Proving Lost Profits
by Hon. Martin Lowy
Lost profits in a business litigation case is often the most difficult (and expensive) element of the case for the plaintiff to prove, and the one most vulnerable to the defendant’s attack. This article will review some of the basics of the law governing proof of lost profits, and what I perceive to be an important trend in the case law, applying Daubert/Robinson standards to lost-profits evidence.
Lost profits are “damages for the loss of net income to a business measured by reasonable certainty.” Miga v. Jensen, 96 S.W.3d 207, 213 (Tex. 2002). Lost profits are available in numerous types of commercial cases in Texas. The appropriate measure of damages for lost profits is net profit, not gross profit.
In evaluating evidence that lost profits were caused by a defendant’s wrongful conduct, the courts are guided by a core holding of Robinson: “An expert who is trying to find a cause of something should carefully consider the alternative causes.” E.I. du Pont de Nemours & Co., Inc. v Robinson, 923 S.W.2d 549, 559 (Tex. 1995). “Further, if there are other plausible causes of the injury or condition, the plaintiff must offer evidence excluding those causes with reasonable certainty.” Merrell Dow Pharmaceuticals, Inc. v. Havner, 953 S.W.2d 706, 720 (Tex. 1997).
While in most cases, one or both parties will offer expert witness testimony on lost profits, expert testimony is not always required. An owner of a business can testify regarding lost profits. This appears to be an extension of the “Property Owner Rule” that allows an owner of real property to testify to its market value without qualifying as an expert.
The Texas Supreme Court recently elaborated on the application of the Property Owner Rule to business entities in the context of a condemnation case, holding that the rule applies to entities, but is limited to officers in managerial positions with duties related to the property, or employees with substantially equivalent positions and duties. Reid RoadM.U.D. No. 2 v. Speedy Stop Food Stores, Ltd., 337 S.W.3d 846 (Tex. 2011). The Reid Road opinion also contains an extensive discussion of the distinction between Rule 701 “lay opinion” witnesses and Rule 702 “expert” witnesses that is recommended reading. If expert testimony is offered on lost profits, Gammill v. Jack Williams Chevrolet, Inc., 972 S.W.2d 713 (Tex. 1998) comes into play, in which the Texas Supreme Court made clear that the gate-keeping principles of Daubert and Robinson apply to all expert witness opinions. Gammill also adopted what has become the often-invoked “analytical gap” rule, requiring the exclusion of evidence “which is connected to existing data only by the ipse dixit of the expert.” A court may conclude that there is simply too great an “analytical gap” between the data and the opinion proffered.
In Kerr-McGee Corp. v. Helton, 133 S.W.3d 245 (Tex. 2004), the Texas Supreme Court extended its Gammill holding to expert testimony on damages in an oil and gas case, applying the “reasonable certainty” standard for lost profits to evidence of lost royalties presented by a petroleum engineer. Determining that the witness had violated the “analytical gap” rule, the Court held that Helton had presented no evidence of damages.
Because Kerr-McGee had not moved to exclude the expert’s testimony prior to trial, or even objected to it until after cross-examining the expert, Helton claimed he had been “ambushed” and sought to have the case remanded for a new trial in the interest of justice under TRAP 60.3. The Court, assuming that Helton had presented the best evidence available to him, and citing the unfairness and expense that would be imposed on Kerr-McGee by giving Helton “another bite at the apple,” rendered a take-nothing judgment against Helton.
Many cases stand for the proposition that a trial court’s decision to admit opinion testimony is reviewed for abuse of discretion. However, in City of Keller v. Wilson, 168 S.W.3d 802 (Tex. 2005), the Texas Supreme Court held that irrelevant or unreliable expert testimony cannot be legally sufficient evidence to support a verdict or a judgment. Further, incompetent expert testimony will not support a verdict or judgment even when it has been admitted without objection. This creates serious pitfalls for lawyers and trial judges: If expert testimony later deemed incompetent has been admitted without objection, how can the trial court have abused its discretion by admitting the evidence? How can a judge act arbitrarily or unreasonably, or without reference to guiding rules or principles, when given no opportunity to act at all?
The path to recovery of lost profits is littered with traps, and they threaten the wary and the unwary alike. Early and very serious attention to these issues can be critical to the successful prosecution or defense of a lost profits claim.
A more detailed paper discussing these issues is available for download from the Business Litigation Section page of the DBA website.
Martin ‘Marty’ Lowy is the Judge of the 101st Judicial District Court.