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.

 

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