(Victor M. Metsch is Senior Litigation/ADR counsel at Smith, Gambrell & Russell, LLP. He can be reached at firstname.lastname@example.org. He maintains a website at www.LegalVictor.net and can be found on Twitter @LegalVictor1.)
A recent decision by the First Department reversed an Order of Supreme Court granting a motion in limine to preclude use at trial of expert testimony and “evidence regarding lost profits from international sales.” The decision appears to have opened the door to routine challenges to the conventional legal wisdom on the “[in]admissibility” of proof regarding claims of lost profits by a “new business endeavor” with no “track record” of earnings. Wathne Imports, Ltd. v. PRL USA Inc., 953 N.Y.S.2d 7,2012 NY Slip Op. 07045 (1st Dept. Oct. 18, 2012).
The opinion in Wathne raises the question of whether the seminal decisions of the Court of Appeals in Kenford Company, Inc. v. County of Erie, 67 N.Y.2d 257, 502 N.Y.S.2d 13 (1986) [“Kenford I”] and 73 N.Y.2d 312, 540 N.Y.S.2d 1, (1989) [“Kenford II”] have been overtaken by the subsequent decision of the Court of Appeals inAshland Management Incorporated v. C. Christopher Janien, 82 N.Y.2d 395, 604 N.Y.S.2d 912 (1993) – notwithstanding that the First Department itself followed Kenford I/II in Zink v. Mark Goodson Productions, Inc., 261 A.D.2d 105, 689 N.Y.S.2d 87 (1st Dept. 1999) and Digital Broadcast Corporation v. Ladenburg, Thalmann & Co., Inc., 63 A.D.3d 647, 883 N.Y.S.2d 186 (1st Dept. 2009).
In Kenford I:
The issue [on] appeal [was] whether a plaintiff, in an action for breach of contract, may recover loss of prospective profits for its contemplated 20-year operation of a domed stadium which was to be constructed by defendant County of Erie[.].
The Court of Appeals summarized the facts in Kenford as follows:
On August 8, 1969, pursuant to a duly adopted resolution of its legislature, the County of Erie entered into a contact with Kenford Company, Inc. (Kenford) and Dome Stadium, Inc. (DSI) for the construction and operation of a domed stadium facility near the City of Buffalo. The contract provided that construction of the facility by the County would commence within 12 months of the contract date and that a mutually acceptable 40-year lease between the County and DSI for the operation of said facility would be negotiated by the parties and agreed upon within three months of the receipt by the County of preliminary plans, drawings and cost estimates. It was further provided that in the event a mutually acceptable lease could not be agreed upon within the three-month period, a separate management contract between the County and DSI, as appended to the basic agreement, would be executed by the parties, providing for the operation of the stadium facility by DSI for a period of 20 years from the completion of the stadium and its availability for use.
Although strenuous and extensive negotiations followed, the parties never agreed upon the terms of a lease, nor did construction of a domed facility begin within the one-year period or at any time thereafter. A breach of the contract thus occurred and this action was commenced in June 1971 by Kenford and DSI.
The plaintiff was granted summary judgment as to liability; the judgment as to liability was affirmed on appeal; and a trial was directed “limited to the issue of damages[.]”
The ensuing trial ended some nine months later with a multimillion dollar jury verdict in plaintiffs’ favor. An appeal to the Appellate Division resulted in a modification of the judgment. That court reversed portions of the judgment awarding damages for loss of profits and for certain out-of-pocket expenses incurred, and directed a new trial upon other issues…On appeal to this court, we are concerned only with that portion of the verdict which awarded DSI money damages for loss of prospective profits during the 20-year period of the proposed management contract, as appended to the basic contract. That portion of the verdict was set aside by the Appellate Division and the cause of action dismissed. The court concluded that the use of expert opinion to present statistical projections of future business operations involved the use of too many variables to provide a rational basis upon which lost profits could be calculated and, therefore, such projections were insufficient as a matter of law to support an award of lost profits.
The Court of Appeals affirmed “but upon different ground[.]”
Loss of future profits as damages for breach of contract have been permitted in New York under long-established and precise rules of law. First, it must be demonstrated with certainty that such damages have been caused by the breach and, second, the alleged loss must be capable of proof with reasonable certainty. In other words, the damages may not be merely speculative, possible or imaginary, but must be reasonably certain and directly traceable to the breach, not remote or the result of other intervening causes…In addition, there must be a showing that the particular damages were fairly within the contemplation of the parties to the contract at the time it was made…If it is a new business seeking to recover for loss of future profits, a stricter standard is imposed for the obvious reason that there does not exist a reasonable basis of experience upon which to estimate loss profits with the requisite degree of reasonable certainty…
Applying the law to the facts of the case, in Kenford I the Court of Appeals wrote:
These rules must be applied to the proof presented by DSI in this case. We note the procedure for computing damages selected by DSI was in accord with contemporary economic theory and was presented through the testimony of recognized experts. Such a procedure has been accepted in this State and many other jurisdictions…DSI’s economic analysis employed historical data, obtained from the operation of other domed stadiums and related facilities throughout the country, which was then applied to the results of a comprehensive study of the marketing prospects for the proposed facility in the Buffalo area. The quantity of proof is massive and unquestionably, represents business and industry’s most advanced and sophisticated method for predicting the probable results of contemplated projects. Indeed, it is difficult to conclude what additional relevant proof could have been submitted by DSI in support of its attempt to establish, with reasonable certainty, loss of prospective profits. Nevertheless, DSI’s proof is insufficient to meet the required standard.
The reason for this conclusion is twofold. Initially, the proof does not satisfy the requirement that liability for loss of profits over a 20-year period was in the contemplation of the parties at the time of the execution of the basic contact or at the time of its breach…Indeed, the provisions in the contract providing remedy for a default do not suggest or provide for such a heavy responsibility on the part of the County. In the absence of any provision for such an eventuality, the commonsense rule to apply is to consider what the parties would have concluded had they considered the subject. The evidence here fails to demonstrate that liability for loss of profits over the length of the contract would have been in the contemplation of the parties at the relevant times.
Next, we note that despite the massive quantity of expert proof submitted by DSI, the ultimate conclusions are still projections, and as employed in the present day commercial world, subject to adjustment and modification. We of course recognize that any projection cannot be absolute, nor is there any such requirement, but it is axiomatic that the degree of certainty is dependent upon known or unknown factors which form the basis of the ultimate conclusion. Here, the foundations upon which the economic model was created undermine the certainty of the projections. DSI assumed that the facility was completed, available for use and successfully operated by it for 20 years, providing professional sporting events and other forms of entertainment, as well as hosting meetings, conventions and related commercial gatherings. At the time of the breach, there was only one other facility in this country to use as a basis of comparison, the Astrodome in Houston. Quite simply, the multitude of assumptions required to establish projections of profitability over the life of this contract require speculation and conjecture, making it beyond the capability of even the most sophisticated procedures to satisfy the legal requirements of proof with reasonable certainty.
The economic facts of life, the whim of the general public and fickle nature of popular support for professional athletic endeavors must be given great weight in attempting to ascertain damages 20 years in the future. New York has long recognized the inherent uncertainties of predicting profits in the entertainment field in general…and, in this case, we are dealing, in large part, with a new facility furnishing entertainment for the public…
In Kenford II:
The issue [was] whether [Kenford] is entitled to recover damages against [the County] for the loss of anticipated appreciated in the value of the land which Kenford owned in the periphery of the proposed stadium site.
Pursuant to the prior Appellate Division decision, “the retrial on the issue of damages for Kenford’s loss of anticipated land appreciation ensued and the jury awarded Kenford the sum of $6.5 million”.
The Court of Appeals held that:
Under the circumstances of this case, we conclude that Kenford is not entitled to recovery on this claim since there is no evidence to support a determination that the parties contemplated, prior to or at the time of the contract, assumption by the County of liability for these damages.
As to the applicable law, the Court of Appeals held that:
It is well established that in actions for breach of contract, the nonbreaching party may recover general damages which are the natural and probable consequence of the breach. ‘[In] order to impose on the defaulting party a further liability than for damages [which] naturally and directly [flow from the breach], i.e., in the ordinary course of things, arising from a breach], i.e., in the ordinary course of things, arising from a breach of contract, such unusual or extraordinary damages must have been brought within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting’…In determining the reasonable contemplation of the parties, the nature, purpose and particular circumstances of the contract known by the parties should be considered…as well as ‘what liability the defendant fairly may be supposed to have assumed consciously, or to have warranted the plaintiff reasonably to suppose that it assumed, when the contract was made…’
And, applying the facts to the law, the Court of Appeals found that:
In the case before us, it is beyond dispute that at the time the contract was executed, all parties thereto harbored an expectation and anticipation that the proposed domed stadium facility would bring about an economic boom in the County and would result in increased land values and increased property taxes. This expectation is evidenced by the terms of the provision of the parties’ contract requiring the County and DSI to undertake negotiations of a lease which would provide for specified revenues to be derived from, inter alia, the increased taxes on the peripheral lands. We cannot conclude, however, that this hope or expectation of increased property values and taxes necessarily or logically leads to the conclusion that the parties contemplated that the County would assume liability for Kenford’s loss of anticipated appreciation in the value of its peripheral lands if the stadium were not built. On this point, our decision in the prior appeal regarding DSI’s right to recover damages for lost profits under the 20-year management contract is particularly instructive…
And the Court of Appeals concluded that:
Thus, the constant refrain which flows throughout the legion of breach of contact cases dating back to the leading case of Hadley v. Baxendale…provides that damages which may be recovered by a party for breach of contract are restricted to those damages which were reasonably foreseen or contemplated by the parties during their negotiations or at the time the contract was executed. The evident purpose of this well-accepted principle of contract law is to limit the liability for unassumed risks of one entering into a contract and, thus, diminish the risk of business enterprise…In the case before us, although Kenford obviously anticipated and expected that it would reap financial benefits from an anticipated dramatic increase in the value of its peripheral lands upon the completion of the proposed domed stadium facility, these expectations did not ripen or translate into cognizable breach of contract damages since there is no indication whatsoever that the County reasonably contemplated at any relevant time that it was to assume liability for Kenford’s unfulfilled land appreciation expectations in the event that the stadium was not built. Thus, under the principles set forth in Hadley v. Baxendale… and its progeny of cases in this State…Kenford is not entitled to recovery, as a matter of law, for its lost appreciation, in the value of its peripheral lands caused by the County’s breach of the parties’ contract.
In Ashland Management:
The principal legal questions presented concern the availability of damages for lost profits under the rule stated in [the Court’s] two decisions in [Kenford Iand Kenford II];and whether the court applied the correct legal standard for trade secrets in determining the misappropriation claim.
The Court of Appeals summarized the litigation:
This litigation involves a dispute between an investment management firm and a former employee. The employee developed a mathematical model for determining investment strategy and sought unsuccessfully to sell it to the firm. A dispute arose during the negotiation and plaintiff, Ashland Management Inc., instituted this action seeking to foreclose defendant from using his model. It alleged that the model is based upon trade secrets defendant misappropriated from the firm. Defendant claims he and plaintiff had agreed upon a contract for the use of the model and that plaintiff breached the contract. Defendant, therefore, counterclaimed seeking damages.
After a nonjury trial, Supreme Court found that the parties had entered into a contract and that plaintiff had breached it. Accordingly, the court awarded defendant damages of $625,000 for lost profits. It held further that the information available to defendant did not constitute a trade secret of Ashland and therefore defendant was not guilty of misappropriation.
The genesis of the suit was a proposal by Janien that “projected the minimum sums expected to be under management by the [mathematical] model for each year between 1988 and 1992”. Supreme Court held, inter alia, that “Janien was entitled to damages for lost profits based upon the projections set forth [in the proposal].” The First Department modified the judgment, on other grounds, while affirming the recovery of damages in accordance with the proposal.
The Court of Appeals affirmed, holding that: “The projection of future profits in this case requires no such speculation”.
As to the law, the Court of Appeals noted that:
A party may not recover damages for lost profits unless they were within the contemplation of the parties at the time the contract was entered into and are capable of measurement with reasonable certainty. The rule that damages must be within the contemplation of the parties is a rule of foreseeability. The party breaching the contract is liable for those risks foreseen or which should have been foreseen at the time the contract was made. The breaching party need not have foreseen the breach itself, however, or the particular way the loss came about. It is only necessary that loss from a breach is foreseeable and probable…
The second requirement, that damages be reasonably certain, does not require absolute certainty. Damages resulting from the loss of future profits are often an approximation. The law does not require that they be determined with mathematical precision. It requires only that damages be capable of measurement based upon known reliable factors without undue speculation…
The Court of Appeals explained that:
Our decisions in the Kenford appeals illustrate these rules. In 1969, Erie County entered into a contract with the Kenford Co. for the construction of a domed stadium to be built near the City of Buffalo. The contract provided, among other things, that construction of the stadium was to commence within 12 months of the contract date and that the parties would execute an attached 20-year contract authorizing Kenford to manage its operation. A breach occurred when construction of the stadium was not timely commenced and Kenford instituted an action for damages sustained as a result of the breach, principally anticipated profits from the management contract. In Kenford II plaintiff sought damages for lost appreciation in the value of real estate located in the periphery of the stadium site.
In Kenford I we held that to recover damages for lost profits, it must be shown that: (1) the damages were caused by the breach; (2) the alleged loss must be capable of proof with reasonable certainty, and (3) the particular damages were within the contemplation of the parties to the contract at the time it was made. We also noted that in the case of a new business seeking to recover loss of future profits, a stricter standard is imposed because there is no experience from which lost profits may be estimated with reasonable certainty and other methods of evaluation may be too speculative…Whether the claim involves an established business or a new business, however, the test remains the same, i.e., whether future profits can be calculated with reasonable certainty.
In discussing the first requirement, we held that the evidence was insufficient because it did not establish that the parties contemplated at the time of contracting that the County would be liable for lost profits over the 20-year term of the management agreement in the event of breach. The contract was silent on the subject and, therefore, we followed a ‘commonsense’ rule to determine what the parties intended by considering what they would have concluded had they considered the subject at the time of entering into the contract. The evidence surrounding the negotiation and execution of the contact, we said, failed to demonstrate that the parties expected Erie County to bear the heavy responsibility for estimated future profits that plaintiff sought to impose on it. Similarly, in Kenford II, where plaintiff sought damages for loss of anticipated appreciation in the value of land surrounding the proposed stadium site, we held that the evidence did not support the conclusion that the parties contemplated liability, particularly when Kenford was under no contractual obligation with the County to purchase the land[.]
The Court of Appeals concluded:
Applying these standards to the present action, it is manifest from an examination of [the proposal] that the parties contemplated that Janien could recover damages if the agreement was not completed and that those damages could include lost profits from accounts using [a designated model]. Paragraph c (21) provided that defendant was to receive 15% of the gross revenues per annum if he left Ashland ‘for any reason’ and paragraph C(12) predicted the minimum funds anticipated to be under management from marketing [pursuant thereto]. The amounts set forth were minimum reasonable levels of investment the parties determined [the project] would earn after studying and discussing the prospects extensively. Thus, the issue of future earnings was not only contemplated but also fully debated and analyzed by sophisticated business professionals at the time of these extended contract negotiations, projections of the increments to be anticipated over the years were calculated and provisions made for Janien’s share of the anticipated profits. Inasmuch as Janien was entitled to damages based upon the revenues derived from ‘any and all existing or future’ accounts, plaintiff must have foreseen that if it breached the contract defendant would be entitled to lost profits.
And, in find that the damages sought by Janien were not speculative, the Court of Appeals wrote:
First, defendant’s claim rests on the parties’ carefully studied professional judgments of what they believed were realistic estimates of future assets to be managed by the use of [the model]. By applying Ashland’s 1% management fee to these sums to determine the revenues derived from them and then allotting defendant 15% of those revenues, as paragraph C (21) provided, Janien’s loss could be easily computed. Second, while the parties were launching a new investment strategy, they were not entering a new or unfamiliar business…Ashland had been a substantial presence in the financial management field for several years. The introduction of [the model] was viewed as an addition to and an enhancement of Ashland’s existing Alpha strategy, which had been highly successful, and Ashland intended to rely on its experience in marketing Alpha to market [the model]. Third, Ashland had a ready reservoir of customers for [the model] because it intended to appeal not only to the market in general but also to its existing Alpha customers. Finally, although [the model] had never been used in a commercial setting, it had been extensively back-tested over a number of years, and Ashland itself had enough confidence in its ability to perform to predict minimum amounts of funding which [the model] would attract. It agreed to compensate Janien on that basis. Based on this evidence, the court properly relied on the projections of paragraph C (12) and the provisions of paragraph C (21) to hold that defendant had met his burden of proving his lost profits with reasonable certainty.
In Zink, the First Department affirmed an order of Supreme Court that dismissed a claim for lost profits.
As to the law, the Appellate Division stated:
The law in New York is well settled that ‘[a] party may not recover damages for lost profits unless they were within the contemplation of the parties at the time the contract was entered into and are capable of measurement with reasonable certainty’…While the mandate ‘that damages be reasonably certain, does not require absolute certainty’…it is still necessary that ‘damages be capable of measurement based upon known reliable factors “without undue speculation’…Indeed, ‘the damages may not be merely speculative, possible or imaginary, but must be reasonably certain’…and, when a new business venture is involved, ‘a stricter standard is imposed for the obvious reason that there does not exist a reasonable basis of experience upon which to estimate lost profits with the requisite degree of reasonable certainty’…
And, as to the facts, the First Department concluded:
Here, plaintiffs had embarked upon a new business endeavor; their proposed television game show had never been broadcast and was to feature a host not well known to American audiences who had never previously hosted a game show. The principal plaintiff, moreover, had no track record either with game shows or television production, and the program in question had not tested favorably in a focus group survey undertaken on behalf of a television network. Accordingly, plaintiffs’ claim for lost profits was properly dismissed since it was predicated not upon the requisite reasonably certain assessment but upon nothing more than assumptions, speculation and conjecture respecting the performance of the game show…New York law, we note, ‘has long recognized the inherent uncertainties of predicting profits in the entertainment field in general’…
In Digital Broadcast, the First Department affirmed an order of Supreme Court that dismissed a claim for damages.
As to the law, the Appellate Division stated:
The breach of contract claim was properly dismissed because there was no objective criteria against which the Ladenburg and Intrater defendants’ efforts could be measured…Furthermore, these defendants’ efforts to market the securities only to institutional investors are protected as an exercise of good faith business judgment…In any event, the claim was properly dismissed because the agreement provided that defendants shall have no liability except for losses resulting from gross negligence or willful misconduct, neither of which occurred.
And, as to the facts, the First Department held:
Even if plaintiff could demonstrate it had a viable claim for breach of contract, it could not demonstrate it suffered any damages as a result of the breach. This is because it could not clear the initial hurdle of demonstrating ‘that the particular damages were fairly within the contemplation of the parties to the contract at the time it was made…’ Furthermore, the parties’ agreement contains no mention of consequential damages.
Moreover, since plaintiff was a ‘development stage’ company and had never generated any revenue, it could not meet the stricter standard for the award of lost profits it seeks because ‘there does not exist a reasonable basis of experience upon which to estimate lost profits with the requisite degree of reasonable certainty…’
In Wathne, Supreme Court “granted defendants’ motion in limine to preclude plaintiff’s expert from testifying as to a particular measure of damages for lost profits for sales of handbags bearing the ‘Polo Sport’ trademark[.]”.
The First Department summarized the operative facts:
Plaintiff Wathne Imports Ltd. is a privately held family business that has been a licensee of defendants PRL USA Inc., The Polo/Ralph Lauren Company L.P. and Polo Ralph Lauren Corporation (collectively, Polo) since 1984, manufacturing and selling products bearing Polo/Ralph Lauren brand trademarks, doing business under the name “Polo Ralph Lauren Handbag and Luggage Company.” On November 23, 1999, Wathne and Polo entered into an amended license agreement under which Polo granted Wathne the exclusive license through December 31, 2007 to manufacture and sell handbags in the United States and Canada bearing the marks “Polo by Ralph Lauren,” “Ralph (Polo Player Design) Lauren,” Ralph Lauren” (including “Collection” and “Blue Label”), “Polo Sport,” “Lauren/Ralph Lauren” and “Polo Jeans Co.” If Polo discontinued one of those trademarks, the agreement required it to provide Wathne with a replacement mark of “substantially equivalent market value.” The amended license agreement also gave Wathne a non-exclusive right to sell the merchandise outside the U.S. and Canada with Polo’s consent, which right Polo could terminate upon 180 days’ written notice.
Wathne alleges that Polo breached the license agreement by, inter alia, discontinuing the use of the “Polo Sport” mark in 2001 without replacing it with a substantially equivalent mark.
In their in limine motion, defendants asked the trial court to preclude plaintiff’s use of its expert at trial and to exclude any testimony and evidence regarding alleged lost profits from international sales. The court granted defendant’s motion by precluding plaintiff from establishing its lost profits through the testimony and reports prepared by plaintiff’s damages expert, to the extent the expert used Coach, Inc., as a comparable in calculating the growth rate that Wathne could have achieved in its handbag sales. The court also precluded plaintiff from relying on international sales in calculating its lost profits claim.
The Appellate Division outlined the facts relating to the expert:
Plaintiff’s designated damages expert was Glenn Newman, an experienced CPA who was a partner at ParenteBeard LLC and was accredited by the American Institute of Certified Public Accountants in certified financial forensics. At his deposition and in his expert report, Newman analyzed, inter alia, Wathne’s damages arising from the discontinuance of the Polo Sport mark. To do so, he determined the average of the actual gross sales from Polo Sport handbags during the period 1998 to 2000, and then compared the available data from other companies selling handbags – specifically, Coach and J. Tod’s s.p.a. – as benchmarks for determining the growth rate in the handbag industry since then. Newman explained that he used Coach’s and J. Tod’s figures because no other companies publicly reported handbag sales. Newman concluded that sales of Polo Sport-branded handbags would have grown throughout the license period, noting that it was a period when people were buying more handbags, as shown by Coach’s handbag sales, which had grown at a rate of 30% a year, a figure he verified by cross-checking against J. Tod’s handbag sales during that period. Newman extrapolated that, had Polo not discontinued the Polo Sport brand in 2001, Wathne’s revenues between 2001 and 2007 would have grown at a compounded annual growth rate of 25%, and using that growth rate, Newman projected that Polo Sport sales should have been $341.3 million between July 1, 2001 and December 31, 2007. He then calculated lost profits on Polo Sport sales of $82.6 million.
The First Department summarized the motion in limine:
In their in limine motion, defendants’ expert asserted that Newman’s damages estimate was grossly overstated, in view of Wathne’s actual profits in the previous years, and suggested that the assumptions upon which Newman based his calculation were ‘aggressive and speculative.’ Defendants also retained an industry expert, Victor Lipko, who challenged Newman’s premise by asserting that Coach’s and Tod’s handbags were not competitive with plaintiff’s; however, Lipko acknowledged that he did not know of any publicly available information about products that were competitive with Polo Sport, explaining that he ‘was not asked to’ look for that information.
And the Appellate Division outlined the decision of Supreme Court:
The trial court held that, as a matter of law, it was incorrect for plaintiff’s expert to use Coach, Inc. as a comparable in order to determine the prospective growth rate for sales of Polo Sport handbags, because the two brands were too dissimilar. The court remarked that sales by a Polo licensee could not be compared with sales by a ‘standalone’ company such as Coach that sold its own product line. It then proposed an analysis of its own devising, not proposed by any expert: that plaintiff’s expert should compare Polo Sport handbag sales with Polo’s sales of its products bearing other trademarks over the same period. Although defendants’ damages expert had admitted that there was no other publicly available data on handbag sales during the relevant period, and defendants’ industry expert had offered no alternative approach to establishing the industry growth rate during the period in question, the trial court stated that sales of Polo-branded products generally was the appropriate mechanism by which plaintiff’s expert should calculate plaintiff’s growth projections and ultimately its lost profits.
The First Department then reversed because:
The perceived flaws in plaintiff’s expert analysis are relevant to the weight a jury should give to the expert’s report and testimony; they do not present sufficient grounds for ruling that analysis inadmissible. Newman’s analysis and conclusions should be challenged through cross-examination; the jury must decide whether or not his methodology was appropriate. As the United States Supreme Court said in Daubert v. Merrell Dow Pharms. Inc., (509 US 579, 596 ), ‘Vigorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attaching shaky but inadmissible evidence.’
It is true that a party may only recover damages for loss of future profits if it ‘demonstrate[s] with certainty that such damages have been caused by the breach…, the alleged loss must be capable of proof with reasonable certainty…not merely speculative, possible or imaginary…and the particular damages [must have been] fairly within the contemplation of the parties’…Of course, ‘New York law does not countenance damage awards based on [s]peculation or conjecture…’
And discussed Kenford, Ashland Management, Zink and Digital Broadcast:
The Court in Ashland Mgt v. Janien…explained that the evidence in Kenford Co. v. Erie County was insufficient to satisfy the applicable standard because the claim of lost profits for managing a stadium required the court to accept too many speculative assumptions, namely, that ‘the stadium had been completed, opened and operated successfully for 20 years, [and] that it also attracted professional sporting events, concerts and conventions fully supported by the public.’ In contrast, the evidence in Ashland was sufficient because it ‘rest[ed] on the parties’ carefully studied professional judgments of what they believed were realistic estimates of future assets to be managed by the use of [a particular growth model]’…
While both Ashland and Kenford were determination made after trial, claims for lost profits have been dismissed by this Court upon a motion for summary judgment where the plaintiff’s lost profits were said to arise from a ‘new business endeavor’ with no track record…or a business in the ‘development stage’ that ‘had never generated any revenue…’
Before holding that:
[A] degree of uncertainty is to be expected in assessing lost profits…’When the existence of damage is certain, and the only uncertainty is as to its amount, the plaintiff will not be denied recovery of substantial damages’, although, of course, the plaintiff must show ‘a stable foundation for a reasonable estimate’ of damages…An estimate of lost profits incurred through a breach of contract ‘necessarily requires some improvisation, and the party who has caused the loss may not insist on theoretical perfection’….’[I]t is always the breaching party…who must shoulder the burden of the uncertainty regarding the amount of damages…’
And finding that the expert’s methodology and calculations were sufficient to avoid preclusion:
Newman’s use of sales of Coach handbags in his methodology was not without foundation; therefore, his analysis should not have been dismissed as a matter of law. Contrary to the trial court’s conclusion, we view the rate of growth experienced in the fashion handbag market during the period in question as related to a calculation of plaintiff’s lost profits. Newman’s effort to anticipate the expected growth rate in sales of Polo Sport handbags may have contained an element of ‘improvisation’. However, Newman did not equate the Polo Sport’s with Coach’s success or profit levels; he merely used Coach’s handbag sales as a tool to evaluate how well that broad category of product sold during the relevant period. The validity of this approach may be challenged at trial, but by holding that it was incorrect as a matter of law, the trial court unduly interfered with the approximation that was required due to the lack of more exact comparables.
It was also error for the trial court to insist that plaintiff’s expert re-calculate plaintiff’s lost profits, replacing the Coach handbag figures with the figures for sales of Polo Sport’s other products. There was no indication by any expert that those figures were more valid or more likely to produce an accurate result than the figures used by plaintiff’s expert.
Furthermore, neither plaintiff’s actual sales figures prior to the alleged breach nor plaintiff’s modest sales projections made in 1998 and 2000 disprove or invalidate the growth rate that, according to Newman, had developed since that time, as determined based on other companies’ handbag sales.
Finally, plaintiff’s expert should also be permitted to testify regarding international sales for purposes of the calculation of damages. Although plaintiff’s right to conduct international sales required Polo’s consent and could be terminated, the record provides a proper basis for inclusion of this category of sales in the estimate of lost profits as well, since plaintiff had, in fact, sold the trademarked handbags on the international market…
The recent decision of the Appellate Division in Wathne may represent a departure from the rulings of the First Department in Zink (1999) and Digital Broadcast (2009). What’s more, the Wathne analyses appears to be more consistent with the Court of Appeals decision in Ashland Management than with that Court’s rulings inKenford I/II.
Thus, the decision in Wathne may be a precursor to the demise of the conventional legal wisdom that supported the pre-trial dismissal of claims for lost profits in connection with “new business endeavors” that have no “track record” of earnings.