PROVING & DEFENDING LOST PROFIT DAMAGES

imagesI 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 1st 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

imagesIt’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. 4th 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.

 

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.

 

 

A LANDLORD’S REFUSAL TO TIMELY PERFORM NEEDED REPAIRS / MAINTENANCE ITEMS

imagesWhat happens if the landlord refuses to timely repair defects or perform necessary maintenance items that it is otherwise responsible to perform per the lease? What happens if the landlord makes rental space untenantable? The case of Katz Deli of Aventura, Inc. v. Waterways Plaza, LLC, 38 Fla. L. Weekly D2511b (Fla. 3d DCA 2013), illustrates the issue of “constructive eviction” and a tenant’s recourse against its landlord including its recovery of lost profits when a landlord does not timely implement needed repairs that impacts a tenant’s business.

 

In this case, a successful deli in Pembroke Pines opened a new location in a shopping plaza in Aventura. After a couple of years of growing revenue, the deli leased larger space within the same Aventura plaza. The lease for the larger space was for five years, with 3% annual rent increases, and with three lease renewal options for five-year terms. Of importance to this case, the landlord was required to make all of the required repairs to the shopping plaza’s structure and roof.

 

After the execution of the lease, the shopping plaza was purchased by the defendant-landlord (which assumed the deli’s existing lease). The new landlord learned exercising its due diligence of inspecting the plaza’s condition prior to purchase that the roof needed to be replaced (re-roofed). Yet, even though it purchased the plaza, it did not timely replace the roof. As a result, leaks started at the deli and became progressively worse resulting in mold and a musty odor in the deli. Naturally, this condition caused the deli to lose business and customers and reached the point where the deli could not continue to operate as a restaurant. Then, suspiciously, after the deli vacated the space, the landlord decided to re-roof the space and found new tenants that leased the space at a much higher rental rate.  The deli sued the landlord for breach of lease (breach of contract) and constructive eviction.

 

The deli argued that the landlord constructively evicted it in order to capitalize on substantially higher rental rates because the agreed-upon rental rate in the lease that the deli entered into with the former landlord (and that the defendant assumed when it purchased the plaza) was well below market rate.

 

At a bench trial, the deli argued that its damages consisted of lost profits. It utilized an accounting expert to prove lost profits. The landlord contended that lost profits was not the proper damages methodology and the deli should have proven its damages by analyzing the market value of the deli since the deli was destroyed. The reason the landlord argued this is because the deli put on no evidence as to these damages (meaning, if this was the proper methodology, the deli would be entitled to no damages because it failed to put on any evidence of these damages). The trial court found that the deli was entitled to lost profits but only awarded lost profits through the end of the initial lease term, and not the three five year lease renewal options.

 

On Appeal, the Third District Court of Appeal maintained:

 

A constructive eviction constitutes a breach of the covenant of quiet enjoyment. Furthermore, Waterways’ [landlord] grossly negligent failure to repair the roof as required by the lease was a breach of its contract. In an action for breach of contract, the goal is to place the injured party in the position it would have been in had the other party not breached the contract so as to give the aggrieved party the benefit of its bargain. However, a successful plaintiff is not entitled to be placed, because of that breach, in a position better than that which he would have occupied had the contract been performed. The injured party may only recover those damages that naturally flow from the breach and can reasonably be said to have been contemplated by the parties at the time that the contract was made. It is not necessary that the parties have contemplated the exact injury that occurred as long as the actual consequences could have reasonably been expected to flow from the breach.”

Waterways Plaza, supra (internal citations and quotations omitted).

 

When dealing with the issue of a landlord constructively evicting its tenant, there are cases that hold that the measure of damages is the market value of the business as of the date of loss when the business is completely destroyed. This is why the landlord argued that this should have been the damages methodology employed by the deli. “However, where, as here, a business [the deli] continues after suffering from an act of negligence the business is entitled to recover the lost profits attributable to defendant’s [landlord] negligent act, but cannot recover both lost profits, and the market value of the business.” Waterways Plaza, supra (internal quotations omitted).

 

The deli was not completely destroyed when the leaks started. Rather, the leaks progressed over a period of time until the space was untenantable. Largely for these reasons, there was no bright line test as to when the deli was completely destroyed. As the Third District explained: “Awarding market value for a business that has been slowly reduced to nothing due to a defendant’s breach, thereby leaving the plaintiff without an adequate recovery, would be completely inequitable, and is not the law in Florida.” Waterways Plaza, supra.

 

Since lost profits was the proper damages methodology, the Third District next analyzed whether the deli sufficiently proved such damages during the trial.

 

Lost profits are recoverable regardless of how well established a business is so long as there is some ‘yardstick’ by which prospective profits can be measured.
***
A business can recover lost prospective profits regardless of whether it is established or has any ‘track record.’ The party must prove that 1) the defendant’s action caused the damage and 2) there is some standard by which the amount of damages may be adequately determined.
***
Any ‘yardstick’ used to show the amount of profits must be reasonable, and the loss of the profits as a result of the [defendant's conduct] must be reasonably certain. Lost profits must be established with a reasonable degree of certainty and must be a natural consequence of the wrong. The projected profits cannot be mere speculation or conjecture, but the inability to prove a precise damages amount will not prevent a plaintiff from recovering so long as it is clear that some loss resulting from the defendant’s actions is certain.”

Waterways Plaza, supra.

 

The deli was able to establish a yardstick because it had another location in Pembroke Pines, had success at its former smaller space within the same shopping plaza, and had limited success during the short time it was in the larger space prior to the leaks. Thus, it was able to demonstrate a history of sales that enabled its expert to establish sale projections and projected profit.

 

Even though lost profits was the proper damages methodology, the deli wanted lost profits that extended through all lease renewals. The deli argued it clearly would have renewed the lease based on the success at that location and plaza prior to the leaks, because its rent was well below market rate, and because the successor tenants leasing the same space after the re-roof were still leasing the space close to ten years after the deli vacated the space. Despite this evidence, the Third District held that this was a question of fact to be determined by the trier of fact, and because the fact finder was the judge, the judge’s fact finding will be presumed correct on appeal unless clearly erroneous. Since the trial judge found that lost profits extending beyond the original five year lease term was speculative, the Third District affirmed the court’s fact finding because it was not clearly erroneous.

 

Notably, the deli also tried to foreclose an equitable lien and recorded a lis pendens against the shopping plaza. The deli’s equitable lien theory was based on the following language in the lease: “Tenant shall look solely and only to the Landlord’s interest in the Plaza in the event of any default or breach.” Waterways Plaza, supra. However, the lis pendens was discharged and the equitable lien claim was dismissed by the trial court. The deli appealed this arguing that the dismissal of the lis pendens to foreclose its equitable lien was error. The Third District affirmed the trial court finding that the language in the lease did not give the tenant an interest in the landlord’s property that would entitle it to an equitable lien and lis pendens.

 

This case illustrates options a tenant has when its rental space becomes untenantable, especially due to the landlord’s failure to timely implement or perform needed repairs / maintenance items. This case further illustrates the importance of knowing and proving a party’s correct damages methodology due to a breach.  Also, considering the factual circumstances in lost profit cases, such as this case, and how a party establishes its lost profits provides future guidance to ensure that these damages are proven with their required reasonable degree of certainty!

 

 

For more information on proving lost profits, please see: http://www.floridaconstructionlegalupdates.com/proving-lost-profit-damages-with-a-reasonable-degree-of-certainty/

 

 

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.