June 26, 2023 | By: Erick Poorbaugh
Part 4: Proving Profits That Never Were
In my previous blogs, I discussed the basic standards governing lost profits, the rules about which profits are recoverable, and the general methods of proving which profits you lost, most commonly by using your past profits as a guidepost. But what if you can’t use your past profits as a guide? For example, what if your business is new and, as a result of the wrongdoing, was never able to earn a profit in the first place? That is a question that we will discuss today.
One of the greatest challenges in proving lost profits is when the business that lost profits is new or unestablished in the area. Traditionally, such businesses were not allowed to recover lost profits at all.
But that changed in 2002 when the General Assembly enacted Section 8.01-221.1 of the Virginia Code. This statute provides that new businesses may recover lost profits “upon proper proof”—in most cases. Va. Code § 8.01-221.1. New businesses cannot recover lost profits if the claim is for personal injury (other than defamation) or wrongful death. Id.
There is not a lot of law in Virginia regarding how new businesses may prove lost profits. Yet, other states have recognized a variety of methods. One major treatise states: “Damages may be established with reasonable certainty with the aid of expert testimony, economic and financial data, market surveys and analysis, and business records of similar enterprises.” 22 Am. Jur. 2d Damages § 459).
Of course, most of these methods tend to depend on your particular situation. One method that has been analyzed a bit by Virginia courts is the use of “similar enterprises.” Unfortunately, the case law on this topic has been mixed at best, and most predates § 8.01-221.1. For example, in one case, the Supreme Court held that a child support collection company’s “evidence of previous child support collection ventures conducted by [the plaintiff] in other jurisdictions and evidence of such collections by the [government] in Virginia had sufficient specificity to allow ‘a reasonable estimate of [the plaintiff’s] lost profits.’” Lockheed Info. Mgmt. Sys. Co. v. Maximus, Inc., 259 Va. 92, 109, 524 S.E.2d 420, 430 (2000) (quoting district court opinion).
However, that case expressly relied on the fact that the case involved intentional wrongdoing—as noted in my first blog, courts are more lenient about proof of lost profits when the wrongdoing was intentional. The Court in Lockheed used the intentional wronging to distinguish the case before it from a prior case where it held that a new location of a pizza chain could not establish its profits by using “[t]he profits derived from [certain other] franchises and the national average of all” franchises. Mullen v. Brantley, 213 Va. 765, 769, 195 S.E.2d 696, 700 (1973).
Meanwhile, another case held categorically that “where a new business is involved, lost profits may not be proved by using the profits history of another business.” Goldstein v. Kaestner, 243 Va. 169, 172, 413 S.E.2d 347, 349 (1992).
It should be noted, however, that these older cases were decided before the statute was enacted allowing new businesses to recover their lost profits. For example, since § 8.01-221.1 was enacted, no case has cited Goldstein for its categorical ban on new businesses using their competitors’ profits.
Meanwhile, while the more recent holding in Preferred Systems Solutions involved a plaintiff’s use of its own established profit margins combined with the competitor’s workload, the Supreme Court of Virginia relied on the fact that “several of our sister states have approved the use of subsequent profits from the benefiting competitors as evidence in damages calculations for breach of covenants not to compete, provided that the profits can be sufficiently tied to the injured party.” Preferred Sys. Sols., Inc. v. GP Consulting, LLC, 284 Va. 382, 400, 732 S.E.2d 676, 686 (2012). Thus, competitors’ profits may be more helpful in the wake of § 8.01-221.1 than they would have been in the past. Still, the exact contours of the law here remain unclear.
Finally, it should be noted that there may be other situations where your losses will be more clearly defined, such as when you lost a specific sale with a clearly-defined profit margin. In these cases, a full lost profits analysis might not be necessary. Although many of the principles we have discussed will still apply. There are also other restrictions that apply to damages in general. For example, if there is something you could have done to mitigate the harm (e.g., finding a replacement), and you failed to do it, your damages might be reduced or nullified entirely. These topics are beyond the scope of this four-week series, but it is worth knowing that other rules do exist.
We can provide a more comprehensive analysis of what rules govern past and future lost profits in your unique situation. Contact Dunlap Bennett & Ludwig. Together, we can work to help you prove—and recover—the profits that might have been. Call us at 800-747-9354 or email clientservices@dbllawyers.com.
Read other articles in the 4-part series “Proving What Might Have Been“:
