When proving lost profits, don’t be gross.

While from the Fifth Circuit rather than the Dallas Court of Appeals, a recent case notes a fundamental principle in business litigation under Texas law. In it, that Court affirmed a JNOV motion on damages, under Texas law, when the plaintiff proved gross profits rather than net profits. “Its expert witness testified that he used ThermoTek’s gross profit margin—gross sales, less the cost of those goods sold, divided by gross sales—to calculate lost profits. He then stated that he reached his lost-profit totals for the VascuTherm units and wraps by (1) multiplying the average sales ThermoTek made to Wilford each month by the unit sales price and relevant time period, and (2) deducting the cost of the goods sold. But that is the very definition of gross profits. See Black’s Law Dictionary, supra (defining gross profits as “[t]otal sales revenue less the cost of the goods sold, no adjustment being made for additional expenses and taxes”). Motion Medical Technologies v. Thermotek, No. 16-11381 (Nov. 14, 2017).

 

No Lost Profits in the Riviera Maya

Except perhaps for emotional distress, lost profits continue to be one of the most difficult measures of damages to sustain on appeal. In this instance, Timothy Barton and two other individuals formed a corporation, JMJ Development, to develop resort properties in the Riviera Maya of Mexico. The company entered into non-binding letters of intent with both property owners and the owners of the W Hotel and St. Regis Hotel brands. Before those deals were completed, however, Barton formed a new corporation, JMJ Hospitality, and the record included evidence that he instructed the landowners to deal with the new company instead of JMJ Development. The jilted business associates sued for breach of fiduciary duty, breach of their shareholder agreement, tortious interference, and conspiracy. The jury returned a verdict of $7 million for past lost profits on the fiduciary duty claim and $3 million in future lost profits on the breach of contract claim.

The Court of Appeals reversed and rendered, concluding that there was insufficient evidence the original company ever had the ability to develop the properties in the first place. Although they had multiple letters of intent, the evidence showed those letters had expired of their own terms, and there had never been any binding contracts for the purchase or development of the properties. The meant there was no causation for the lost profits claimed by Barton’s former business owners. The plaintiffs also failed to account for subsequent events — namely, the economic recession that started after Barton formed his new company — and that failure rendered their lost profits model speculative and not reasonably certain. The plaintiffs also confused projected items of income as profits, without properly accounting for associated expenses. Without any reliable, non-speculative evidence of the plaintiffs’ lost damages, the Court of Appeals reversed the jury’s verdict and the trial court’s judgment.

Barton v. Resort Dev. Latin Am., Inc., No 05-11-00769-CV

They’re Probably Good at Collecting on a Judgment

Michael Malone, Jr. worked for Nationwide Recovery Systems, a commercial debt collector, but resigned and began working for a competitor named HHT Limited Company. Malone also convinced two of Nationwide’s other employees to move over to HHT. Nationwide sued HHT and Malone for tortious interference with existing contract and related claims, and the jury sided with Nationwide. On appeal, the defendants argued that the trial court had erred by admitting several summaries of Nationwide’s claimed damages. The court of appeals concluded that HHT had failed to explain how the summaries were based on improper accounting methods or were otherwise inadmissible. The court also rejected the defendants’ legal sufficiency challenge to the damages. Lost profits do not need to be susceptible of exact calculation, and the testimony of Nationwide’s president was based on years of experience and an established profit margin of 20 percent. That testimony was sufficient basis for the jury’s award of damages, and the court of appeals therefore affirmed the judgment.

HHT Ltd. Co. v. Nationwide Recovery Sys., Ltd., No. 05-11-01058-CV

Damages Basically Sustained

Almost nine years ago, the 68th District Court granted judgment notwithstanding the verdict against plaintiff Basic Capital Management and several related entities, wiping out a jury verdict in their favor for tens of millions of dollars in lost profits. The underlying dispute involved the failure of Dynex to fund an alleged $160 million loan commitment for Basic’s “Single-Asset, Bankruptcy Remote Entities” to make real estate investments. In 2008, the Dallas Court of Appeals affirmed that ruling, holding that the SABRE entities were not intended, third-party beneficiaries of the loan agreement, and that the lost profits from the contemplated real estate transactions were not foreseeable. In 2011, the Texas Supreme Court reversed that decision and remanded the case for consideration of Dynex’s argument that the damages were not supported by legally sufficient evidence. Now, in 2013, the court of appeals has held that, with one exception, there was legally sufficient evidence to support the jury’s original award of damages. The court went through a detailed analysis of the testimony of Basic’s damages expert, concluding that his testimony was sufficient to sustain the jury’s award of damages for the lost real estate investments Basic had envisioned. However, the court of appeals sustained the trial court’s grant of JNOV as to one item of damages — $252,577 awarded by the jury for “lost opportunity” on an investment that Basic had actually completed.

The saga of Basic v. Dynex is not over yet. In addition to the possibility of further appeal to the Supreme Court, the court of appeals also remanded to the district court for further consideration of Basic’s claim for attorney fees, as well as pre- and post-judgment interest. We’ll keep you posted if the case results in any further opinions on appeal.

Basic Capital Mgmt., Inc. v. Dynex Commercial, Inc., No. 05-04-01358-CV

No Future Profits Without Proof You Were Entitled to Receive Them

The court of appeals has issued a lengthy opinion in an employment non-disclosure case, partially affirming a jury verdict in favor of the former employer.  In this instance, both the plaintiff and the corporate defendant were in the business of providing in-home pediatric nursing services.  After the defendant company hired away three of the plaintiff’s employees, eleven of the plaintiff’s most profitable accounts moved over to the new company.  The court of appeals started by noting that the defendants did not challenge the jury’s finding that they had entered into a conspiracy to damage the plaintiff.  That led the court to conclude that each of the defendants was jointly and severally liable for the other defendants’ breaches of their non-disclosure agreements, which were themselves established by sufficient evidence at trial.  The court of appeals upheld the jury’s award of $250,000 in lost profits attributable to the eleven patients lost by the plaintiff, but reversed and rendered amounts that had been awarded for profits that would have been earned after the plaintiff went bankrupt and sold off its business.  According to the court, there was no evidence that he plaintiff would have had the right to continue receiving profits from customers after the business was sold, so there was no evidentiary basis for the recovery of those post-sale profits.  Finally, the court of appeals affirmed the trial court’s grant of JNOV against the plaintiff on its claim for attorney fees, holding that fees were not recoverable because the plaintiff had not offered any proof of presentment to the defendants.

Helping Hands Home Care, Inc. v. Home Health of Tarrant County, Inc., No. 05-08-01657-CV

Unbillable Hours

The court reversed a judgment awarding an law firm lost profits in an action against a litigation services company. Elrod, a litigation law firm, hired A-Legal to perform support services related to E-Discovery. Two days later, Elrod pulled the job when A-Legal doubled the price it previously quoted. Both parties sued each other for breach of contract. Elrod claimed damages from lost revenue and lost business opportunities due to the time its attorney’s and staff lost dealing with A-Legal’s breach. Elrod presented evidence of lost revenue, which it valued at $20,000, but the only specific evidence relating to a worker’s time lost dealing with the breach came from one attorney, Nassar. Nassar testified that her hourly rate is $325 and that she spent about eighty hours in total “dealing with the situation.” Elrod made no attempt to establish what expenses would have been attributable to Nassar’s billable hours or whether the firm lost any specific business or billing during that time. The trial court entered a judgment awarding $20,000 lost profits plus attorney’s fees.

On appeal, the court noted that the only calculation that can be made from Elrod’s evidence is potential gross revenue brought in by Nassar, not net profits, because Elrod presented no evidence to show any expenses related to that revenue or that she actually billed less time because of the breach than she would have otherwise. Thus, the evidence was legally insufficient to show lost profits, the only measure of damages presented, and the court reversed and rendered a take nothing judgment.

A-Delta Overnight Legal Reproduction Services Corp. v. David W. Elrod, PLLC, No. 05-11-00708-CV