Lost Profits in Business Litigation

Business litigation attorneys must determine the proper measure of damages in any type of commercial litigation. Whether the lawsuit centers around a breach of contract, a business tort, a breach of a covenant or fraud, one measure of damages is lost profits. California sets forth various rules for establishing a claim for lost profits in business litigation.

The California jury instruction for lost profits provides that “To recover damages for lost profits, plaintiff must prove it is reasonably certain he would have earned profits but for defendant’s conduct. To decide the amount of damages for lost profits, you must determine the gross amount plaintiff would have received but for defendant’s conduct and then subtract from that amount the expenses [including the value of specific categories such as labor, materials, rents, all expenses and/or interest of capital employed] plaintiff would have had if defendant’s conduct had not occurred. The amount of the lost profits need not be calculated with mathematical precision, but there must be a reasonable basis for computing the loss.”

California’s appeals court has held that the measure of damages for the commission of a tort is that amount which will compensate the plaintiff for all detriment sustained by him as the proximate result of the defendant’s wrong, regardless of whether or not such detriment could have been anticipated by the defendant. It is well established in California, moreover, that such damages may include loss of anticipated profits where an established business has been injured. In other words, if a party’s wrong (e.g., negligence) caused another party to lose profits, that party can claim lost profits as damage.

Commercial litigation lawyers in Los Angeles or California must establish whether lost profits can be ascertained with reasonable certainty. Once their existence has been established, recovery of lost profits will not be denied because the amount cannot be shown with mathematical precision. In a business litigation case the attorney can establish lost profits by using historical data, such as past business volume and past profits. However, an attorney need not establish the damage with absolute precision, only reasonable certainty. The plaintiff has the burden to produce the best evidence available in the circumstances to attempt to establish a claim for loss of profits.

The fact that lost profits may have to be estimated or are difficult (but not impossible) to ascertain does not defeat a claim for lost profits. The courts have uniformly held that the one whose wrongful conduct has made the ascertainment of damages difficult cannot then escape liability since it was that party’s conduct that caused the problem. As one court put it, “the wrongdoer cannot complain if his own condition creates a situation in which the court must estimate rather than compute.”

Cases in which lost profits are more difficult to establish usually involve businesses that do not have the operating history necessary to establish a historical record. Examples include businesses that are so new that they do not have profits, that they do not have existing business, that they have never signed any contracts or that they have never even opened. Lost profits in these situations are more speculative and may not be allowed.

Another issue that arises in commercial litigation relating to lost profits is when one party contributes to the damage (i.e., lost profits) but is not the sole reason for the lost profits. Similar to the rule above, one who contributes to damage cannot escape liability because the proportionate contribution may not be accurately measured. If a party’s negligence is one of the contributing causes of the lost profits, it becomes the defendant’s burden of proof to show that those damages should be reduced because of the contributing negligence of some other party. If a defendant cannot sustain his burden, he can be found liable for the full loss.

Lost profits are often difficult to establish in a business litigation case. However, they can be one of the bigger areas of damage for a business suffering from unfair competition or another business tort. The key for business litigation lawyers is to present enough evidence to establish with reasonable certainty a basis for such damages.

Laine T. Wagenseller is a business litigation lawyer in Los Angeles with extensive trial experience in representing business owners. Wagenseller Law Firm is a Los Angeles commercial litigation law firm that specializes in breach of contract, breach of fiduciary duty, business fraud and other business litigation lawsuits. For more information contact Mr. Wagenseller at (213) 286-0371.

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