Proving Lost Profits for a New Business

The most commonly applied rule is that a plaintiff must prove lost profits with “reasonable certainty.” However, the methodology and scrutiny applied by courts vary, particularly when the business is new. The Fifth Circuit, applying Texas law, upheld a jury’s award of lost profits for a “revolutionary new product” based on expert testimony, and it did so with the following recognition:

It is true these predictions are not guaranteed. No one can definitively say what the future holds for SDV technology, or DSC and Next Level in particular. However, uncertainty surrounding precisely how the industry will evolve does not reduce all analysis about future developments to mere speculation. [DSC’s damages expert] based his predictions on data obtained from respected sources in the telecommunications market. The jury chose to believe his estimation of damages. There was sufficient evidence presented to support the jury’s verdict.

DSC Commc’ns Corp. v. Next Level Commc’ns, 107 F.3d 322, 329–30 (5th Cir. 1997).

Similarly, other courts have recognized the importance of expert testimony and quantitative, data-driven analysis in supporting a plaintiff’s claim for lost profits damages. In a recent case that we handled in Florida, the court held that to recover lost profits, our client (the plaintiff and a new business) had to prove “that there is some standard by which the amount of damages may be adequately determined.” (citing W.M. Gay Mech. Contractor, Inc. v. Wharfside Two, Ltd., 545 So. 2d 1348, 1351 (Fla. 1989)). The court held that the amount of damages may be shown through “regular market values, or other established data, by reference to which the amount may be satisfactorily established” (citing Marshall Auto Painting & Collision, Inc. v. Westco Eng’g, Inc., No. 6:02CV-109-ORL22KRS, 2003 WL 25668018, at *7 (M.D. Fla. May 8, 2003)), and that “expert testimony is sufficient to prove lost profits, as long as it is reliable.” (citing Nebula Glass Int’l, Inc. v. Reichhold, Inc., 454 F.3d 1203, 1206 (11th Cir. 2006)).

Notably, the First, Seventh, and Tenth Circuits, while applying the reasonable certainty standard to lost profit damages for new businesses, put the risk of the uncertainty on the defendant, recognizing that “where the defendant’s wrongdoing created the risk of uncertainty, the defendant cannot complain about imprecision.” Jay Edwards, Inc. v. New Eng. Toyota Distributor, Inc., 708 F.2d 814, 821 (1st Cir. 1983). See also Mid-Am. Tablewares, Inc. v. Mogi Trading Co., Ltd., 100 F.3d 1353, 1365 (7th Cir. 1996); Randy’s Studebaker Sales, Inc. v. Nissan Motor Corp., 533 F.2d 510, 518 (10th Cir. 1976).

Not all jurisdictions, however, permit new businesses to recover lost profits. Vermont, for example, prohibits a new business from recovering lost profits because a plaintiff is required to show that his or her “business (1) was a going concern with (2) an established history of profits.” Vescio v. Merchs. Bank, 272 B.R. 413, 436 (D. Vt. 2001), aff’d, 54 F. App’x 513 (2d Cir. 2002) (unpublished). While Illinois does not have a blanket prohibition on new businesses recovering lost profits, the general rule under Illinois law is that a new business has no right to recover lost profits. TAS Distrib. Co., Inc. v. Cummins Engine Co., Inc., 491 F.3d 625, 634 (7th Cir. 2007). See also Tri-G, Inc. v. Burke, Bosselman & Weaver, 856 N.E.2d 389, 407 (Ill. 2006) (“Generally speaking, however, courts consider evidence of lost profits in a new business too speculative to sustain the burden of proof.”). Similarly, Georgia’s new business rule “generally precludes a claim for lost profits arising from the operation of a new business, because such damages are considered too speculative, remote, and uncertain.” Blair-Naughton L.L.C. v. Diner Concepts, Inc., 369 F. App’x 895, 904 (10th Cir. 2010) (unpublished) (citing SMD, L.L.P. v. City of Roswell, 252 Ga. App. 438, 555 S.E.2d 813, 816 (Ga. Ct. App. 2001)).

Still other jurisdictions, including Ohio and New York, recognize that lost profits can be proven by a new business but are subject to a higher standard. See, e.g., Washington v. Kellwood Co., 105 F. Supp. 3d 293, 313 (S.D.N.Y. 2015) (“In the case of a new business seeking to recover loss of future profits, a stricter standard is imposed because there is no experience from which lost profits may be estimated with reasonable certainty and other methods of evaluation may be too speculative.”) (internal quotations and citations omitted); Ask Chems., LP v. Comput. Packages, Inc., 593 F. App’x 506, 512 (6th Cir. 2014) (unpublished) (quoting Andrew v. Power Mktg. Direct, Inc., 978 N.E.2d 974, 992 (Ohio 2012) (“Since the demonstration of lost profits in a new business is necessarily more speculative, such demonstrations ‘receive greater scrutiny because there is no track record upon which to base an estimate.’”)). Michigan, in contrast, requires only that new businesses prove lost profits with the traditional “reasonable certainty,” which may be established through expert reports, market analyses, comparisons with similar businesses operating under similar market conditions, and economic and financial data. Fredonia Farms, LLC v. Enbridge Energy Partners, L.P., No. 1:12-CV-1005, 2014 WL 3573723, at *5 (W.D. Mich. July 18, 2014). See also Fera v. Vill. Plaza, Inc., 396 Mich. 639, 644, 242 N.W.2d 372, 374 (Mich. 1976).

While proving lost profits can be an uphill battle for a new business, the case law on this issue is ever-evolving and fact specific. Often, a plaintiff’s best chance to prove lost profits for a new business requires the effective use of quantitative expert analysis and comparisons with similar businesses, while defendants should be mindful of the possibility that their conduct may make a court more likely to accept uncertainty in the plaintiff’s damages calculation.