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.