PROVING & DEFENDING LOST PROFIT DAMAGES

Posted on May 27, 2016May 27, 2016 by Edward Garber

I have written numerous articles regarding the challenge in proving lost profit damages. Yes, lost profits are a form of damages in business disputes, but they are a form of damages that are subject to a certain degree of conjecture and speculation. For this reason, lost profit evidence is oftentimes precluded from being presented at trial or lost profit damages are reversed on appeal. This is why it is imperative to ensure i’s are dotted and t’s are crossed when it comes to proving lost profit damages. It is also imperative, when defending a lost profit claim, to put on evidence and establish the speculative nature of the lost profit damages.

In the recent decision of Arizona Chemical Company, LLC v. Mohawk Industries, Inc., 41 Fla. L. Weekly D1213a (Florida 1^st DCA 2016), the First District Court of Appeals held that the plaintiff’s lost profit evidence was sufficient and affirmed the lost profit damages. In this case, a flooring / carpet manufacturer sued the manufacturer of resin utilized for a particular brand of broadloom commercial carpet claiming that the resin was defective. This resulted in spikes in consumer complaints and warranty claims relating to the particular brand of carpet. The plaintiff utilized a forensic accountant (expert witness) to testify as to lost profit damages. The expert determined the average annual profits from the sale of the particular carpet brand before 2008, which is when the manufacturer became aware of the defects with the brand. The expert then used this data along with market data for broadloom commercial carpet to project the revenue the manufacturer would have gained from the sale of the specific carpet brand between 2008 and 2017, but for the defects. The expert testified he factored in the economic recession on the demand for broadloom commercial carpet brands and market trends to determine the projected revenue.

The defendant challenged the speculative nature of the lost profit testimony because the plaintiff’s expert failed to consider competition in the flooring marketplace, a shift in the market from broadloom commercial carpet towards carpet tile, and reputational damage to the manufacturer due to the failure of another of the manufacturer’s brands that failed. The First District, however, held that such issues did not render the lost profit damages insufficient or speculative because nothing in the record established that such factors had a substantial effect on the sale of the particular brand of broadloom commercial carpet.

The defendant needed to put on evidence and establish that other factors had an actual impact and link on the sale of the particular brand of carpet such that the plaintiff’s expert’s failure to consider these factors rendered his testimony speculative. Had the defendant done so and established this link, the appellate court may very likely have reversed the lost profit damages awarded to the plaintiff based on their speculative nature.

When it comes to lost profit damages, the First District explained:

A plaintiff can recover lost profits as damages if the defendant’s actions caused the damage and there is some standard by which the amount of damages may be determined. The plaintiff need not show that the defendant’s action was the sole cause of the damages sought; instead, the plaintiff’s burden is to show that the defendant’s action was a substantial factor in causing the lost profits and establish the amount with reasonable certainty. However, where the plaintiff’s evidence reflects a mere assumption that the defendant’s action caused its lost profits without consideration of other factors shown by the record to be significant, the evidence is legally insufficient to support a claim for lost profits.

Arizona Chemical Company, supra (internal quotations and citations omitted).

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

USING THE YARDSTICK TEST TO PROVE LOST PROFIT DAMAGES

Posted on May 22, 2015May 22, 2015 by Edward Garber

It’s all about proving your damages! One category of consequential damages that parties sometimes seek is lost profit damages. Lost profits, though, are one of the most difficult damages to prove. If a party is interested in pursuing lost profit damages (such as when the opposing party materially breaches their contract) it is important to understand the burden and expert testimony needed to support these damages with a reasonable degree of certainty.

In a prior article, I discussed a tenant supporting a lost profit claim against its landlord due to the landlord’s breach of the lease. Recently, in Victoriana Buildings, LLC v. Ft. Lauderdale Surgical Center, LLC, 40 Fla.L.Weekly D1169b (Fla. 4^th DCA 2015), the Fourth District found that a tenant did not properly support its lost profit damages even though the landlord breached the lease. The Court affirmed that the tenant’s lost profits claim was speculative and, therefore, not recoverable. In reaching this determination, the Court explained:

Lost profits are typically proven by one of two methods: (1) the before and after theory; or (2) the yardstick test. The yardstick test is generally used when a business has not been established long enough to compile an earnings record that would sufficiently demonstrate lost profits and compares the profits of businesses that are closely comparable to the plaintiff’s. Here, the tenant’s expert consultant, in analyzing the viability of the tenant’s proposed facility, did not evaluate any comparable facility’s profitability as a “yardstick,” and the tenant’s expert CPA acknowledged that his report, which was based on the consultant’s report and forecast, was only as good or as bad as [the consultant’s] forecast. Thus, the tenant’s proof was insufficient.

Victoriana Buildings, supra (internal quotation and citation omitted).

Without a true proven history of profitability, the tenant should have used the yardstick test supported by sufficient expert testimony. Under this yardstick test, the expert would analyze closely comparable businesses to render an opinion as to the lost profits caused by the defendant’s breach. Because the tenant’s expert failed to properly perform this yardstick analysis, the tenant was denied lost profit damages since these damages became purely conjectural.

If you have incurred damages, it is important to consult with counsel to ensure the damages you have incurred can be sufficiently proven. Whether those damages are lost profit damages or another category of damages, it is crucial to sufficiently prove these damages in accordance with applicable law. Otherwise, you can wind up in the position of not properly presenting your damages at trial. In the case of a business that does not have a sufficient track record to prove lost profitability, a yardstick needs to be established to prove lost profits with a reasonable degree of certainty.

PROVING LOST PROFIT DAMAGES WITH A REASONABLE DEGREE OF CERTAINTY

Posted on October 13, 2013October 13, 2013 by Edward Garber

Lost profit damages are challenging damages to prove, but are an important form of consequential damages that parties seek based on the dynamics of the case. These damages must be proven with a reasonable degree of certainty. The recent Southern District of Florida opinion, Topp Paper Co., LLC v. ETI Converting Equipment, 2013 WL 5446341 (S.D.Fla. 2013), explained:

“Under Florida law, lost profits must be proven with a reasonable degree of certainty before the loss is recoverable. Courts have construed this standard as requiring that the mind of a prudent or impartial person be satisfied that the damages are not the result of speculation or conjecture. In unproven businesses such as Topp’s [plaintiff], Florida courts have allowed damages where the plaintiff proves that (1) the defendant’s action caused the damage and (2) there is some standard [yardstick] by which the amount of damages may be adequately determined.” Id. at *7 (internal citations and quotations omitted).

The first step is the causation requirement, i.e., that the defendant’s conduct caused the lost profit damages that the plaintiff seeks.

The second step is the lost profit methodology demonstrating the plaintiff’s lost profit damages with a reasonable degree of certainty and without speculation. Oftentimes parties retain experts to prove these damages based on the yardstick or standard in which the lost profit damages are determined. However, in Topp Paper, the Southern District maintained that both steps “may be satisfied without resort to expert testimony.” Topp Paper, supra, at *8. In this case, the plaintiff, a new business, planned to show lost profits without an expert by laying the foundation for cancelled contracts with its clients that were solely caused by the defendant’s actions. The plaintiff’s position was that but for defendant’s actions, it would have been able to satisfy the contracts with its actual clients and, because it was not able to, it lost the profit associated with those contracts.

On the other hand, the Southern District would not allow the plaintiff to prove its lost profit damages through income projections by comparing projected income with actual income to assess lost profits. The reason is that establishing lost profit damages through projections would be purely speculative, especially considering the plaintiff’s business was a new business without a history of profits.

In Topp Paper, the plaintiff could be in a position to establish lost profits because it actually had contracts with clients that had to be cancelled due to the defendant’s alleged actions. This was vital because the plaintiff could establish lost profits without the need to retain an expert. However, what if the plaintiff, as a new business, did not actually have cancelled contracts? It would not be able to prove damages through income or profit projections. In this scenario, the plaintiff would need to establish some yardstick to prove its damages with a reasonable degree of certainly. One yardstick could be the plaintiff’s past business and profit history. A plaintiff’s accountant or financial officer could assist in this methodology / calculation (although, if possible, it helps to have this supported by an expert). However, as a new business, the plaintiff did not have a business history. The other way would be to find a comparable business with a comparable business model as the yardstick to establish lost profits. This should require expert testimony and it will be important to work with the expert and cross-examine the expert to flesh out any speculative portion of the yardstick.

The bottom line is that lost profit damages are challenging and require a game plan that will be used to support (1) causation–that the defendant’s action caused these damages and (2) the standard or yardstick that will be utilized to support lost profit damages. A new business will likely have a different game plan than an established business unless there is documentary evidence (such as in Topp Paper) that the business had actual clients that would have been serviced but for the defendant’s actions. Also, knowing that income projections or pro forma profit and loss statements will be deemed speculative, getting an expert involved sooner than later is important to assist with establishing the yardstick or methodology that will be used to prove lost profits with a reasonable degree of certainty.

For more information on lost profit damages, please see https://floridaconstru.wpengine.com/the-difference-between-lost-profit-and-loss-of-use-damages/