Lost profits claims fail to meet New York’s strict standard

BVWireIssue #208-2
January 15, 2020

economic damages & lost profits
breach of contract, expert testimony, economic damages & lost profits, projections, reasonable certainty, lost business value

Establishing lost profits under New York law can be difficult. The evidentiary burden is high, particularly when the plaintiff is a new business, and experts relying merely on sales and revenue projections are not providing convincing evidence, as several damages cases make clear.

'Reasonable certainty': Most recently, in IceMOS v. Omron Corp, the plaintiff, a business selling special semiconductor transistors, sued the defendant over the alleged breach of a supply agreement that was subject to New York law. The plaintiff claimed various types of damages, including lost profits.

New York law requires the plaintiff to show that lost profits are foreseeable and “within the contemplation of the parties at the time the contract was made.” Moreover, the plaintiff has to establish lost profits with reasonable certainty. A new business or one entering a new market does not have “a reasonable basis of experience” and therefore is subject to a stricter standard, the court explained. It said that projections of future profit “typically will not be enough to establish reasonable certainty.” The plaintiff has to show a history of profit or an analysis that compares the new business with other comparable and profitable businesses. The court found the plaintiff was a new business as it was trying to enter a new market. Its lost profits calculation was solely based on projections from the company’s president and two experts. Even if the court allowed that this was not a new business, the plaintiff would fail the reasonable certainty test, the court found. The experts’ opinions were “laden with assumptions,” and the plaintiff made no attempt to “connect any quantifiable data to its projections of lost profits.” The court struck the lost profits claim.

Similarly, in the 2018 case MYImagination v. M.Z. Berger & Co., centering on a new stationery company, the court found lost profits were not available to the plaintiff. For one, the plaintiff initially conceded that it was a new business with no track record and that lost profits or lost opportunities damages would be speculative. The plaintiff later tried to walk back these statements but failed given the record. The court also found flawed the plaintiff expert’s methodology for calculating lost profits, noting he seemed unaware of key facts and relied blindly on statements from the plaintiff as to possible sales and profit margins.

Then there is the Washington v. Kellwood case, a protracted litigation involving a startup that wanted to enter the compression sportswear market and made a license agreement with the defendant to market and promote the plaintiff’s products. The relationship broke down, and the plaintiff sued, alleging breach of contract. To calculate lost profits, the plaintiff’s expert performed a yardstick analysis in which he compared the plaintiff, a new business with less than $200,000 in sales during its brief existence, to Under Armour, the leader in this market, which at the relevant period had sales of between $49.5 million and $195 million. The expert, without proof, maintained the plaintiff’s revenue would have been 50% of Under Armour’s revenues but for the defendant’s breach. A jury awarded the plaintiff $4.35 million in lost profits, but the district court vacated the verdict, ultimately awarding the plaintiff $1 in nominal damages. The 2nd Circuit later agreed with the district court that the plaintiff “failed to proffer evidence from which lost profits could be established with reasonable certainty.” The 2nd Circuit said the plaintiff’s assumptions that, but for the defendant’s breach, “a commercial would have aired and consumers would have purchased millions of dollars in [the plaintiff’s] products were ‘purely hypothetical.’”

A digest of IceMOS Tech. Corp. v. Omron Corp., 2019 U.S. Dist. LEXIS 196610, 2019 WL 5960069 (Nov. 13, 2019), and the court’s opinion, will be available soon at BVLaw.

Digests and court opinions for My Imagination v. M.Z. Berger & Co., 2018 U.S. Dist. LEXIS 184346 (Oct. 29, 2018), and Washington v. Kellwood Co. (IV), 2017 U.S. App. LEXIS 21871, are currently available to BVLaw subscribers, as are digests of earlier rulings in the Kellwood case.

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