Professor Margit Livingston on Recovering Lost Profits: The New Business Rule

Professor Margit Livingston on Recovering Lost Profits: The New Business Rule


When injured by another's breach of contract or tort, a commercial plaintiff will often believe that it has suffered lost profits. However, it is much more difficult for a newly formed business to prove lost profits as some courts, applying the so-called "new business rule," refuse to allow recovery of lost profits where the plaintiff is an unestablished enterprise. Professor Margit Livingston discusses the new business rule, its barrier to recovering lost profits, and its application and erosion in various jurisdictions. She writes:
 
     In Tas Distributing [491 F.3d 625 (7th Cir. 2007)], the plaintiff Tas had entered into a contract with the defendant Cummins under which Cummins was to use “all reasonable efforts” to market and sell the plaintiff’s idle-control technology for heavy-duty truck engines. The contract required the defendant to make minimum royalty payments of $1,000,000 over a five-year period to the plaintiff, but the parties anticipated that actual royalties from the sale of defendant’s products incorporating the plaintiff’s technology would exceed that amount. When sales of defendant’s products proved disappointing, the plaintiff sued the defendant for breach of contract, seeking damages for lost profits and specific performance of the contract. The district court granted the defendant’s motion for summary judgment on the basis that although there were disputed issues of material fact regarding the defendant’s use of “all reasonable efforts” to market the plaintiff’s technology, the plaintiff has failed to present any proof that it suffered damages as a result of the defendant’s alleged breach of contract. The plaintiff appealed.
 
     In reviewing the district court’s grant of summary judgment, the Seventh Circuit Court of Appeals applied Illinois law to the controversy and upheld the lower court’s action. The appellate court noted that under Illinois law, the plaintiff in a breach of contract action must allege “(1) the existence of a valid and enforceable contract; (2) substantial performance by the plaintiff; (3) a breach by the defendant; and (4) resultant damages.” It is essential, therefore, that plaintiffs in a contract action show that they have sustained some sort of damages, even if they cannot establish amount of damages with absolute precision. The plaintiff in this case failed to demonstrate that it had sustained any damages, specifically any lost profits, as a result of the defendant’s alleged breach.
 
     . . . .
 
     Notwithstanding the Seventh Circuit’s resounding endorsement of the new business rule in this case, the majority of jurisdictions have moved away from a strict application of it. Courts in these jurisdictions reason that it would be unfair to allow defendants to avoid liability for lost profits simply because plaintiff’s enterprise is recently established. Such courts allow plaintiffs to introduce several types of evidence by which a new business’s lost profits may be calculated. Evidence of profits of similar businesses owned by the plaintiff or even third parties may be used. In addition, future profits earned by plaintiff’s business after the breach or tort may be probative of lost profits. Finally, some courts may look to “expert testimony, economic and financial data, [and] market surveys and analyses” in determining lost profits.
 
(citations omitted)