When business lawyers evaluate the merits of bringing a lawsuit, one of the first questions to ask a client should be “what are the damages?” Many times, in business litigation cases, business owners want to seek recovery of lost profits with a very optimistic view of what is recoverable in a case. In such cases, the next question to the client should be “how do we prove the damages.”
When I consult with a new client that wants to bring a claim in court for lost profits, I will often ask the client to articulate how he or she would go about proving the lost profits. There are no clear, bright line tests in Connecticut for what is or is not recoverable for lost profits. Instead, attorneys are guided by the general law on lost profit damages and case precedents.
In Connecticut, the plaintiff bringing the case bears the burden of proving lost profit damages by a preponderance of the evidence. When lost profit damages are available, the general standard is that a plaintiff must prove the damages with reasonable certainty. Difficulty in establishing damages is not necessarily a bar to recovery and mathematical exactitude is not required. Nevertheless, the facts and evidence must permit the trier of fact to form an objective basis to award damages, not merely speculation or subjective belief. Basically, this means that the plaintiff has to provide evidence to support the claim for damages, not merely a subjective belief or speculative theory.
In the case of a new business venture, lost profit damages are available if a plaintiff can prove the damages with reasonable certainty. Of course, proof of lost profits damages for a new business likely will require some creativity and perhaps an expert to provide the necessary proof. The reason is that there is a lack of history of profits in the business so it may be difficult to project what would have happened in the future. As a result, courts typically will look for more evidence from the new business plaintiff than an established business.
A recent appellate court case in Connecticut pointed out that the evidence in the case of a new business will often have to focus on the likelihood of whether the new business would have succeeded including an evaluation of factors such as business climate, business planning, experience of the business owners, and the success of similar businesses. An expert may be necessary to help with proof of lost profit damages. Simply providing a subjective belief without documentation or statistical analysis may fall short of the required proof.
Here are some instances where a new business satisfied the required proof for lost profit damages: (1) statistical analysis of future profits deemed reliable by the court; (2) expert testimony including an analysis based on similar new businesses; and (3) expert testimony based on relevant industry models for profits. It is important to note that expert testimony alone will not necessarily suffice to prove damages. A damages expert likely will face a reliability challenge from an opponent. Once challenged in court, an expert’s methodology on determining lost profits must be deemed reliable before the testimony is permitted. An expert’s subjective opinion alone, or opinion based on speculation, will not satisfy the standards for admissibility.
The take away here is that lost profit damages are available to a new business venture. However, the level of proof required to recover such damages likely will be more difficult than for an established business. Subject belief and speculation by the business owner as to the probable success of the business will likely fall short of the required proof. A plaintiff considering a claim for lost profit damages for a new business venture may want to bring in an expert to evaluate the case and remove the damages from the realm of speculation.