IS EXPERT OPINION TESTIMONY REGARDING LOST PROFITS ADMISSIBLE IF YOU HAVE AN UNESTABLISHED BUSINESS?

In these times of economic uncertainty, the failure of a relatively new or unestablished business is not uncommon.  But what happens when the business fails due to the wrongdoing of another?  How does the trier-of-fact value the lost profits with no track record of earnings to look to?

The California Supreme Court has granted review to decide the question of what is the permissible scope of expert testimony regarding lost profits claimed by an unestablished business.  (Sargon Enterprises, Inc. v. University of Southern California (case no. S191550) ___Cal.4^th ___.)  In California, when a defendant prevents the operation of an unestablished business, the plaintiff may recover an award of lost profits only by showing with reasonable certainty their nature and occurrence.  In Sargon Enterprises, the plaintiff alleged he invented a superior dental implant, but was unable to market the implant because of defendant’s alleged breach of the clinical trial agreement.  Plaintiff’s expert witness on the issue of damages would have testified the anticipated lost profits depended principally on the implant’s innovativeness.  Therefore, if the jury found a high degree of innovation, plaintiff would have achieved a larger market share, and larger profits, than if the jury found a lower degree of innovation.  The lost profits calculated applying the plaintiff’s expert’s theory ranged from $1.18 billion to $220 million.  However, the trial court excluded the expert’s testimony as speculative.

In a split decision, the Second District Court of Appeal reversed the trial court’s evidentiary exclusion.  The majority held the trial court’s ruling was “tatamount to a flat prohibition on lost profits in any case involving a revolutionary breakthrough in an industry,” while also acknowledging the “factor of innovation…is not easily converted into dollars and cents.”  The dissent opined the trial court had acted within its discretion ruling a comparison of “degrees of innovation” was inherently speculative.

The California Supreme Court has granted review, framing the issue before it as:  “Did the trial court err in excluding proffered expert opinion testimony regarding lost profits?” Undoubtedly, this decision will be of importance to the technology industry in our State.

If you are interested in following this case as it moves through the briefing process, to oral argument and decision, visit http://appellatecases.courtinfo.ca.gov/, search for the case number provided above, and enter your email in the box provided.  Questions?  Please don’t hesitate to contact me!

Nothing in this blog is intended to create an attorney-client relationship.  This article is intended to provide a general overview of the current status of the law for informational purposes only, and is not intended to constitute, or serve as a substitute for, a professional legal consultation.  Laws change every day; please consult an attorney regarding the current status of the law, and how the law affects your specific circumstances. Thank you.