Tag: new business rule

Legal Malpractice Claims: Elements and Damages: Illinois Case Snippets (2015)

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Two First District cases – one published, the other not – decided some eight days apart in April 2015, provide good capsule summaries of the pleading and proof elements of a legal malpractice claim in Illinois, the nature and reach of the attorney-client relationship (“A-C Relationship”) and the universe of possible damages that a plaintiff can recover in legal malpractice suits.

The plaintiff in Tuckaway Development, LLC v. Schain, Burney, Ross & Citron, Ltd., 2015 IL App (1st) 140621-U asked for over $1M but was awarded just over $1,000 in a case involving a late-recorded mortgage in connection with a related real estate deal.  Meriturn Partners, LLC v. Banner and Witcoff, Ltd.’s plaintiff (2015 IL App (1st) 131883) fared much better.  There, a jury awarded the private equity firm plaintiff a cool $6M in a case involving an intellectual property lawyer’s misguided advice concerning patents owned by a waste disposal company the plaintiff planned to invest in.

Here are some key legal malpractice points distilled from the two cases:

1/ To win a legal malpractice suit, a plaintiff must prove the existence of an A-C Relationship;

2/ An A-C Relationship requires both the attorney and client to consent to the relationship’s formation;

3/ That consent (to the formation of an A-C Relationship) can be express (by words) or implied (by conduct);

4/ A client can’t unilaterally create an A-C Relationship and his subjective belief that such a relationship exists isn’t enough to bind the attorney;

5/ Where an attorney knows a person is relying on his services or advice, an A-C Relationship exists;

6/ In some cases, third-party non-clients can establish that an attorney owes contractual duties to them (the third parties);

7/ An attorney’s obligations can extend to third-party non-clients where they are intended beneficiaries of the attorneys’ services;

8/ The measure of damages in an attorney malpractice suit are those damages that would put plaintiff in a position he would have been in had the attorney not been negligent;

9/ Legal malpractice damages present a question for a jury and that damage assessment is entitled to great deference;

10/ Absent evidence that the jury failed to follow the law, considered erroneous evidence or that the verdict was the result of passion or prejudice, an appeals court can’t negate the verdict.

Tuckaway, ¶¶ 28-30; Meriturn, ¶¶ 10, 18.

In Meriturn, the court ruled that the IP lawyer’s duties extended to third party investors even though he never signed a contract with them. The key evidence supporting the finding included testimony and e-mails that showed that the lawyer knew that outside investors were relying on his patent opinions and also illustrated some direct communications between the lawyer and the (non-client) third party investors.  

The lawyer’s failure to limit the scope of his representation to the plaintiff investment firm made it easy for the court to find the lawyer’s fiduciary duties extended beyond his immediate client, the plaintiff.  

The court also upheld the jury’s $6M damage verdict in Meriturn against the plaintiff’s claim that it was too low (the plaintiff sought over $23M,)  While the plaintiff sought lost profits (profits lost as a result of the investment going bad due to the bad patent advice), those damages were foreclosed by the “new business” rule.  

Since the plaintiff’s investment in the waste disposal company was a new venture for both the plaintiff and the company, any claimed lost profits were purely speculative and couldn’t be recovered.

Tuckaway’s paltry damages sum awarded to the plaintiff was also supported by the evidence.  There, the lawyer defendant offered uncontested expert testimony that the property that was subject of the late mortgage recording was worth next to nothing since it was already encumbered by a prior mortgage.  

As a result, the jury’s damage amount – some 800 times less than was claimed by the plaintiff – was supported by the evidence.

Take-aways:

1/ An attorney who doesn’t clearly define and limit the scope of his representation can find himself owing duties to third party “strangers” to his attorney-client agreement;

2/ A jury is given wide latitude in fashioning damage awards.  Unless there is obvious error or where it’s clear they considered improper evidence, their damage assessment will be sustained.

 

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 the ‘New Business Rule’ – A Short and Sweet One

Aside from delving into some unique issues that crop up in corporate guaranty suits, Williamson Co. v. Ill-Eagle Enterprises, Ltd., 2015 WL 802250, the case I featured yesterday (http://paulporvaznik.com/business-compulsion-duress-and-guaranties-signed-after-the-underlying-contract/7667) also provides some lost profits essentials adapted to a new(ish) business relationship.

In the case, the home decor designer who vends to large retailers (think Bed Bath & Beyond) countersued against the plaintiff foreign manufacturer for lost profits resulting from defective merchandise shipped by the manufacturer.

The manufacturer moved to dismiss the counterclaim on the basis that the designer’s claimed lost profits were speculative since the designer was a “new business” with a sparse profit history.  The court disagreed and posited some key lost profit rules:

– lost profits can be recovered when they’re proven with reasonable certainty – mathematical certainty is not required;

– the plaintiff seeking lost profits must show a reasonable basis for the computation of the claimed damages;

– damages must be shown with reasonable certainty and shown to have been contemplated of the defaulting party at the time the contract was entered into;

– expert testimony is sometimes considered in a lost profits claim but isn’t required;

– the “New Business Rule” (NBR) precludes lost profits recovery for a new or unestablished business since it lacks a financial track record with which to gauge future profits;

– Illinois extends the NBR to both new businesses and new products;

– courts generally permit discovery on lost profits damages before deeming them too speculative;

– If after discovery, the plaintiff can’t show an established market for a given product or business, a lost profits claim will fail.

Here, the plaintiff designer established enough of a track record to permit discovery on the issue of lost profits.  There was a five-year relationship between the wall furnishings  manufacturer and designer wall furnishings as well as a multi-year history of contracts the designer had with “big box” retailers.

As a consequence, the court held it was premature to dismiss the designer’s counterclaim without allowing the designer to take oral and written discovery to support the damages claim.

Afterwords:

The case presents a useful summary of Illinois lost profits basics in the context of a high-dollar/high-sophistication dispute between two commercial entities.

The New Business Rule (NBR) applies to new businesses as well as new products.  However, despite the newness of a given company or enterprise, courts will allow discovery on the lost profits question.  The longer the parties’ contractual relationship, the less likely the NBR will defeat a lost profits claim.