Lost Profits May Not Be Lost / February 18, 2011
by Jeffrey Huron

Lost profits are net gains made from sales, after deducting expenses.[1] They are recoverable in California if there is sufficient evidence to show with reasonable certainty that, but for the defendant's conduct, the plaintiff would have earned such profits. However, the plaintiff does not have to prove the exact amount of its lost profits.[2]

For an established business, lost profits may be proven from “the past volume of business and other provable data relevant to the probable future sales.”[3] It is more difficult to prove lost profits for an unestablished business. Courts frequently decline to award lost profits for such new businesses because the “absence of income and expense experience renders anticipated profits too speculative to meet the standard of reasonable certainty.”[4]

Nonetheless, lost profits for an unestablished business can be proven in various ways, including with “expert testimony, economic and financial data, market surveys and analyses, business records of similar enterprises, and the like.”[5]  Other evidence relevant to proving lost profits for new businesses includes: (i) whether the business is in an established market; (ii) the plaintiff’s experience in the business he or she is seeking to establish; (iii) the defendant’s own pre-dispute projections (if, for example, the dispute involves the sale of a business); and (iv) the experience of others in a similar business.[6]

If evidence of lost profits includes a comparison to other businesses, those businesses must be sufficiently similar.[7] The comparable businesses must operate “under similar conditions, such as the same area and with the same equipment.”[8] However, what is and is not a sufficiently similar business is not always clear. In one case, Plaintiff, who was prevented from opening several ice cream restaurant franchises, relied on profit-and-loss figures from small ice cream parlors as well as a large restaurant chain.[9] Plaintiff’s expert principally relied on figures from the restaurant chain because it served both food and ice cream. In overturning the award, the court of appeal noted that many restaurants serve both food and ice cream. It found that Plaintiff’s expert failed to establish that the chain’s business model was sufficiently similar to that of Plaintiff’s franchises, and therefore, the expert could not make a meaningful comparison of the chain’s profit-and-loss experience to that of Plaintiff’s franchises.

In another case, the court of appeal affirmed a lost profits award to an insurance provider who was denied access to a preferred provider network.[10] There, Plaintiff’s expert based his lost profits calculation upon the average gross revenue of the top admitted providers in the relevant area and then made adjustments for such factors as expenses and services offered. Defendant argued that the projections were flawed because Plaintiff’s expert did not know the identity and practices of all of the providers on which he based his projections. In rejecting this claim, the court found it was sufficient that (i) the expert knew the name of the top provider with services comparable to those of Plaintiff and (ii) Plaintiff had established it could handle a similar volume of patients as the providers to which it was compared.

At Huron Law Group, we have successfully obtained lost profits for our clients and prevented the recovery of lost profits by our opponents. In our experience, the key to recovering lost profits is obtaining comparable profit-and-loss information from companies with similar business models, size, sales, and capacity operating in the same market and locale. The key to preventing the opposition’s recovery of lost profits is to exclude such evidence by (i) attacking an expert’s assumptions as rooted in speculation and (ii) casting doubt on an expert’s profit-and-loss comparisons as based on dissimilar businesses with better capitalization, management and capacity. One important factor to consider is any barrier to entry, which alone can render any lost profits analysis uncertain.

Our experience includes the recovery of more than $7 million for breach of an agreement to purchase a software company, and the exclusion of evidence of lost profits exceeding seven figures stemming from a failed real estate development.