Tag: lost profits

Lost Profits and the ‘New Business Rule’ – A Case Snapshot

The Northern District of Illinois recently denied a foreign truck parts supplier’s claim for lost profits in a contract dispute involving an Illinois-based global truck manufacturer.  In doing so, the court expansively applied the “new business rule” to the plaintiff despite its forty-year history in the automotive parts industry.

In Clutch v. Navistar, 2015 WL 1299281 (N.D.Ill. 2015), the plaintiff parts supplier sued the manufacturing giant for breaching an agreement to help plaintiff unload a multi-million dollar surplus of clutches that plaintiff made for the defendant under a cancelled supply contract.  The plaintiff alleged that defendant didn’t adhere to its promise to help plaintiff market the unsold clutches.

The court granted summary judgment for the defendant since the plaintiff failed to prove damages under Illinois contract law.

The reasons:

An Illinois breach of contract plaintiff must show (1) the existence of a contract, (2) performance by the plaintiff, (3) breach by the defendant and (4) resulting damages.

Damages don’t have to be shown with laser-like precision.  Instead, a plaintiff must show a “reasonable basis for computing” the damages and must show lost sales damages to a “reasonable degree of certainty.”  Otherwise, a plaintiff’s recovery is limited to nominal damages (typically, $1).

Lost sales damages generally require expert testimony since those damages usually require “specialized knowledge” derived from detailed financial and marketing analyses.  If a plaintiff offers “lay” lost profits damages testimony (“I would have earned $1 million in sales if the defendant didn’t breach the contract”) without any sufficient foundation for that testimony, the testimony can be excluded under Federal Rule of Evidence 701.

Lost profits are especially hard to prove with new businesses that lack a financial track record with which to gauge estimated profits.  Under the new business rule, a new business or, like here, an established business selling new products, can’t recover lost profits.

In this case, the plaintiff’s procurement director testified via affidavit of the millions in lost profits damages and ancillary expenses.  The court found that the testimony lacked foundation.  The director never conducted a market analysis and failed to provide evidence that established a basis for his lost sales testimony.  As a result, the testimony was viewed as conclusory and stricken by the court.

The court also found that the new business rule defeated plaintiff’s damages.  While plaintiff had a decades-long history in making and selling truck clutches, the specific clutches that were the subject of the suit were a different kind than plaintiff usually makes and sold under a different brand name.  Because the plaintiff hadn’t previously supplied the clutches that were specific to the suit, the court viewed the plaintiff as new and found the plaintiff lacked a sufficient sales history for the clutches to support lost profits damages.

Finally, the court rejected the plaintiff’s claim for over $1M in expenses incurred including inventory, storage and insurance payments for the clutch surplus.  The court viewed these expenses more akin to “ordinary overhead” charges that would have been incurred in the ordinary course of plaintiff’s business.  Since overhead, by definition, is incurred regardless and not the result of a specific contract breach, the plaintiff was precluded from recovering the expense damages.  As a result, the plaintiff’s expenses weren’t imputed to the defendant.

Afterwords:

Even a well-established business can be considered “new” if the particular product or market is one the business hasn’t previously serviced

On summary judgment, the proverbial put up or shut up litigation moment, a respondent must do more than offer conclusory affidavit testimony.  Here, the plaintiff’s principal’s failure to conduct a market analysis for the clutch surplus was fatal to the plaintiff’s breach of contract suit.

Lost Profits and Breach of Contract Damages: Illinois Law

imageIn Santorini Cab Corporation v. Banco Popular, 2013 IL App (1st) 122070, the plaintiff cab company sued a bank for breaching two contracts to transfer taxicab medallions totalling $96,000 ($48,000 each).  The plaintiff sought damages for lost profits (profits it would have earned had the bank transferred the medallions) and the increased value of the medallions as of the trial date.

After a bench trial, the court entered judgment for the cab company but in an amount (about $40,000) much lower than the company sought.  The trial court previously entered partial summary judgment for the bank and excluded plaintiff’s lost profits evidence as a discovery sanction.  The court also ruled that the proper measure of plaintiff’s damages was the difference between the medallions’ contract price and their value on the date of breach (2007); not on the trial date (2011).  The cab company appealed.

Holding: Trial court affirmed.

Reasons: The trial court properly barred the plaintiff from offering lost profits evidence.  The Court noted that plaintiff repeatedly failed to respond to defendant’s discovery requests for information to support plaintiff’s claimed damages.

Lost Profits Standards and Discovery Sanctions

Under Illinois law, lost profits can be awarded as long as there is a sufficient basis to estimate them with  reasonable certainty.  Lost profits won’t be awarded where the proof is remote or speculative.  (¶¶ 18-19).  The plaintiff has the burden of proving lost profits by presenting a reasonable basis for their computation.  A common source of lost profits evidence is a plaintiff’s track record of past profits as a gauge of what future profits would have been (if there was no breach of contract).

Here, the plaintiff didn’t meet its burden of proving lost profits.  Since the plaintiff failed to comply with defendant’s lost profits discovery on multiple occasions, the trial court properly struck plaintiff’s damage claims as a discovery sanction under Supreme Court Rule 219.

Rule 219 gives the trial court wide latitude to impose discovery sanctions, including barring a non-complying party from offering evidence on issues sought by the ignored discovery requests.  (¶¶ 21-22).

Contract Damages – From When to When?

The Court also affirmed the trial court’s damage award of $37,550 which consisted of the difference in the (a) contract price of each medallion ($48,000) and (b) the medallion’s value on the date of breach ($66,775).

Breach of contract damages seek to put the plaintiff in the position he would have been in had the contract been performed, but not in a better position.  Contract damages should not provide plaintiff with a windfall.  (¶ 26).

In a personal property case, the measure of damages is the difference between the contract price and the market price of the item at the time of breach.  ¶ 27. But where there is no market for the item, this rule doesn’t apply.  Instead, the damage amount is “actual loss” to the buyer as shown by the  evidence.  (¶¶ 26-27).

Here, there was a definite market for cab medallions.  The evidence was that there were thousands of cab medallions bought and sold over a 3 1/2 year period preceding the trial date and several medallions were sold the month of the bank’s breach.  The Court found that the trial court properly averaged the sale price of medallions sold in Chicago during the month and year of breach (Feb. 2007) and sustained the lower court’s damage award for the plaintiff.

Take-aways:

Santorini provides a nice gloss on contract damages and lost profits requirements in the personal property context.  It clarifies that contract damages involving personal property  are measured on the date of breach; not a later trial date.  This case also shows how crucial it is to timely and properly answer discovery requests on damages issues; especially if you have the burden of proof at trial.

It’s crucial for parties to vigilantly update discovery responses – especially on damage computations – so they aren’t barred from offering damages evidence at trial.