Page 89 - Economic Damages Calculation

Among the issues examined by the Court of Appeals of Washington was whether the trial court properly
applied the new business rule to preclude the plaintiff from pursuing its claim for lost profits. The Court
of Appeals first noted that the state’s highest court had concluded in Larsen fn 95 that new businesses
were not barred from recovering lost profits when the calculation was based on a similar business or the
plaintiff offered expert testimony based on "tangible evidence." fn 96

The plaintiff’s expert had apparently relied on the defendants’ own profit history and profit projections
of national franchises, along with sales projections provided to potential franchisees. The defendants ar-
gued that the analysis was inadequate under the law because the plaintiff’s expert had not based his
analysis on the "market conditions or profits of comparable businesses operating in Hawaii." fn 97

In rejecting the defendants’ argument, the Court of Appeals ruled that "[e]ven if the ‘local comparables’
factor was intended to be a bright-line, sine qua non requirement, we decline to extend that bright line to
the unique context of national franchising." fn 98

In reversing the order of summary judgment and remanding the issue of lost profits for trial, the court
pointed to the unique nature of franchises that eliminates much of the concerns of uncertainty underlying
"the original rationale for the new business rule." fn 99

Here, proof of the nationwide character of the franchise business at issue provided an ample ba-
sis for computation of probable losses. It has come to be recognized that in the arena of franchise
or chain stores, ‘courts are displaying increasing reluctance to apply the new business rule’ be-
cause of the inherent characteristics of franchise outlets, which ‘eliminate nearly all uncertainty.’

...

[The] costs and the profit histories of existing franchise outlets are known and largely uniform;
in fact the benefit of these certainties is what makes the franchise system attractive to potential
franchisees. It would be ill advised for the courts to impose a formal bar to recovery of lost prof-
its when the context otherwise provides such a wealth of available profitability evidence." fn 100

The Court of Appeals also reasoned that it would be "particularly inequitable to deny plaintiff lost prof-
its where the plaintiff produces the best evidence available and it is sufficient to afford a reasonable ba-
sis for estimating loss." fn 101 The defendants’ argument that the plaintiff’s expert’s lost profits testimony

fn 95 Larsen v. Walton Plywood Co., 390 P.2d 377 (Wash. 1964).

fn 96 No Kai Oi Corp, 863 P.2d at 82.

fn 97 Id.

fn 98 Id.

fn 99 Id. at 83.

fn 100 Id. at 83–84 (citations omitted).

fn 101 Id. at 84.

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