claim, for at least three reasons. First, the FAC alleges that the time of contracting was 2019—it does not allege that CCDH agreed to subsequent versions of the ToS. See FAC ¶ 8. Second, the argument that “it is foreseeable that we might change our policy” would work an absurd extension of the law, essentially eliminating the requirement of foreseeability altogether. Any change of policy would be foreseeable because it is always foreseeable that policy can change. Unsurprisingly, X Corp. offers no legal support for that reasoning. Third, the argument that logging back into the Twitter/X platform constitutes a reaffirmation of the ToS (and therefore that the Court must assess foreseeability at a later point in time than 2019) fails because it appears that the ToS in effect at the time of the February 9, 2023 report was in place from June 10, 2022 to May 18, 2023, and June 10, 2022 predated Musk’s purchase of Twitter. See Tr. of 2/29/24 Hearing at 29:3–14; see also Kaplan Decl. Ex. A; see also X, Previous Terms of Service, (listing one version dated June 10, 2022 and a next version dated May 18, 2023). So there does not appear to have been a reaffirmation of the ToS at the time when Musk was changing the platform’s policies and reinstating “tens of thousands of anti-Semites and white supremacists and other people to the platform.” See Tr. of 2/29/24 Hearing at 29:11–13.

Accordingly, X Corp. has not plausibly pleaded that CCDH had knowledge at the time of contracting in 2019 of the “tens of millions of dollars” X Corp. now seeks in connection with advertisers’ decisions to pause spending in response to CCDH’s February 9, 2023 report.

b. Reputation Damages

Another reason that the damages X Corp. seeks—“at least tens of millions of dollars” of lost revenue that X Corp. suffered when CCDH’s reports criticizing X Corp. caused advertisers to pause spending, see FAC ¶ 70—are problematic is that X Corp. has alleged a breach of contract but seeks reputation damages. Of course, the main problem with X Corp.’s theory is that the damages alleged for the breach of contract claim all spring from CCDH’s speech in the Toxic Twitter report, and not its scraping of the X platform. See Reply at 7 (“Because X Corp. seeks (impermissibly) to hold CCDH U.S. liable for speech without asserting a defamation claim, it is forced to allege damages that are (impermissibly) attenuated from its claimed breach.”). One way we know that this is true is that if CCDH had scraped the X platform and never spoken, there would be no damages. Cf. ACLU Br. at 12. (“Had CCDH U.S. praised rather than criticized X Corp., there would be no damages to claim and therefore no lawsuit.”). Again, X Corp. conceded this point at the motion hearing. See Tr. of 2/29/24 Hearing at 7:22–8:3.

CCDH’s reputation damages argument is another way of saying that the damages X Corp. suffered when advertisers paused their spending in response to CCDH’s reporting was not a foreseeable result of a claimed breach. There is certainly support for that point. See Frangipani v. Boecker, 64 Cal. App. 4th 860, 865–66 (1998) (“The invariable rule is pronounced by a legion of cases that damages are not recoverable for . . . injury to reputation resulting from breach of contract”) (internal quotation marks omitted; cleaned up); see also Rice v. Cmty. Health Ass’n, 203 F.3d 283, 287–88 (4th Cir. 2000) (reputational damages “universally rejected” for breach of contract because they are “too speculative and could not reasonably be presumed to have been contemplated by the parties when they formed the contract.”).

X Corp. argues that this reputation argument is inapposite because X Corp. did not suffer amorphous reputational damages, but “tangible, economic losses . . . e.g., advertising revenue.” Opp’n at 18 (citing Cohen v. Cowles Media Co., 501 U.S. 663, 671 (1991); Planned Parenthood Fed’n of Am., Inc. v. Newman, 51 F.4th 1125, 1134 (9th Cir.2022); Nat’l Abortion Fed’n v. Ctr. for Medical Progress, No. 15-cv-3522-WHO, 2018 WL 5879786, at *6 (N.D. Cal. Nov. 7, 2018))[15]; see also Opp’n at 19 (the FAC “pleads specific and measurable harm”). But even if X Corp. can quantify its reputational harms (and “at least tens of millions of dollars” is not terribly specific or measured), it has not plausibly alleged that such harm was “contemplated by the parties when they formed the contract.” See Rice, 203 F.3d at 288.

c. “Specifically Stated”

One last reason that the breach of contract claim fails to adequately allege special damages is that Rule 9(g) of the Federal Rules of Civil Procedure requires that “[i]f an item of special damage is claimed, it must be specifically stated.” Fed. R. Civ. P. 9(g). “A specific statement of special damages requires not just the total lump sum, but a statement of the specific items which make up the lump sum.” City & Cnty. of S.F. v. Tutor-Saliba Corp., No. 02-5286 CW, 2005 WL 645389, at *17 (N.D. Cal. March 17, 2005). Here, X Corp. does not attempt to identify the specific items that make up the lump sum of “at least tens of millions of dollars.” See FAC ¶ 70. Indeed, the “at least tens of millions of dollars” amount is the same amount X Corp. alleges as to all three state law claims, even though the first cause of action is about CCDH’s scraping of the X platform, and the third and fourth causes of action are about CCDH accessing X Corp. data held by Brandwatch. See id. ¶¶ 78, 93, 99.

This deficiency in the pleading, which X Corp. ignores in its opposition brief, see Opp’n at 18 (“These allegations satisfy the pleading requirements under Rule 8”); Reply at 6 (deeming this “an incomplete argument about a different rule”), is fixable in one sense. In an amended complaint, X Corp. could probably come up with a list of advertising revenues that it lost out on, and that add up to “tens of millions of dollars.” But in another sense, it would be hard for X Corp. to tie those losses back to CCDH’s alleged scraping, as opposed to CCDH’s speech based on that scraping, or CCDH’s accessing of the Brandwatch data, or its speech based on the Brandwatch data, or the speech of other X Corp. critics, or other things happening in the market.[16]

For all of these reasons, the complaint fails to allege recoverable damages for the breach of contract under state contract law.

Continue Reading Here.

[12] In its opposition brief, X Corp. asserts that it had further alleged that “CCDH’s conduct forced X Corp. to ‘conduct internal investigations,’” “‘allocate[] significant employee resources,’” and “‘incur[] attorneys’ fees.’” Opp’n at 18 (citing FAC ¶ 71). But those other sources of X Corp.’s damages appear in the complaint as allegations of harm caused by “CCDH’s unauthorized access to the [Brandwatch] data”—something not at issue in the first cause of action. See FAC ¶ 71.

[13] The classic case discussing special damages is an 1854 English case called Hadley v. Baxendale, in which, “[a]fter Hadley’s mill shut down because of a broken crankshaft, he entered into a contract to have a new one built.” Id. at 969 (citing Hadley v. Baxendale (1854) 156 Eng.Rep. 145). Hadley took the broken shaft to Baxendale, to deliver it to the builder to use as a model. Id. When Baxendale did not deliver the shaft for seven days, Hadley sued Baxendale for lost profits. Id. The court held that Hadley’s lost profits were not recoverable, because Hadley had not communicated the special circumstance—that the mill could not operate without the shaft—to Baxendale. Id.

[14] Interestingly, the plaintiff in that case, Rogan O’Handley, is behind one of the “ten reinstated accounts” highlighted in CCDH’s Toxic Twitter report. See Toxic Twitter at 4 (“Rogan O’Handley, a Hollywood former entertainment lawyer turned far-right conspiracy theorist, who has been criticized for fanning the flames of vaccine conspiracies in the wake of the NFL athlete Damar Hamlin’s heart attack.”).

[15] X Corp. cites to a number of cases involving constitutional law in response to CCDH’s arguments under state contract law. The Court will address these cases in the next section.

[16] See, e.g., Reply at 16 (noting that “X Corp. has now carried out [its threat to bring suit] against yet another social-media-monitoring nonprofit, see X Corp. v. Media Matters for Am., No. 23 Civ. 1175 (N.D. Tex), all while engaging in conduct that plainly refutes its own theory of harm in both cases, see, e.g., Lora Kolodny, Elon Musk Claims Advertisers Are Trying to ‘Blackmail’ Him, Says ‘Go F---Yourself,’ CNBC (Nov. 29, 2023).”).

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