Lost Profit Damages in Connecticut for New Business Ventures

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.

 

 

 

Forensic Accounting in Connecticut Business Litigation

Forensic accountants are frequently necessary in business litigation.  This is my next installment of the "ask the experts" series.   Stephen Pedneault is an expert in forensic accounting.  He is the principal of Forsenic Accounting Services.  Here is my interview with Stephen.

Disclaimer:  I am not endorsing any experts that I feature on this blog or the opinions expressed.  I am posting these interviews to offer insights from the various professionals that get involved with business litigation cases.

What are the biggest issues you see now with respect to forensic accounting and business litigation?  Probably the biggest issue we face in every case regardless of the venue it’s in is the availability of records. We can pretty much figure out anything if we have records available, computerized records or paper records. The biggest challenge for us is getting access to them and actually getting the opposing side to produce them. That’s our biggest stumbling block in pretty much every engagement we do. 

If a business owner suspects fraud, how soon should they come to you or an attorney to deal with that issue? 

Well as soon as possible. We get a lot of calls from exactly the audience you described and one of the first things we have to ask them is you know do you have counsel, do you have an attorney that’s either representing you as a shareholder or a partner or a member, or does the LLC or the entity have counsel because before I hear too much of the story there’s no privilege between an accountant and a client. So I don’t want to hear too much, what I want to make sure is as early as possible, I want to be involved early, but I got to make sure that before I’m involved early on there’s an attorney involved so we can establish some attorney/client privilege and then we can get retained directly by counsel to be part of that privilege and then we can start talking about what are the issues and concerns. 

What can business owners do to stop or detect or prevent fraud amongst it’s employees?   When we’re talking employee embezzlement, there’s really only three things that are available. You can prevent certain things, you can detect certain things, and then you can insure against the things you didn’t prevent and detect. Certainly setting up the controls to prevent as much as possible, so employees not signing checks, having business owners involved in the signing of checks, not issuing credit cards and bank cards to employees, limiting what they have access and opportunity. That’s on the prevention side but you can’t prevent everything from occurring so on the detection side, starting with the basics, the owners looking at the bank statements every month, looking at the cancelled check images, looking online at the banking activity, looking at accounts receivable, knowing who owes what balances and are we getting paid, managing the cash flows. These are all important basic controls that over time probably start out as the owners are doing but then people get busy and they hire key people and they delegate the responsibilities and once again you know down the road that key employee, and it’s almost always the key employee that we depend on, has taken advantage of the situation and started either stealing the checks or paying themselves extra payroll or stealing the deposits.  

 What kinds of problems have you come across that have been created in terms of your investigations of fraud brought about by smartphones and portable devices?

Well there is two clear trends. One is that our evidence which was already computerized is now becoming wireless. The evidence meaning the transactions and also where the records are maintained. This whole concept of cloud computing, businesses are putting all their business records no longer on their servers, their putting it out on a server somewhere in the world. So they can access it anywhere on the internet. The problem is gaining access to that evidence is going to be a challenge because nobody really knows where it’s hosted. It could be hosted next door, it could be hosted in Nigeria. So getting access to the ultimate records of where the company’s accounting system is maintained is a challenge. Using cellular devices to do the banking there is no history on any laptop servers or computers, it’s all wireless. So the whole nature of gaining evidence is changing and becoming a huge challenge for us just to get access to it. 

What records do you look to get access to from an audit perspective and also what form of the records do you like to receive it in?

That answer depends on what the context is for the forensic accounting. Ultimately we want to see the underlying reliable records: bank statements, cancelled check images, deposit details, credit card statements. We like the general ledgers, we like the computerized records but they can all be manipulated so we like to get, we’d like to get the records but we’d like to be able to corroborate them to underlying source third party records that are ultimately reliable and whether we get them in computerized form, we get them in images, we get them in paper, it doesn’t really matter to us, we’re used to dealing with boxes and boxes of records.

Computer Forensics In Business Litigation – Ask The Expert

Many business litigation cases require experts in various fields.  I am going to feature experts on this blog in an "ask the expert" series of interviews.  Disclaimer:  I am not endorsing any experts that I feature on this blog or the opinions expressed.  I am posting these interviews to offer my readers some insights from the various professionals that get involved with business litigation cases.

Monique Ferraro is an expert in computer forensics and the principal of Technology Forensics, LLC.  She is also an attorney. The following is my recent interview with Monique. 

Q: What issues do you see in business disputes involving computer forensics:

 

A: Mostly, we see parties seeking email and deleted email. Increasingly, lawyers are asking for email and all electronically stored information containing metadata in their discovery requests. When they don’t get what they asked for initially, or if the party is not able to produce the information on their own, they call us. We figure out the best way to obtain the information requested without disrupting the business process while maintaining the integrity of the potential evidence and providing a solid chain of custody.

As far as the types of cases, we see computer forensics being requested in every type of litigation, from contract disputes to debt collection, employment litigation and even motor vehicle accidents.

 

 

Q: Many people think that when they delete computers docs and emails, its deleted.  In laymans terms, what really happens to it?  Can it be recovered?

 

A: It’s important to remember that computers were designed by engineers, not lawyers. Lawyers are concerned with precision of language. If you say you deleted something, then you deleted something. It’s gone. Unrecoverable. Engineers think in terms of efficiency.

 

When computer systems were designed, the engineers who developed them figured it would be more efficient to simply mark the space where information is held as available for reuse rather than truly deleting the file. The process uses less energy and is more efficient than truly deleting the file.

So, when we hit the ‘delete’ key, information isn’t deleted.

 

What happens is that the computer software goes to the table that keeps track of all the files and where they’re located and makes a check mark indicating that the space where that file is kept can be used for something else. Next time the computer goes to save a file, it can save it to this newly open space. However, because the size of computer storage is so large now, the space left open by the ‘deleted’ file is rarely reused. The original file stays there, lying in storage but with the space marked as available until it is either overwritten or ‘wiped.’

 

‘Wiping’ refers to really deleting a computer file. To really delete a computer file by wiping, a process is used that both marks the space as available and overwrites the space. Usually, the space is overwritten several times in order to obliterate any data remaining.

 

Because deleted data isn’t really deleted in the true sense unless it is wiped, most of the time deleted files can be retrieved and fully restored. That is true for files that have been consciously saved as well as data that has not been saved is held in temporary storage, as with Internet data.

 

Q: What are you seeing in the courts in terms of road blocks to getting access to servers and hard drives?

 

A: Most of the time, courts have been quite willing to grant discovery of electronically stored information. It gets tricky when litigants ask for a specific file or folder on a network or a targeted hard drive. Parties resist requests that involve having the opposing party’s expert on site, which is what litigants often request when seeking a specific storage device, folder or file. Of course, few businesses welcome the opposing party coming in and accessing their systems and data.

 

The objections are usually based upon keeping their business and client data secure and confidential and preventing disruption of their business. If there haven’t been discovery abuses and the party is trustworthy, the court usually allows the business to hire its own expert. To validate the acquisition of potential evidence, there are several methods that can be used, from documenting the process in writing to videotaping it, that can minimize the intrusion into business information and keep business disruption to a minimum.

 

Q: How do attorneys get access to emails that are on ISP accounts like Comcast, or third party servers like Gmail?

 

Most ISPs require a subpoena or court order to release information. It depends on the service provider, the information you’re looking for and who you’re requesting the information about. It’s best practice to contact the legal department of the ISP and ask them what they need and how they want it in order to get the results you seek. It may be that you’re legally entitled to the information, but if you don’t request if in the form that the ISP wants you to ask it in and from the person they designate, you won’t get what you’re looking for. It’s important to bear in mind that quite a lot of Internet service provider information is held in storage for a limited amount of time and that by the time there’s a lawsuit pending, the information is long gone.

 

Q: What issues have you seen with forensics and social media sites like Facebook, MySpace and Twitter?

A: Usually, we’re asked to mine data from social media sites as part of the whole process of investigating a specific person or case. It’s often an adjunct to the larger inquiry that helps to establish that we have the right information or to identify someone a target is communicating with. Of course, in some cases, the use of the social media is an issue in a case, and gaining the posting history is the challenge for the forensic examiner.

 

Q: Is it a good idea to work with an attorney early in an investigation?

 

A: We prefer to contract with the attorney representing the business because that’s the best way to protect our work product from being discovered by the opposing party. Attorney-client privilege extends to us if the attorney contracts with us. That provides the business with the same sort of protection of confidential information that they enjoy in their relationship with their attorney.

Q: What can someone in a business dispute do to preserve critical ESI (electronically storied information) when they know they are going to be in a lawsuit

 

A: Every business will be involved in litigation at some point. As with all things, planning saves a lot of labor and expense. Every business today holds at least some electronically stored information- email, accounting information, transaction information. Businesses need to know what electronic data they have, who accesses it and where it’s stored. A big issue we see is that electronic data is being held on business-owned as well as personally owned resources such as smart phones and laptops. It’s essential for the business owners to know where their data are stored so that they can ensure its preservation and production in the event of litigation.

  

 

Q: What mistakes do people make before business disputes that end up hurting them after the case is in court?

 

A: By far the biggest mistake people make is deleting electronic records. The fundamentals of litigation have changed. Whereas it was once possible to shred documents (which was spoliation, but was harder to prove), electronic storage of data makes it very difficult to destroy information without leaving behind a trail of evidence documenting the destruction. 

 

Q: What if you do not control the servers, infrastructure, how can you save critical ESI for later use in a lawsuit:

 

A: If you don’t control the storage media, you need to have your attorney issue a letter that informs the other party of your intent to sue and tells them of their duty to preserve relevant data. It’s best if the party who doesn’t have access has a good understanding of where the data are maintained so that discovery requests can be crafted intelligently. Without knowing how the data are stored and where, it’s more difficult to know whether you’re getting all the information when the other party produces it.

 

The good news (sort of) is that if a party knowingly or intentionally destroys electronically stored information, there are pretty harsh sanctions and a separate cause of action available to the person harmed by the loss of data. The intentional destruction of potential evidence is called spoliation. It’s a fairly easy proposition for a digital forensics examiner to determine if spoliation of electronically stored information has occurred and document it. Armed with the proof that spoliation occurred, courts have ordered pretty severe sanctions that range from ordering an adverse inference about the evidence (meaning that the jury should assume that the evidence was damaging) to default judgments. Money damages have also been awarded, some going into millions of dollars. In Connecticut, spoliation of evidence is a separate civil cause of action for which damages can be awarded.