August 01, 2016 article

"Preponderance of Evidence" Standard Deems Lost Profits Recoverable

By Carmen D. Caruso

For many years, the majority of state and federal courts have held that the recovery of lost profits is governed by a "reasonable certainty" standard, at least in the first instance of determining whether the "fact" of lost profits is established, as opposed to the second level of the question, i.e., determining the amount of lost profits to award. This has prompted debate as to how much evidence is required to establish "reasonable certainty"? Is it something more than a preponderance of evidence? Does it approach "beyond a reasonable doubt"?

On June 10, 2016, in Wilbern et al v. Culver Franchising System, Inc., case no.1:13-cv-03269 (Northern District of Illinois), District Judge Thomas Durkin broke new ground in resolving this debate. The district court rejected the two-tiered approach to the burden of proof for the recovery of lost profits and held that the preponderance of evidence standard applies to the question of whether any lost profits were sustained, as well as to the amount of lost profits to be recovered. Wilbern et al v. Culver Franchising System, Inc. is a civil rights case under 42 U.S.C. Section 1981 in which a franchisee sought the recovery of lost profits for certain franchises that were never built. The court's oral ruling on the lost profits/burden of proof issue broke new ground, at least in the Seventh Circuit. Based on this ruling, the court instructed the jury that lost profits are recoverable under the preponderance standard (that governed the entire civil case). The court saw no need to mention "reasonable certainty" in the jury instructions, explaining that to introduce a new term (reasonable certainty) only to define it as requiring a preponderance of evidence would be circular and create needless confusion.

Also in Wilbern et al v. Culver Franchising System, the district court previously held, at the Rule 56 stage, that a Chicago area franchisee could seek the recovery of lost profits for certain Culver's restaurants that were never built. According to the plaintiff, this was due to the defendant's alleged racial steering away from sites that the franchisee had proposed, which were located in primarily African-American communities on the south side of Chicago. See 2015 U.S. Dist. LEXIS 130888 (N.D. Ill. Sept.29, 2015). Rejecting arguments that the lost profits claims for unbuilt, unopened franchises were barred by the common law "New Business Rule," the district court held that, in the franchise context, historical data as to the performance of similar franchised units is a permissible "yardstick" for measuring losses sustained by the potential franchisee that were prevented from going into the franchise business by the wrongful conduct of the defendant. Id. at *105, citing FMS, Inc. v. Volvo Construction Equipment North America, Inc., 2007 U.S. Dist. LEXIS 19517 (N.D. Ill. Mar. 20, 2007). The court held that the "the nationwide character of the franchise business at issue provide[s] an ample basis for computation of probable losses"( Id. at *105–06., citing No Ka Oi Corp. v. Nat'l 60 Minute Tune, Inc., 863 P.2d 79, 83 (Wash. Ct. App. 1993). The court also added that "a national franchisor, with uniformity of national advertising, uniform quality control, earnings, and expense figures on nearby and comparable locations, and an available history concerning success and failure ratios" can provide adequate yardsticks for calculating lost profits. Id., citing Pauline's Chicken Villa, Inc. v. KFC Corp., 701 S.W.2d 399, 401 (Ky. 1985).

Keywords: solo, small firm, litigation, lost profits, preponderance of evidence, reasonable certainty, Wilbern, Culver Franchising System

Carmen D. Caruso is the principal attorney at his own firm, Carment D. Caruso Law Firm, in Chicago, Illinois. He and Shane D. Valenzi represented the plaintiff at the trial in this case and argued for the application of the preponderance standard. Though the jury returned a verdict for the defendant, this case has made law that we wish to share.

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