Know Your State: New Businesses or Product Lines May Face Stricter Bar for Recovery of Lost Profits
Lawsuits filed by businesses often include a damage claim for lost profits. However, there are potentially drastic differences in jurisdictions’ treatment of lost profits, especially where the business seeking lost profits is either new or the damage is to a new product line or operation that does not have significant financial history. Some states are extremely hostile to such claims or apply a heightened standard of evidence, such as “reasonable certainty,” which can make it nearly impossible to establish lost profits for a new business, product, or operation. And yet others use a more subjective approach where the length of operations is just one factor considered when looking at lost profit claims. If lost profits are important to your claim for damages, it is important that you understand the applicable state law prior to filing a lawsuit, as this information should significantly inform your litigation strategy or impact your decision to litigate at all.
There are some states, such as Georgia, Illinois, Ohio, and Virginia, that still follow the common law approach, which categorically bars new or unestablished businesses from collecting lost profits because lost profits of a new business are simply too speculative for recovery.
For example, in Molly Pitcher Canning Co. v. Central Georgia Ry. Co., the Molly Pitcher Canning Co. sued the Central Georgia Railroad seeking, in part, the lost profits it claimed it incurred following a train collision that forced it to halt canning operations. Regarding one of its newer canning operations, the Court held that, because the operation was in its “incipiency, . . . there plainly exists no basis upon which a reasonably accurate computation of lost profits might be made . . . .” Thus, the Court refused to consider that new operation when determining the total lost profits.
This case exemplifies the nearly impossible hurdle imposed on a new business or new product lines when seeking lost profits in those states that follow the common law approach.
No Bar to Recovery, but Stricter Standard
In other jurisdictions, such as New York and Missouri, although there is no complete bar to recovery of lost profits for a new business, Courts hold a new business to a stricter standard or higher burden of proof than that applied to an established business. As the Eighth Circuit Court of Appeals noted in Handi Caddy, Inc. v. American Home Products Corp., in Missouri, “[a] new business labors under a greater burden of proof in overcoming the general rule that evidence of expected profits is too speculative[;] . . . [i]t does not follow, however, that so-called ‘new’ business can never recover lost profits . . . .”
In New York, however, this use of a stricter standard renders it nearly impossible for a new business to establish sufficient proof to recover lost profits. As one New York Court recognized in Kenford Co., Inc. v. Erie Cnty:
Indeed, it is difficult to conclude what additional relevant proof could have been submitted by [Plaintiff] in support of its attempt to establish, with reasonable certainty, loss of prospective profits. Nevertheless, [Plaintiff]’s proof is insufficient to meet the required standard.
Fortunately, a majority of jurisdictions have taken the more modern and less draconian approach of creating a subjective rule for determining whether a new business may collect lost profits. Under this approach, the age of the business is only one factor to be considered in determining whether lost profits have been demonstrated with certainty. In such jurisdictions, a party may use evidence of a business’s subsequent operations, operations of similar businesses in the same locality, as well as market surveys, previous business experience, and expert testimony to calculate lost profits with reasonable certainty.