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May 29, 2015 Practice Points

Texas Supreme Court Addresses Standard for Expert Opinion on Damages

The Supreme Court of Texas determined that a jury's award in damages related to the fair market value of Carlton Energy Group, LLC's lost investment opportunity was overly speculative

by Neil Steinkamp and Robert Levine

Upon a finding of liability, courts and arbitral tribunals must make a determination with respect to damages. Claims related to events that have occurred in the past or that consist of a sum certain are straightforward and simple to calculate. Damages resulting from a breach of contract with benefits reaching into the future, or those that would have occurred in a hypothetical world, however, often include elements of uncertainty in their measurement. Such claims for damages may be challenging for claimants to establish and for a tier of fact to evaluate. The evidentiary threshold for establishing the existence and measure of damages is reasonable certainty.

In a recent decision, Gene E. Phillips, et al. v. Carlton Energy Group, LLC, No. 12-0255 (Tex. May 8, 2015), the Supreme Court of Texas determined that a jury's award of $66.5 million in damages related to the fair market value of Carlton Energy Group, LLC's lost investment opportunity was overly speculative, insofar as "[n]othing in the evidence supports the jury's $66.5 million finding." Accordingly, the court remanded the case to the appellate court for a determination of damages.

The court stated that "the law is well settled: lost profits can only be recovered when the amount is proved with reasonable certainty. Proof need not be exact, but neither can it be speculative." Id. at 18 (emphasis added). In the decision, the court extended the requirement of reasonable certainty beyond lost profits to include the determination of fair market value based upon those profits: "[w]hile we have never spoken to whether this requirement of reasonable certainty of proof should apply when lost profits are not sought as damages themselves but are used to determine the market value of property for which recovery is sought, it clearly must." Id. at 20 (emphasis added).

When applying this threshold, however, the court also explained that "when evidence of potential profits is used to prove the market value of an income-producing asset, the law should not require greater certainty in projecting those profits than the market itself would." Id. at 21. The court further stated in the Phillips opinion that reasonable certainty "should not be used to deny a claimant damages equal to the value the market would have placed on lost property." Id.

If a party cannot demonstrate that damages are reasonably certain, the trier of fact is likely to find that damages have not been proven and may even exclude an expert's testimony. Without this testimony, even successful proof on liability may lead to an award of no damages.

Professional literature, court and arbitral opinions, rules of evidence, and treatises often use the phrase "reasonable certainty" when discussing damages. However, the definition of reasonable certainty remains ambiguous. Indeed, "most courts agree that reasonable certainty as to damages is a flexible, inexact concept." Matthew Milikowsky, A Not Intractable Problem: Reasonable Certainty, Tractebel, and the Problem of Damages for Anticipatory Breach of a Long-Term Contract in a Thin Market, 108 Colum. L. Rev. 452, 467 (2008).

Courts will look toward several potential variables to determine whether or not an expert's testimony is reasonably certain, including, but not limited to: (i) soundness of the opinion based upon; (ii) an acceptable methodology underpinned by; (iii) relevant data; and possibly judged against (iv) the intellectual rigor that could be expected of an industry expert, if applicable. Ultimately, as the Phillips decision reminds us, achieving reasonable certainty of expert opinions will provide greater opportunities for the opinions to be accepted and given the weight they deserve within the context of the evidence provided.

Keywords: commercial and business, damages, expert opinion, experts, reasonable certainty, litigation

Neil Steinkamp and Robert Levine are with Stout Risius Ross, Inc., in New York, New York.

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