subject: Recovery Of Lost Profits In Business Litigation [print this page] Recovery of damages for lost profits in a business litigation case is subject to the general principle that damages must be proximately caused by the wrongful conduct of the defendant.
Recovery can be based upon a breach of contract or it could be from a civil wrong or tort. Examples of some torts are trademark infringement, copyright infringement, or interference with contract.
If recovery is based upon contract, under California law the measure of damages is the amount that will compensate the party aggrieved for all the detriment proximately caused thereby, or which, in the ordinary course of things, would likely to result.
If recovery is based upon an obligation other than a contract like a business tort, the measure of damages is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.
Essentially, if the action is based upon a tort, the measure of damages is much broader. The courts are also split on whether the element of proximate cause is less stringent in tort cases. In California, it is enough to demonstrate a reasonable probability that profits would have been earned but for the defendant's conduct.
It is always a challenge to recover lost profits from a start up business. One requirement for obtaining a lost profits award is if the damages for loss of profits can be proven with "reasonable certainty". If the business has a long history of progressively increasing profits that can be depicted on a graph, and then there is an "event" cased by the wrongful act of the defendant and immediately thereafter there is a noticeable decline in profits one can argue the "event" was the proximate cause of the lost profits. In start up businesses without a history of profits it is obviously more difficult.
In unfair competition cases like trade secrets cases, breach of fiduciary duty, interference with business, or misappropriation of trade secrets, lost profits can be recoverable by a projection of the profits that could have been earned. It is not critical to prove lost profits with precision. It is enough to show they were more likely than not to occur.
Some courts allow a plaintiff to elect between recovering its own lost profits or requiring the defendant to disgorge its gains to prevent unjust enrichment. In California in a case called Electronic Funds Solutions, LLC v. Murphy the plaintiffs alleged that the defendants appropriated their business assets and then went into business as competitors. The plaintiffs obtained a default judgment based upon the value of the defendant's business. The appellate court reversed, holding that the proper measure of damages was plaintiff's lost profits, not the defendant's gains.
In a case involving a breach of the covenant not to compete and for interference with contract the courts have concluded that plaintiff's lost profits was the exclusive measure of pecuniary damages for tortious interference with business or economic relations.
Courts have held however, that because of the difficulty in proving lost profits, evidence of the defendant's profits could be admitted is shown to correspond to plaintiff's losses.
