By: Edward M. Koch and Anthony LaMonaca
On August 17, the New Jersey Supreme Court ruled Schwartz v. Menas, #086155 (NJ 17 Aug 2022). It was disputed whether the plaintiff’s claim for compensation for lost profits as new business was excluded by the “New Business Rule”. This regulation generally prohibits claims for lost profits by business founders, since such claims cannot be proven with sufficient certainty. The reason for this rule is that untried, inexperienced companies should be treated differently than experienced companies with a proven track record, as the prospective earnings of a new company are too small and speculative to be “reasonably safe”.
In that case, plaintiff Larry Schwartz and his company, NJ 322, LLC, sued multiple parties for tortious conduct that interfered with Schwartz’s efforts to develop two real estate projects. What was undisputed was that Schwartz had no experience as a real estate developer and his development business was “new business”. Schwartz provided expert testimony about his lost profits in several scenarios. These reports did not confirm that Schwartz had no experience, but rather assumed that he received funding and worked with experienced developers. The lower court denied this evidence under the New Business Rule and subsequently awarded summary judgment to the defendants.
The Appeals Department confirmed this and found that she was compelled to comply Weiss v. Revenue Bldg. & Credit Ass’n, 182 A. 891 (NJL 1936), and applied the new business rule. The Appellate Division also found that even if the rule did not apply, the expert’s reports were too speculative to meet the standard of reasonable certainty required for damages for lost profits. The New Jersey Supreme Court granted confirmation.
The Supreme Court reversed this in an advisory opinion clarifying the application of the new business rules standard. The New Jersey court faced a new question: whether a plaintiff’s status as a new entity is an important factor in determining whether lost profits can be established with reasonable certainty or whether such damages are entirely precluded.
In view of the reasoning of several other jurisdictions and the rewriting of contracts, the court dismissed a per se Prohibition of such claims. The court emphasized that claims for damages for lost profits are subject to the standard of “reasonable certainty”, which requires a fact-sensitive individual examination. The court justified this by saying that although it is “much” more difficult for a new company to prove lost profits with sufficient certainty, it is not impossible. The court refused White insofar as it stood for a per se Prohibition of such claims. The court also appeared to regard Schwartz’s near-total lack of experience in the field of his new venture as significant. His expert reports did not acknowledge this lack of experience, but rather assumed that he simply teamed up with more experienced developers. The court reversed this and directed the lower court to examine all evidence in order to apply this fact-sensitive analysis.
In the wake of blackAlthough there is no longer an absolute prohibition, it will remain difficult for a new company to prove such damages as they are often remote, uncertain or speculative. This opinion directs court cases to “carefully consider” a new company’s allegation that a defendant’s tortuous conduct or breach of contract prevented it from benefiting from a company in which it had no experience. A court should bar such a claim unless the loss of profit can be established with reasonable certainty. The court cited the rewrite of contracts, which referred to possible evidence including “expert testimony, economic and financial data, market research and analysis, business records of similar companies, and the like.” Of course, supporting opinions must be specific and backed up with such data in order to even attempt to meet the high standards of reasonable assurance.
Although there is no longer an absolute prohibition on new business claims for lost profits in New Jersey, the burden of proof is high and can ultimately prove insurmountable when new businesses make such claims.
This correspondence should not be construed as legal advice or an opinion as to any specific fact or circumstance. The content is provided for general informational purposes only and you are strongly advised to consult an attorney regarding your own situation and legal questions.