Page 73 - Calculating Lost Profits

Cases Addressing Mitigating Revenues Versus Additional Revenues

Penncro Associates Inc. v. Sprint Spectrum PCS fn 14 addressed whether amounts earned by Penncro
were mitigating revenues or unrelated revenues, after a breach of contract by Sprint. The district court
found that Penncro avoided over $7 million in losses by taking on work for AT&T and American Water;
however, Penncro argued on appeal that it could have handled the new jobs and the work for Sprint. The
appeals court evaluated whether Penncro was a "lost volume seller," explaining that "[a] lost volume
seller is one who has the capacity to perform the contract which was breached as well as other potential
contracts, without resource or capacity constraints." Because the district court found that Penncro had
the capacity to perform additional work only because of the breach of the Sprint contract (freeing up ca-
pacity), the appellate court found that Penncro was not a lost volume seller. The appeals court concluded
that the Penncro work for AT&T and American Water provided mitigating revenues and not additional
revenues; therefore, the amounts were proper offsets to the damages awarded to Penncro.

Conversely, Collins Entertainment v. Coats involved a broken six-year lease agreement for video poker
machines. fn 15 The successor entity to Coats claimed Collins’s damages failed to consider the opportuni-
ty to re-lease the video poker machines. Collins countered that it held a sufficient number of machines to
service the Coats contract as well as any subsequent contracts. To resolve this dispute, this court also
looked to the lost volume seller doctrine. fn 16 The court concluded Collins may have mitigating sales,
but it still would have had sufficient inventory to fulfill both the lost sales and the mitigating sales. Thus,
the court concluded any subsequent transactions did not qualify as a substitute or mitigation of lost sales.

Application of the Mitigation-of-Damages Doctrine

A practitioner who is calculating lost profits should generally investigate and understand (such as by
discussing this issue with counsel) if the mitigation-of-damages doctrine is applicable to the matter. If
so, mitigation offsets are applied to projected losses. However, if the plaintiff incurs reasonable expens-
es in an effort to mitigate damages, the mitigation expenses may be recoverable as damages of the plain-
tiff, even if the mitigation efforts are unsuccessful.

The expert should also consider mitigation as a factor in the determination of the loss period. That is, the
loss period may end when the plaintiff reasonably should have offset or mitigated any damage amounts.
For example, lost profits for income-producing assets should generally end after the reasonable life of
the income-producing asset.

Limitations to the Plaintiff’s Ability to Mitigate

The plaintiff’s ability to mitigate is dependent upon several factors, which may include the following:

 Plaintiff’s financial ability to mitigate. Mitigation of damages may not be possible if the plaintiff
is financially unable to effectuate the mitigating activity.

fn 14 Penncro Assocs., Inc. v. Sprint Spectrum, L.P., 499 F.3d 1151, 1155-56 (10th Cir. 2007).

fn 15 Collins Entertainment v. Coats and Coats, 368 S.C. 410 (S.C. 2006).

fn 16 Citing the Restatement (Second) of Contracts § 347 (1981).

© 2020 Association of International Certified Professional Accountants 71