Page 66 - Economic Damages Calculation

New Business Rule and the Modern Treatment

In many jurisdictions, the "new business rule" historically limited recovery for lost profits damages
sought by a plaintiff. fn 2 Many older courts found that a lack of historical profits made lost profits of
such businesses inherently speculative. In Mullen v. Brantley, fn 3 the court articulated a common ra-
tionale used to justify application of the new business rule:

When an established business, with an established earning capacity, is interrupted and there is no
other practical way to estimate the damages thereby caused, evidence of the prior and subsequent
record of the business has been held admissible to permit an intelligent and probable estimate of
damages. ... But where a new business or enterprise is involved, the rule is not applicable for the
reason that such a business is a speculative venture, the successful operation of which depends
upon future bargains, the status of the market, and too many other contingencies to furnish a
safeguard in fixing the measure of damages. fn 4

In applying this legal reasoning to the facts at hand, the Mullen court found that "Mullen’s proper meas-
ure of damages could not be based on the loss of anticipated profits from an unestablished business."
Likewise, in Kinesoft Development Corp. v. Softbank Holdings Inc., fn 5 the Court found that

[a] new business, or an existing business with a new product, cannot recover lost profits because
the future profits of a new business cannot be ascertained with any degree of certainty. ... The
reason for the rule is that a new business has yet to show what its profits actually are. fn 6

The Mullen and Kinesoft Development Corp. decisions illustrate what is often referred to as a per se ver-
sion of the new business rule, with the award of lost profits hinging on whether or not the business in
question is "new" or "unestablished" — in essence, a mechanical determination used by courts in an at-
tempt to guard against windfall recoveries based upon speculative forecasts. However, at least since the
1970s, many courts have recognized the inherent unfairness of this stricter form of the new business rule
as it precludes recovery and is divorced from the facts as well as evidence of harm in a particular case.
The following quotes from court opinions are examples of this recognition:

• "We ... reject the harsh rule which forecloses recovery merely because a business is new or unes-
tablished. In our opinion, it would be grossly unfair to deny a plaintiff meaningful recovery for
lack of a sufficient ‘track record’ where the plaintiff has been prevented from establishing such a
record by defendant's actions." fn 7

fn 2 While courts have common themes and phrasing in case law pertaining to damages for newly established businesses, the case law
of different state and federal courts varies. As a result, while the authors have identified representative examples, a review of case law
specific to each jurisdiction may provide further insight and highlight additional relevant considerations.

fn 3 195 S.E.2d 696 (Va. 1973).

fn 4 Id. at 699–700 (citations omitted).

fn 5 Kinesoft Dev’t Corp. v. Softbank Holdings Inc., 139 F. Supp 2d 869 (N.D. Ill. 2001).

fn 6 Id. at 908.

fn 7 Chung v. Kaonohi Center Co., 62 Hawaii 594, 606; 618 P.2d 283, *291 (Haw. 1980).

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