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.