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.