An Outlier No More?: New Jersey Supreme Court Considers Overturning “New Business Rule”
On April 26, 2022 the Supreme Court of New Jersey heard arguments about whether New Jersey should retain the judicially created “new business rule”. Since 1936 the rule has held that in the context of calculating damages “prospective profits of a new business are considered too remote and speculative to meet the legal standard of reasonable certainty.” RSB Lab. Servs., Inc. v. BSI, Corp. This case is interesting for aggrieved business litigants as well as interested observers of the appellate process.
The case before the Court, Larry Schwartz v. Nicholas Menas, Esq. involved malpractice allegations against Defendants Menas and his law firm. Plaintiff Schwartz, who had no experience in construction or real estate development, purchased properties in Monroe Township and Egg Harbor Township, NJ with plans to develop them. He alleged that his attorney Menas improperly arranged for the Monroe Township land to be rezoned for affordable housing, which eventually resulted in the sale of his property. He also alleged that Menas improperly allowed another individual to take over the Egg Harbor Township project. His complaint alleged conspiracy, fraud, conversion, and tortious interference. Schwartz sought damages including lost profits. To support his damages claims, the plaintiff submitted expert reports that assessed the profits that would have been earned in the event that his development goals and had not been frustrated by Defendants’ alleged negligence and breach of fiduciary duty.
Defendants filed motions to bar the expert’s testimony under the new business rule, which was created in the 1936 case Weiss v. Revenue Bldg. & Loan Ass’n, In Weiss the Court of Errors and Appeals held that:
There is a well-established distinction, in respect of the ascertainment of future probable profits, between a new business or venture and one in actual operation. In the first, the prospective profits are too remote, contingent, and speculative to meet the legal standard of reasonable certainty; while in the second, the provable data furnished by actual experience provides the basis for an estimation of the quantum of such profits with a satisfactory degree of definiteness.
In an unpublished opinion, the trial court in Schwartz excluded plaintiff’s expert report and dismissed his case on the basis of the new business rule.
However, the New Jersey Appellate Division has repeatedly recognized that the holding in Weiss is no longer the majority position in the United States. See, ex. RSB, Bell Atl. Network Servs. v. P.M. Video Corp., V.A.L. Floors, Inc. v. Westminster Cmtys., Inc.
In the following appeal, a three judge Appellate Division panel cited the instances above in which the Appellate Division had previously suggested that the new business rule is out-dated, as well as the Restatement (Second) of Contracts, § 352,which notes the majority rule that even if a business is new or speculative “damages may be established with reasonable certainty with the aid of expert testimony, economic and financial data, market surveys and analyses, business records of similar enterprises, and the like.”
Despite this analysis, Appellate Division applied the rule nonetheless because “until the Supreme Court says otherwise, the new business rule remains the law in this State.” Thus “[b]ecause Schwartz was unquestionably a new business within the intendment of the governing case law, his claim for lost profits was not permitted by the new business rule.” The appellate court, in other words, made clear that it disagreed with the new business rule but was nonetheless bound to apply it.
Plaintiff accepted this implicit invitation to appeal to the Supreme Court, and the Supreme Court granted certiorari in April 2021. Regardless of whether or not the New Jersey Supreme Court opts to retire the new business rule, the history of this case provides a model of how courts can both remain faithful to the law as it exists and open to considering whether changes are necessary.