Page 92 - Economic Damages Calculation

Cases addressing the Existence of Management Experience in the Business in Question

General Observations

While courts look favorably on expert analyses in which the owner of the harmed business had extensive
or relevant experience operating the failed business that is the subject of the litigation, experts may ben-
efit from consideration of differences in the managing the yardstick business and the harmed business.
At a minimum, experts should be mindful in relying on such evidence when there is a meaningful dis-
crepancy in the management experience between the yardstick and subject entities.

Pauline’s Chicken Villa Inc. v. KFC Corp.

In Pauline’s Chicken Villa Inc. v. KFC Corp., the business at issue was a new franchise location for
which construction had not been completed, with the defendant ultimately rescinding the contract and
franchise agreement. fn 107 The plaintiff brought an action for breach of contract, seeking lost profits
damages. From 1962 to the time of the litigation, the plaintiff owned and operated six Kentucky Fried
Chicken franchises, including locations in Clarksville and Jeffersonville, Indiana.

The trial court found in favor of the defendant, noting that the "plaintiff’s choice of remedy, recovery of
lost profits, under the facts and circumstances of this case, is not an allowable measure of damages re-
coverable under Kentucky law and Plaintiff failed to offer proof of any other measure of damages." fn 108
The Court of Appeals reversed the verdict and remanded for a new trial, stating that the question of
breach of contract should be submitted to a jury. However, the Court of Appeals also limited damages
on remand to "measures of recovery" (other than lost profits) because the plaintiff’s loss related to an
"unestablished business."

Ultimately, the Supreme Court of Kentucky took up the issue and unequivocally stated that recovery of
lost profits for an unestablished business in Kentucky was not barred where lost profits were proven
with reasonable certainty. The court concluded as follows:

[T]he test is not whether the business is a new or unestablished one, without a history of past
profits, but whether damages in the nature of lost profits may be established with reasonable cer-
tainty ... No court, including this one, can elucidate a single definition of "reasonable certainty"
which may be used as a yardstick in all cases. However, this is a case containing factors and el-
ements which eliminate virtually all uncertain variables. fn 109

In reversing the lower court’s decision precluding lost profits, the Supreme Court of Kentucky pointed
to the quality of the information available and the relevant management experience of the plaintiff.

This is a national franchiser, with uniformity of national advertising, uniform quality control,
earnings and expense figures on nearby and comparable locations, and an available history con-
cerning success and failure ratios. The franchisee, likewise, is experienced in the field and with

fn 107 Pauline’s Chicken Villa Inc. v. KFC Corp., 701 S.W.2d 399 (Ky. 1985).

fn 108 Id. at 401.

fn 109 Id.

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