Pleading Lost Profits Damages in New York and Federal Courts

March 14, 2016Articles New York Law Journal

Reprinted with permission from the April 6 issue of New York Law Journal. (c) 2016 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

The ability for plaintiffs to plead and prove lost profits, and for defendants to avoid the results of such potential adverse judgments, has long been a unique, shifting and challenging issue in New York state and federal litigation.

Lost profits do not need to be merely speculative damages if a plaintiff can provide a strong basis for the damages alleged. For their part, defendants can overcome claims for lost profits by making a substantial showing that the plaintiff cannot demonstrate damages with reasonable certainty.

This article will examine the current jurisprudence and highlight recent case law in several different kinds of cases concerning the recoverability of lost profits, the evidence required for a party's burden of proof, and what potential defendants should consider in attacking such prima facie evidence.

Lost Profits in Breach of Contract Cases

In a breach of contract action brought under New York law, a party generally may recover lost profits if: (1) its alleged lost profits were caused by the breach of contract; (2) the damages were fairly within the contemplation of the parties when contracting and; (3) the damages can be proved with a reasonable certainty.1 Damages from lost profits are often considered speculative when a party cannot provide an adequate evidentiary basis for the damages claim.2

In June 2015, on appeal from a nonjury trial in which the Supreme Court, Kings County, denied a motion for judgment as a matter of law, the Appellate Division, Second Department, highlighted an important issue in the calculus of lost profits: that the standard of reasonable certainty does not wholly preclude approximations.3 Family Operating v. Young Cab, involved a breach of contract action between a taxi operator and the owner of two New York City taxi medallions. There, the Appellate Division faced a claim that the owner of the taxi medallions violated the terms of an agreement to lease the taxi medallions.4 The Appellate Division upheld New York law in ruling that "[w]here the plaintiff seeks to recover damages for lost profits, such profits must also be 'within the contemplation of the parties at the time the contract was entered into' and, even though required to be proven with reasonable certainty, damages 'resulting from the loss of future profits are often an approximation.'" (internal quotations omitted) (emphasis added).5

Several courts have ruled similarly and permitted lost profits to be proven as an approximation. For example, the Appellate Division, First Department, in Wathne Imports v. PRL USA, applied New York common law in affirming that "a degree of uncertainty is to be expected in assessing lost profits" (internal quotations omitted).6 The Appellate Division further affirmed that 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." (internal quotation marks omitted).7 Likewise the U.S. Court of Appeals for the Second Circuit, applying New York law, held that the district court confused the benefit of the bargain with speculative profits on collateral transactions, and that a plaintiff could seek lost profits as general damages.8 Thus, lost profit calculations should include enough evidence to plead and prove approximate lost profits.

As Always, Evidence Matters

Central to a plaintiff's ability to successfully prove lost profits is a strong evidentiary showing that links the defendant as the proximate cause of the plaintiff's lost profits. Although lost profits may appear to be speculative, strong admissible evidence can shift the alleged theory of damages from the overly abstract to the legitimate.

The plaintiff in Family Operating, was able to satisfy lost profits by offering the testimony of a witness who calculated lost profits by subtracting expenses from the revenue, which would have been generated by the plaintiff's collection of lease fees from individual taxicab drivers.9 Furthermore, the Appellate Division, Second Department, held that the expenses provided for in the agreement were the same expenses the plaintiff used in calculating its lost profits. In contrast, the defendant "declined to cross-examine the plaintiff's witness as to damages at trial or to specifically dispute any of the calculations."10 Where testimony is offered to establish lost profits, defendants must make a strategic decision whether to conduct cross examinations, but leaving evidence uncontroverted may prove problematic.

Federal district courts in New York have also held that gross profits alone cannot be relied upon to establish reasonably certain lost profit damages.11 In RGI Brands v. Cognac Brisset-Aurige, S.a.r.l., the plaintiff sought monetary damages including lost sales damages of at least $600,000 for, inter alia, defendant's alleged breaches of an exclusive distribution agreement for specific brands of vodka bottles.12 The U.S. District Court for the Southern District of New York (S.D.N.Y.), applying New York law, found plaintiff's calculation of lost profits to be "predicated solely on the amount of gross receipts from customers, not the net profit." Further, the S.D.N.Y. held that the plaintiff failed to consider the costs of running a business, "market fluctuations over the course of fifteen years and a host of other variables that would almost certainly change customers' purchasing patterns."13 The S.D.N.Y. concluded that RGI did not provide an adequate basis for its projection of lost profits and declined to award lost profit damages.14

New Businesses Face Greater Scrutiny

It should be noted that new businesses often face a higher evidentiary standard for proving lost profits than established business. By virtue of being a new business, a stricter standard is generally imposed upon a plaintiff claiming lost profits because there is no prior experience from which to base an estimate of lost profits.15 Accordingly, claims for lost profits by new business run the risk of being more speculative and further away from an estimation calculated with reasonable certainty.16

For example, lost profits were denied where a plaintiff sought to project eight years of lost profits based on just two months of revenues in a new business venture.17 Case law going back almost 100 years in the New York Court of Appeals further demonstrates that what's old and time tested is seemingly new again: Courts are "reluctant" to grant lost profits damages in cases with new business ventures.18 Thus, when making a claim for lost profits, it is important for a party to consider whether it has an adequate track record on which to base the damages alleged.

Lost Profits in N.Y. U.C.C. Matters

KSW, a Delaware corporation with a principal place of business in New York, filed an action in the Supreme Court, Queens County, alleging breach of contract for an agreement with JCI, a Wisconsin-based corporation for the sale of air handling units to be used in a construction project (KSW Action).19 KSW alleged damages in the amount of $1,833,555, including amounts paid and outstanding for subcontractors' work, KSW's increased overhead, and lost profits.20 On the basis of diversity jurisdiction, the KSW Action migrated to the Eastern District of New York (E.D.N.Y.).21

The E.D.N.Y. applied New York law to its analysis of whether the purchase order of the air handling units was governed by the New York Uniform Commercial Code (U.C.C.).22 Defendant JCI moved for summary judgment arguing that because KSW accepted the goods at issue, U.C.C. §2-709 should mandate summary judgment in its favor. Defendant further alleged that KSW's purported damages must be barred as consequential damages.23

On the question of whether the New York U.C.C. was applicable, the E.D.N.Y. held, that "[e]ven the buyer's acceptance of tendered goods does not extinguish all opportunity to recover damages on a breach of contract."24 The E.D.N.Y. further quoted New York U.C.C. §2-607(2), affirming that "[a]cceptance of goods by the buyer precludes rejection of the goods accepted … but acceptance does not of itself impair any other remedy provided by this Article for non-conformity." (internal quotations omitted) (emphasis added). The E.D.N.Y. held that "given that the line 'between direct and consequential damages is a question of fact' it cannot be said that as a matter of law that KSW's claimed damages are consequential or incidental, and Defendant's motion for summary judgment in favor of its counterclaim is denied." (internal quotations omitted).

Although lost profits are sometimes characterized as consequential damages, the E.D.N.Y.'s holding in the KSW Action reminds practitioners that whether lost profits are consequential or incidental damages is truly a question of fact. KSW alleged that it incurred damages as a proximate cause of defendant supplying non-conforming goods that were "not pre-assembled, including assembly costs, costs for the rigger to lift additional crates, costs to construct and design supports, costs for the use of a crane, and a 15% markup for KSW's additional overhead and diminished profits." (emphasis added)25 Although the E.D.N.Y. refrained from addressing the "reasonableness" of KSW's alleged damages, it held that "… whether or not [it] is possible for KSW to state a claim for such damages under the U.C.C. and the terms of the contract, this Court cannot find as a matter of law that KSW's damages are precluded consequential or incidental damages."26 The E.D.N.Y. concluded that "if direct damages are 'what it would take to put the non-breaching party in the same position that it would be in had the breaching party performed as promised under the contract,' KSW's enumerated costs might well fall within that definition."27 (internal quotations omitted.).

The KSW Action is an important reminder to practitioners that lost profits, often deemed consequential or incidental damages, can prove tantamount to direct damages when only an award of damages "equal to lost profits will put the non-breaching party in the same position he would have occupied had the contract been performed."28

Establishing Lost Profits in RICO Matters

Claims for lost profits are not confined only to garden variety commercial litigation breach of contract actions. Several Second Circuit district courts have held that a plaintiff in a civil Racketeer Influenced and Corrupt Organizations Act (RICO) action may recover lost profits, provided that the general limitations of proximate cause and lack of "speculativeness" apply.29

In Elsevier v. W.H.P.R. (Elsevier Action), Elsevier, the publishers of scholarly scientific, technical and medical journals brought a RICO claim against defendant subscription agents and subscribers alleging, inter alia, that defendants conspired to defraud plaintiffs by placing purchase orders for thousands of scholarly journals priced at a lower, discounted "individual" subscription rate, instead of at the higher "institutional" rate, and subsequently reselling the journals to institutions for more than the individual rate.30 The Elsevier plaintiffs alleged lost profits asserting that as a result of defendants' fraudulent scheme "they suffered a 'loss of subscription revenue'—specifically, the difference between the individual rates plaintiffs actually received, and the higher rates they would have received if the institutional end users had subscribed to the journals." (internal quotations omitted).31

The S.D.N.Y. held that the plain language of the RICO statute does not bar a plaintiff from recovering lost profit damages "proximately caused by the racketeering enterprise engaged in subscription fraud."32 In making this determination, the S.D.N.Y. engaged in a close reading of Second Circuit case law, which it held, supports the conclusion that a plaintiff can "adequately plead RICO damages by alleging lost profits where, as here, they constitute an injury to plaintiffs' business, were proximately caused by the alleged racketeering, and are not merely speculative."33

For example, in Terminate Control v. Horowitz, 28 F.3d 1335 (2d Cir. 1994), the Second Circuit upheld a jury award of lost profits stemming from construction contracts the plaintiff might have obtained but for the racketeering, "where plaintiff had proceeded on the theory that the lost profits constituted business injury caused by a racketeering conspiracy."34 Further, in a class action suit for damages under RICO, the Second Circuit similarly held that a RICO plaintiff who alleged that defendant-competitor hired undocumented aliens in violation of the Immigration and Nationality Act in order to, inter alia, underbid in competing firms, adequately pled lost profits under RICO by alleging lost business profits directly caused by defendant-competitor's fraudulent hiring scheme.35

The Elsevier court held that plaintiffs did not seek to recover lost profits that "would have been generated by the fraudulent subscription agreements with defendants. Instead, [plaintiffs] allege that defendants' subscription fraud—their racketeering—directly caused plaintiffs to lose revenues that they otherwise would have earned by selling the subscriptions at the higher institutional rate."36 The Second Circuit held that plaintiffs adequately pled RICO damages, including damages for lost profits because plaintiff's RICO claim sought to recover profits "that they allegedly would have earned if the racketeering had not occurred."37

Conclusion

A court's analysis of claims for lost profit damages may boil down to a plaintiff's ability to successfully demonstrate in a non-speculative manner that defendant's actions are the proximate cause of specified lost profits. Depending on the individual facts of a case, with a strong evidentiary footing, lost profits are attainable. Likewise, a lack of strong evidentiary footing can provide defendants with a strong basis for rebutting such claims.

Endnotes:

1. Washington v. Kellwood Co., 105 F. Supp. 3d 293, 312-13 (S.D.N.Y. 2015); Int'l Telecom. v. Generadora Electrica del Oriente S.A., 2004 WL 784941, at *3 (S.D.N.Y. April 13, 2004) (internal quotations omitted).

2. Int'l Telecom. v. Generadora Electrica del Oriente S.A., 2004 WL 784941, at *3 (S.D.N.Y. April 13, 2004) (internal quotations omitted).

3. Family Operating, v. Young Cab, 129 A.D.3d 1016 (2d Dep't 2015).

4. Id.

5. Id. at 1017.

6. Wathne Imports v PRL USA, 101 A.D.3d 83, 88-89 (1st Dep't 2012).

7. Id.

8. Tractebel Energy Mktg. v. AEP Power Mktg., 487 F.3d 89, 111 (2d Cir. 2007).

9. Family Operating v. Young Cab, 129 A.D..3d 1016, 1018 (2d Dep't 2015).

10. Id.

11. RGI Brands v. Cognac Brisset-Aurige, S.a.r.l., 2013 WL 1668206, at *13 (S.D.N.Y. AprIL 18, 2013); Healing Power v. Ace Cont'l Exps., 2008 WL 4693246 at *8 (E.D.N.Y. Oct. 17, 2008).

12. Id.

13. Id. (internal citations omitted)

14. Id. at 13.

15. ACCD Global Agriculture and Curt Meltzer v. Alan P. Perry and Farm Technologies Network, 2013 WL 840706, at *5 (S.D.N.Y. March 1, 2013).

16. Int'l Telecom. v. Generadora Electrica del Oriente S.A., 2004 WL 784941, at *4 (S.D.N.Y. April 13, 2004) (internal quotations omitted); Kenford Co. v. County of Erie, 67 N.Y.2d 257, 261-62 (1986).

17. Id. at 4.

18. ACCD Global Agriculture, 2013 WL 840706, at *5; Cramer v. Grand Rapids Show Case Co., 223 N.Y. 63, 119 N.E. 227, 228-29 (N.Y. 1918).

19. KSW Mechanical Services v. Johnson Controls, 992 F. Supp. 2d 135, 140 (E.D.N.Y. 2014).

20. Id.

21. Id.

22. Id. at 142.

23. Id.

24. Id. at 143.

25. KSW Mechanical Services v. Johnson Controls, 992 F. Supp. 2d 135, 146 (E.D.N.Y. 2014).

26. Id.

27. Id.

28. Id. at 135; see also Westlaw headnote 10.

29. Elsevier v. W.H.P.R., 692 F. Supp. 2d 297, 310 (S.D.N.Y. 2010).

30. Id.

31. Id. at 310.

32. Id.

33. Id.

34. Id.

35. Commercial Cleaning Servs. v. Colin Serv. Sys., 271 F.3d 374, 384 (2d Cir. 2001).

36. Id. at 311.

37. Id.



Reprinted with permission from the April 6 issue of New York Law Journal. (c) 2016 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.