Disgorgement of Profits as a California Breach of Contract Remedy: Intellectual Property and Other Guideposts

Disgorgement of profits has long been available as a remedy for certain property-related torts, including multiple varieties of intellectual property infringement. But until recently, conventional breach of contract theory has excluded disgorgement of the breacher’s profits from the monetary remedies available to the breach victim. Moreover, the California Civil Code generally limits the monetary remedy for breach of contract to damages sufficient to compensate the victim for “detriment” caused by the breach, capped at the equivalent of full contract performance by the breacher — all of which would seem at first blush to foreclose disgorgement of the breacher’s profits to the extent those profits exceed the victim’s loss. Here, we examine the history of, and limitations on, the new disgorgement-of-profits remedy for breach of contract under Restatement (Third) of Restitution and Unjust Enrichment § 39. We suggest that up to the “cost of modification” — the figure the breacher hypothetically would have had to pay to “buy out” its remaining performance obligation under the contract but, choosing instead to breach, did not — disgorgement-of-profits is not inconsistent with the Civil Code’s limitations on monetary recovery for breach of contract. We also identify intellectual property infringement analogs — chiefly focusing on the “reasonable royalty” calculation from patent law — that may guide California businesses and courts in applying disgorgement-of-profits in future breach of contract disputes and cases.