Will the “New Business Rule” Survive in its Last Refuge?
One persistent challenge for any new business as a plaintiff in litigation in New Jersey is how to prove damages in the form of “lost profits.”
Proving Lost Profits for New Businesses
Lost profits are often a critical, if not the largest source or only source, of business tort and contractual damages. But for new businesses, how can you prove “lost profits” without pointing to past profits as an indicator?
The general rule is that you have to prove any form of damages to “a reasonable degree of certainty” as opposed to, say, with exact precision. But even under this supposedly moderate standard, with no history to go by, New Jersey courts treat new businesses seeking lost profits with great skepticism, shunning unspecific proof about what “similarly situated” businesses’ profits have recently been.
Reasonable certainty in the context of lost profits means proof of the profits that this particular business would have earned in the current market. Specifics matter. Because promising startups sometimes fail and others thrive unexpectedly, the question is, “What can be reasonably said about the prospective profits of this particular new business?”
New Business Rule in New Jersey: No Lost Profits Claims
Unlike most states, New Jersey still follows the “new business rule,” which answers this question with a resounding, “Absolutely nothing!” Or, in other words, “prospective profits of a new business are considered too remote and speculative to meet the legal standard of reasonable certainty.” As most other courts have recognized, this rule isn’t moderate but rather strict, making it effectively impossible for a new business to prove “lost profits” damages in New Jersey.
In Larry Schwarz, et al. v. Nicholas Menas, Esq., et al., the New Jersey Supreme Court will soon consider whether to hammer the very last nail into the coffin of claims for new business “lost profits” in this State or, conversely, resurrect “lost profits” for new business litigants by killing the New Business Rule.
In one of two consolidated appeals, Larry Schwarz is suing his former attorney and law firm for legal malpractice. In the other, Schwarz and NJ 322, LLC, his newly formed real estate development business, are also suing his former attorney and law firm as well as a real estate developer, among others, alleging the defendants conspired to commit fraud, conversion, and tortious interference with a contract and business advantage.
In both cases, the plaintiffs seek damages in the form of lost profits. The issue is whether proof of a new business’s prospective profits is so inherently speculative that expert testimony is legally meaningless and, therefore, should be barred as inadmissible.
The cases arise out of two related real estate transactions, one in Monroe Township and the other in Egg Harbor Township.
To quantify the plaintiffs’ prospective profits that were allegedly lost due to the defendants’ conduct, the plaintiffs’ expert postulated a few scenarios and, for each one, came to specific numbers ranging from $1,907,241 to $3,579,724 in the Egg Harbor transaction and from $5,135,804 to $8,167,416 in the Monroe transaction.
The expert did not, however, mention, let alone take into account, the fact that Schwartz had admitted that he had no prior experience in developing properties, a fact the Appellate Division found extremely important.
The Appellate Division further found that the New Business Rule was still the law of this State, even though the vast majority of jurisdictions have rejected it as a per se exclusion and despite the fact that the Third Circuit has opined that the New Jersey Supreme Court would do away with it if the opportunity to do so presented itself. It therefore had to apply the law as it is to these consolidated appeals, even if its tone suggested the Court wasn’t happy about it.
Applying the rule, the Appellate Division affirmed the trial court’s decisions to bar the expert’s reports and testimony altogether, which had left the plaintiffs without any other claims for damages, ending both cases entirely.
It also noted without further comment that the trial judge had alternatively found that the expert’s opinions were speculative in and of themselves, since he was not sure what type of developments Schwartz would attempt, didn’t take into account Schwartz’s inexperience, and based his profit projections on successful projects undertaken by fully experienced firms in other locations. Even without the New Business Rule, then, the plaintiffs’ expert opinion might have been inadmissible.
The Supreme Court now has the opportunity to reexamine the New Business Rule and prove right or wrong the Third Circuit’s prediction about how it would rule.
Although it’s hard to predict how the Supreme Court will rule, there is a decent chance it will join the rest of the country in rejecting the New Business Rule.
However, it is more likely that the Court will take the oft-traveled path of least resistance by affirming the lower courts’ decisions on the alternative ground that the expert’s opinion was speculative independent of the New Business Rule, leaving for another day whether that rule is no longer tenable under modern notions of fairness and justice.
We’ll keep our eyes open and update this page when the Court renders its decision.
