Obtaining an “investment right” to share in a successful and growing new business venture, like a right-of-first-refusal, can feel like a golden ticket. But what is the value of that right, and what damages are the injured would-be investor entitled to if that right is violated? In a recent unanimous decision, the Supreme Court of Maryland provided the following answer: $1.00.
The Court’s ruling in Maryland Indoor Play, LLC v. Snowden Investment LLC overturns a nearly half-million-dollar trial court award and serves as a reminder for businesses and investors: failing to pursue the right kind of damages may entitle investors to damages of only a single dollar. This case underscores that winning on liability (i.e., proving the other party breached the contract) is half the battle. Proving damages is another battle entirely, requiring a fundamentally sound legal strategy from the outset of the case.
The case began with a common scenario: a startup business in need of capital. In 2018, Maryland Indoor Play, LLC (MIP), the developer of the Hyper Kidz indoor play facility concept, needed funds to complete construction on its first location. An investor group, Snowden Investment LLC (Snowden), provided the loan. The loan included a key provision giving Snowden an “Investment Right”—the option to receive notice and an opportunity to invest in any future indoor-play-related businesses started by MIP’s owners.
The Hyper Kidz concept proved successful, and MIP’s owners soon expanded. They formed two new companies: a franchising entity called Boomerang Franchise, LLC and a new location in Virginia called Ashburn Indoor Play LLC. However, they did so without giving Snowden the required notice or opportunity to invest.
Snowden filed suit for breach of contract. The trial court awarded Snowden: (1) specific performance for the Boomerang venture, forcing the owners to offer the investment opportunity to Snowden (years after the fact); and (2) $453,333 in damages for the missed opportunity in the Ashburn venture. After the Appellate Court of Maryland, Maryland’s intermediate appellate court, largely affirmed the trial court’s rulings, the Supreme Court of Maryland weighed in, ultimately overturning the trial court’s findings.
The Supreme Court reversed the trial court’s $453,333 award of consequential damages (missed opportunity damages), finding the plaintiff’s expert opinion “legally deficient” on three fundamental grounds:
- The right category of damages: General, not consequential. The Court first clarified that the damages in this case were general damages. The Court distinguished this from consequential damages, which cover secondary losses, like lost profits.
- The right date: The moment of breach. The Court held that general damages must be measured at the time of the breach. Here, the breach occurred in October 2018 when the equity in Ashburn was issued to its founders without notice to Snowden. Snowden, however, valued the company as of March 2021, nearly three years later. This, the Court found, was a fatal error.
- The right method: “Fair market value,” not “fair value.” Perhaps most critically, the Court ruled that Snowden used the wrong valuation method. It used “fair value,” a standard often applied in dissenting shareholder cases that does not include discounts for lack of control or lack of marketability. The Court held that the correct standard for contract damages is “fair market value,” that is, the price a willing buyer would offer on the open market. A real-world buyer would apply significant discounts for a non-controlling, minority interest in a private company. Using “fair value,” the Court held, would have put Snowden in a better position than it would have occupied had the contract been performed, which is not the purpose of contract damages.
Because Snowden failed to provide evidence of damages measured on the correct date and with the correct methodology, the Court found it was entitled only to nominal damages of $1.00—the value of the “notice” MIP failed to provide.
The Court’s decision hinged on a foundational concept in contract law: the difference between general and consequential damages. The Court focused on the “value of the promise” because Snowden’s loss was direct. The breach did not prevent Snowden from operating its business or making other investments; it simply deprived it of the specific membership interest it was promised. The goal of contract law is to give the injured party the value of what they were promised at the time of the breach, not to award speculative, future profits.
This distinction is a critical takeaway for anyone drafting or litigating similar contract provisions. Depending on the facts of the case and terms of the agreement, the default remedy for a missed investment opportunity is its fair market value at the time of the breach. Attempting to claim years of speculative, future profits, under the facts of this case, proved to be legally flawed, turning a material claim into one for a single dollar.
Navigating complex damages issues requires careful planning before and throughout the litigation process. Counsel should partner with investors to identify available remedies and develop sound legal strategies from day one, ensuring that client’s rights are protected and enforced.
