When are expectancy damages, including damages for lost profits, reasonably foreseeable and therefore recoverable?

In Stockton East Water District v. United States, 109 Fed.Cl. 760 (2013), a United States Court of Federal Claims engaged in a detailed discussion of the recoverability of “expectancy damages,” a category of damages that includes but is not limited to lost profits. The party seeking expectancy damages must show that the claimed damages were within the realm of reasonable foreseeability at the time the contract was entered into. Actual foresight is not required, and the specific loss need not have been within the contemplation of the parties at the time of contracting. Reasonable foreseeability requires merely that the injury suffered must be one of a kind that the defendant had reason to foresee and of an amount that is not beyond the bounds of reasonable prediction. The breaching party will not be liable for a particular type of loss that was so unusual as not to have been foreseeable.

Distinguishing admissible from inadmissible expert testimony concerning lost profits damages

In Alaska Rent-A-Car, Inc. v. Avis Budget Group, Inc., 709 F.3d 872 (9th Cir. 2013), the Ninth Circuit emphasized the flexibility of Daubert’s reliability requirement and, in a case that had resulted in a jury’s award $16 million in lost profits, rejected challenges to expert testimony as going only to its weight, not its admissibility. On the other hand, in Sargon Enterprises, Inc. v. University of Southern California, 55 Cal.4th 747, 149 Cal.Rptr.3d 614, 288 P.3d 1237 (2012), the California Supreme Court, also discussing the characteristics of expert testimony that is admissible on lost profits calculations, upheld the trial court’s exclusion of expert testimony that, in the court’s view, was based only on “speculative assumptions and circular reasoning.” And in Arthur J. Gallagher v. Babcock, 703 F.3d 284 (5th Cir. 2012) (Louisiana law), a case involving a jury’s award of $1.2 million for profits lost as the result of breaches of non-competition and non-solicitation agreements, the Fifth Circuit closely analyzed both the proper and the “critically flawed” aspects of an accountant’s expert testimony.

What is the role of post-breach market evidence?

Concerning the use and admissibility of post-breach market evidence, the Court of Appeals of Maryland filed an important decision on November 27, 2012, in CR-RSC Tower I, LLC v. RSC Tower I, LLC, 429 Md. 387, 56 A.3d 170 (2012). Addressing a situation in which a jury had awarded over $36 million to developer-tenants in lost profits in connection with the landlord’s breach of ground leases and the resulting failure of a development project. Over a strong dissent, the Court of Appeals held that the trial court had correctly prevented the landlord from introducing evidence of a “cataclysmic” post-breach swing in the real estate market to show that the development would not, in fact, have been profitable. The two dissenting justices argued that the majority’s holding was inconsistent with the Restatement, provided a windfall for the non-breaching party, and placed the breaching party in the position of a guarantor of the non-breaching party’s unrealistic expectations.

New Discounting Theory

In the latest issue of Dunn on Damages—The Economic Damages Report for Litigators and Experts, edited by Robert L. Dunn, an article appears that may overturn a key settled assumption made by experts in discounting future damages to present value. In “Future Damages—Before and After Tax Discount Rates,” by Everett Harry, the author considers the general assumption that if before-tax damages are discounted at a before-tax discount rate and the same after-tax damages are discounted at an after-tax discount rate the calculations will always reach the same result.  He demonstrates mathematically that this is not correct.  The article is a must-read for any damages litigator or expert.  The next supplement to Recovery of Damages for Lost Profits will have a reference to the article.

What are the limits (if any) to the “economic loss rule” restricting recovery of economic damages on tort claims?

The economic loss rule, in one formulation or another, has been adopted in every jurisdiction where the question has arisen whether damages for economic loss can be recovered on a tort claim. But how far does the economic loss rule go?  Two recent cases call a halt to expansion of the economic loss rule.

  • In Sharyland Water Supply Co. v. City of Alton, 354 S.W.3d 407 (Tex. 2011), the Texas Supreme Court called a halt when the intermediate appellate court applied an economic loss rule “that says you can never recover economic damages for a tort claim.” The Court found it necessary to catalog the recognized tort causes of action including, for example, fraud and negligent misrepresentation, that would virtually disappear under this expansive and oversimplified rule.  But the court declined to define the proper scope of the economic loss rule holding only that it did not apply to a negligence claim against a defendant not in contractual privity with the plaintiff merely because the defendant caused a loss not related to its contract with someone else.
  • In Lesiak v. Central Valley AG Cooperative, 283 Neb. 103, 808 N.W.2d 67 (2012), the Nebraska Supreme  Court collected academic and judicial criticism of the economic loss rule.  In contrast to the often-quoted statement that contract law should not drown in a sea of tort, the court remarked that “the doctrine should not be expanded to allow traditional tort remedies to drown in a sea of contract.”  In an action alleging a claim of crop damage due to negligent over-application of herbicide, the court limited the rule to product liability cases in which a breach of warranty was the proper remedy and permitted this action to go forward.

 

How should lawyers and expert witnesses present testimony to regression analysis in proving lost profits damages claims?

ATA Airlines, Inc. v. Federal Express Corp., 665 F.3d 882 (7th Cir. 2011) (Posner, J.), is noteworthy for the extended discussion of regression analysis in the court’s opinion. The court rejected expert testimony to lost profits damages based on regression analysis in a breach of contract action.   It was not enough, the court stated, that regression analysis is an accepted analytical technique; the proponent must also show that the analysis was properly performed.  The court warned that the lawyer for the proponent must be able to understand the testimony and that unintelligible evidence should not be presented to the trier of fact.

How should lost profits damages be proven by use of a “yardstick” reference to plaintiff’s other business locations?

Two recent cases take different approaches in analyzing this evidence—producing very different results. Both are analyzed in the March 2012 supplement to Recovery of Damages for Lost Profits. Gary’s Implement, Inc. v. Bridgeport Tractor Parts, Inc., 281 Neb. 281, 799 N.W.2d 249 (2011), a claim by Bridgeport of breach of its agreement not to compete with Gary’s Implement, concluded that any weakness in the expert testimony arising from the assertion that the data from Bridgeport’s other business locations was not comparable was a matter for the jury to consider. The court affirmed a substantial judgment for Bridgeport on its claim. But in Blinds to Go (U.S.), Inc. v. Times Plaza Development, L.P., 88 A.D.3d 838, 931 NY.S.2d 105 (2011), a claim for breach of lease, the court reversed a multimillion judgment for lost profits in favor of the tenant against its landlord and remanded for a new trial on damages. The court found differences in the locations that the tenant (through its expert witness) used as comparable locations to the leased location in issue. These differences were substantial enough that, in the court’s view, the evidence did not support the jury verdict at trial.

What is required of an expert witness to substantiate testimony to a discount rate used to reduce future lost profits damages to present value?

In Fail-Safe, L.L.C. v. A.O. Smith Corp. 744 F. Supp. 2d 870 (E.D Wis. 2010), the court rejected expert testimony to a discount rate that was only, the court stated, a “bottom line number.” The court concluded that the expert did not substantiate each element of his discount rate conclusion. It appears that expert witnesses do not always explain the basis for each element of their calculations of the discount rate, relying instead on their standing as experts. The strong language in this opinion will no doubt be cited in opposition to future testimony of this kind. This case is analyzed in detail in the March 2012 supplement to Recovery of Damages for Lost Profits.

Can lost profits damages be awarded for breach of a contract to negotiate a future contract?

Bob Dunn thinks this is a terrible idea and many cases agree. But other cases do not. In Columbia Park Golf Course, Inc. v. City of Kennewick, 160 Wash. App. 66, 248 P.3d 1067 (2011), a majority of the court held damages for breach of an agreement recoverable, measured by the value of the “lost asset’ that was allegedly destroyed when defendant repudiated a development option agreement. The value of the asset was proven at trial by discounting the future projected profits from it to present value. A strong dissent would have limited recoverable damages to reliance damages; in the view of the dissent, the result was nothing more than permitting, under a different name, recovery of lost profits damages for breach of an agreement that was never entered into. The case is discussed in detail in the March 2012 supplement to Recovery of Damages for Lost Profits. The supplement and text also collect the important cases on both sides of this hotly debated question.

How does the plaintiff prove that lost profits damages were caused by the wrongful act of the defendant?

Strange to say, this basic question is unresolved by the case law. Intergraph Corp. v. Bentley Systems Inc., 58 So. 3d 63 (Ala. 2010), is an example of a successful approach to the problem by one plaintiff. On Bentley’s claim that Intergraph had breached its agreement to sell software maintenance contracts to Bentley, the court held expert testimony to the causes of the loss was sufficient. Bentley did not have to offer, contract by contract, evidence of the reasons why the contracts were not renewed. Bentley also did not have to rebut all other possible reasons why the contracts were not renewed with Bentley. Intergraph was required to go forward with some evidence that these causes were implicated. This decision is discussed in detail in the March 2012 supplement to Recovery of Damages for Lost Profits. The text collects the important decisions dealing with proof of causation of lost profits — not all of which reach comparable conclusions to Bentley Systems.