Recovering Lost Profits - Articles

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Posted by: J. Ross Pepper on Aug 13, 2008

Journal Issue Date: Aug 2008

Journal Name: August 2008 - Vol. 44, No. 8

Prove. Calculate. Award

Historical Perspective and Current Law

At one time in this state, lost anticipated profits which were the result of the breach or other wrong of a defendant could not, for all practical purposes, be recovered in most cases.[1] Back then, lost profits were considered, almost per se, to be speculative.[2] A statement of the Tennessee Court of Appeals in a 1911 case sums up pretty well how receptive our courts once were to plaintiffs claiming lost profits: "Nothing is more uncertain than the probable or anticipated profits of a commercial business."[3]

Tennessee law regarding lost profits damages has evolved to become starkly less stingy and to allow for the recovery of lost profits as damages for a range of wrongs. In Tennessee, lost profits have been awarded for breach of contract[4]; ordinary negligence[5]; conversion[6]; wrongful eviction[7]; wrongful replevy[8]; unconstitutional and illegal actions by a legislative body[9]; and intentional interference with contract.[10] Not only have lost profits been awarded in situations where the defendant's conduct caused lost sales or lost revenues, but also, such damages have been awarded where the defendant's conduct caused the plaintiff's expenses to increase, which in turn, reduced the plaintiff's profits.[11]

Under current Tennessee law, plaintiffs are allowed to recover lost profits if they are proven with "reasonable certainty."[12] A plaintiff does not have to prove such damages to an absolute certainty or with mathematical precision,[13] and our courts have recognized that lost profits damages may be based on estimates.[14] Once a plaintiff has proven, with reasonable certainty, the fact that the defendant's wrong caused a loss of expected profits, less certainty is required with regard to the proof as to the amount of the lost profits damages.[15] Consistent with damages principles applicable to other types of damages, lost profits damages become too speculative "only when the existence of damages is uncertain, not when the precise amount is uncertain."[16]

Net Profits Allowed, Not Gross Profits

A plaintiff may not recover lost gross profits, gross revenues or gross sales.[17] Only lost net profits may be recovered.[18] The burden of proof is on the plaintiff to prove that the required expenses have been properly deducted from its lost gross revenues in order to arrive at its lost net profits.[19] Thus, plaintiffs who have offered no proof or inadequate proof of their expenses have been denied a recovery for lost profits even though they offered proof of their lost sales or gross profits.[20] Moreover, if a plaintiff seeks lost profits, but fails to produce evidence of its expenses, which evidence the plaintiff had the ability to produce, the court can make a presumption that the unproduced evidence would have been adverse to the plaintiff's position.[21]

A. Fixed Overhead Expenses
What expenses must be deducted from a plaintiff's lost gross sales, gross profits or gross revenues to arrive at an allowable sum for lost net profits? Assume that a plaintiff sells widgets, and that the defendant's conduct caused the loss of the sale of 20 widgets. The plaintiff must prove that its net profit figure was calculated by deducting direct expenses, such as its cost for the 20 widgets, if it purchased the widgets, or the cost of the raw materials it used to manufacture the widgets, if it manufactured them.[22] The plaintiff must also prove that its net profit calculation includes a deduction for all expenses directly related to the sale of the widgets, such as commissions.[23] Does the plaintiff widget seller also have to deduct overhead expenses, or some allocable portion thereof, which were not directly related to the purchase, manufacture or sale of the 20 widgets, such as rent and insurance premiums paid for its facilities? Since the widget seller's prices for its widgets undoubtedly take into account all of its expenses, including fixed overhead, should it not be required to make some deduction for fixed overhead expenses? After all, without paying rent and other fixed expenses, the widget seller could not sell the first widget.

1. No Deduction for Fixed Overhead. The only published case in Tennessee that offers anything more than a cursory explanation of what expenses must be deducted from gross profits to arrive at net profits is Waggoner Motors Inc. v. Waverly Church of Christ.[24] The plaintiff in the Waggoner Motors case was an automobile dealer, so the case involved lost profits from the sale of goods, not from services.[25] In Waggoner Motors, the court defined net profits as "the expected revenue from the sale of the goods minus the cost of the goods sold minus all the seller's expenses fairly attributable to the sale of the goods."[26] Citing an unpublished Tennessee opinion, the Waggoner Motors court further stated that net profit means gross profit less "administrative costs including selling expenses, which are overhead."[27] Finally, in Waggoner Motors, in a footnote, the court stated that "fixed overhead expenses" do not have to be deducted from gross revenue to arrive at net profits.[28] Therefore, under Waggoner Motors, a plaintiff must deduct all expenses "fairly attributable" to the sale of goods, but fixed overhead expenses are not considered to be expenses encompassed in that phrase.

2. What Is Fixed Overhead? What expenses are considered "fixed overhead?" In Waggoner Motors, the court, again speaking in a footnote, defined fixed overhead expenses as "expenses that the injured party would have incurred notwithstanding the wrongful act."[29] Thus, the plaintiff widget seller in our hypothetical would not have to deduct a portion of its rent or insurance expense for its facilities in order to arrive at its lost net profits under the reasoning of the Waggoner Motors case. The rule laid out in Waggoner Motors, that a plaintiff does not have to deduct fixed overhead expenses to arrive at an allowable sum for net profits, is consistent with the overwhelming weight of authority from other jurisdictions.[30]

3. Fixed Overhead and Contracts for Services. The Waggoner Motors court's treatment of "fixed overhead" expenses (expenses that the plaintiff would have incurred notwithstanding the defendant's wrongful conduct) allows a windfall of sorts, it could be argued, to a plaintiff in a service business whose expenses are nearly all fixed. What if an accounting firm, whose expenses are nearly all fixed, loses the opportunity to perform work for a client because of the conduct of the defendant, and the work would have generated $100,000 in fees? Under Waggoner Motors, the accounting firm could, and should, argue that its lost net profits are $100,000, or very close, because nearly all of the expenses necessary to produce the fees, such as salaries and rent, were fixed.

For a plaintiff in a service business, like the hypothetical accounting firm discussed above, the case of B & L Corporation v. Thomas and Thorngren Inc.[31] is also supportive of the position that fixed costs do not have to be deducted from gross revenue. In B & L Corporation, unlike in Waggoner Motors, the lost profits at issue flowed from a contract for the performance of services, and not from the sale of goods.[32] Thus, the plaintiff in that case did not have the direct costs that the plaintiff in Waggoner Motors had (the wholesale costs of the automobiles to be resold at retail). The contract in B & L Corporation called for the plaintiff to implement a program for its client that would ensure that its client received proper tax credits for hiring individuals in a targeted group.[33] In that case, the court awarded the plaintiff the "face value," or gross amount, which the plaintiff would have made from its contract, which contract was lost as a result of interference by the defendants.[34]

The defendants' objection that the amount awarded by the trial court was for lost gross revenue, and not lost net profits, was rejected by the court of appeals in B & L Corporation.[35] The court of appeals, however, did not address the defendants' argument squarely or directly in its ruling.[36] Instead of opining as to whether expenses should be deducted from the gross amount received by the defendants from the contract that they took from the plaintiff, the court just stated that the award of the gross amount of the contract was appropriate because the lost revenue was the "direct and proximate result" of the defendants' wrongful conduct.[37] Very notably, there was evidence offered at trial, by the plaintiff no less, that the plaintiff's profit margins on its contracts were between 40 and 50 percent.[38]

4. Arguments for Requiring Fixed Overhead to Be Deducted. Assuming that the law in Tennessee is such that fixed overhead expenses do not have to be deducted from gross revenues to arrive at an allowable amount for lost net profits, defendants should not assume that, just because a plaintiff or the plaintiff's financial records or expert label some item of expense as "fixed" that, ipso facto, the plaintiff will not be required to deduct that expense, or any portion of it, from gross revenue. If the defendant can prove that the expense, or some portion of it, was saved as a result of the circumstances caused by the defendant, then, under Waggoner Motors, not to mention a fundamental principle of damages,[39] the plaintiff should be required to deduct the expense, or an allocable portion of it. Defendants should focus less on how an expense is defined by a plaintiff and more on whether or not some or all of the expense was, in fact, saved. Conversely, if you are representing a plaintiff and you are relying on the net income figures in its federal tax returns, you may be shortchanging your client since those figures may include deductions for fixed expenses.

Defendants in this state should also argue for the rule adopted by some courts in other jurisdictions: that the burden of proof is on the plaintiff to overcome the presumption that the manufacture of the goods in question, or provision of the services in question, would have caused an increase in the plaintiff's fixed expenses.[40] Therefore, because the plaintiff, as a result of the defendant's conduct, did not have to produce the goods, or provide the services, it saved some portion of its fixed expenses. Moreover, there is authority for the argument that a plaintiff claiming lost profits must disprove the presumption that the plaintiff has been "freed by the breach to utilize his overhead with equal profit."[41] This rule, which is based on the principle that a plaintiff has a duty to mitigate damages, does not reduce the potential award of lost net profits by requiring the plaintiff to deduct fixed expenses. It places the burden on the plaintiff to prove that it could have mitigated its damages by using its fixed overhead to earn other profits.

B. Net Profits of Professional Corporations and Subchapter S Corporations
Can a business entity, like a professional corporation or an IRS Subchapter S corporation, which generally has no income because all, or substantially all, of its income is paid to its shareholders or to professional members, recover lost profits? If the entity cannot recover lost profits because it would have never had a loss of net income, can the shareholders or members, individually, recover the compensation they lost as the result of the defendant's wrong?

Authority from other jurisdictions gives conflicting answers to the immediately preceding questions.[42] There is no Tennessee law to answer these questions, and defendants should argue that neither such an entity nor its members or shareholders, individually, can recover lost profits. Defendants do not have to take their cue just from this author: The court in Waggoner Motors stated that there was a "substantial question" with regard to whether an IRS Subchapter S corporation might be barred from recovering lost profits.[43]

In Anesthesiologists of Ogden v. St. Benedict's Hospital,[44] a decision of the Utah Supreme Court, the plaintiff was a professional corporation whose members consisted of anesthesiologists.[45] The plaintiff professional corporation claimed that the defendant hospital had breached a contract.[46] It claimed lost profits in excess of $1 million.[47] The trial court only awarded the plaintiff $14,833 on the grounds that most of the $1 million in lost revenue would have been paid out in salaries to the shareholders of the plaintiff.[48] The trial court awarded nothing to the individual shareholders of the plaintiff professional corporation.[49] The Utah Court of Appeals reversed the trial court on the basis that the shareholders of the plaintiff, who were physicians, should have been awarded, as lost profits, the amount by which their salaries were reduced because of the defendant's breach.[50] The Utah Supreme Court reversed the court of appeals and expressly rejected the argument that shareholder salaries in the professional corporation represented lost profits.[51] The reasoning of the Utah Supreme Court, in Anesthesiologists of Ogden, boiled down to its belief that, to rule otherwise, would allow the shareholders of the professional corporation to take advantage of a corporate form which they had chosen.[52]

For lawyers representing plaintiff professional corporations and Subchapter S corporations, there is authority that is squarely contrary to cases like Anesthesiologists of Ogden.[53] Those cases hold that professional corporations are distinguishable from other corporations, and that it is unrealistic and unfair to assume that a professional corporation is not earning a profit even though its net income for tax purposes is always at or near zero.[54]

Methods of Proving Lost Profits

What is the most effective way to prove lost profits damages? In Waggoner Motors, the court stated that the "best evidence of lost profits is a comparison of the experience of the injured party's own business before and after the wrongdoing."[55] To be sure, plaintiffs that have been able to offer this "before and after" evidence have successfully recovered lost profits in many cases.[56] There are also, however, plenty of Tennessee cases in which a plaintiff has been allowed to recover lost profits without showing this kind of "before and after" proof.[57] In fact, in Tennessee, lost profits have been held to have been proven with reasonable certainty based on evidence of the plaintiff's financial performance subsequent to the alleged wrongful conduct without any comparison to the plaintiff's financial performance before the alleged wrongful act.[58]

While the court in Waggoner Motors stated that the "best evidence" of lost profits is evidence which is based on a comparison of the injured plaintiff's business before the defendant's conduct with the plaintiff's business subsequent to the defendant's conduct, that case involved a loss of profits based on automobiles that the plaintiff alleged it could have sold. In Waggoner Motors, the plaintiff, for obvious reasons, could not offer evidence of lost profits based on contracts entered into before the defendant's conduct or evidence of "lost customers" who could testify about their willingness and intent to buy an automobile. In cases where the defendant's conduct results in the loss of profits under a contract that was formed before the defendant's alleged wrongful conduct, a "before and after" comparison of the kind employed by the Waggoner Motors court is unnecessary.

Must a plaintiff seeking lost profits offer evidence that it has a track record of profitability? No. A new business, with no history of profits at all, may recover lost profits.[59] It should be noted, however, that many Tennessee courts that have denied lost profits have pointed out, and, presumably, relied upon, the fact that the plaintiff was a new business or was inexperienced.[60] In a 1956 case, the Tennessee Supreme Court stated, in dicta, that "where the business is new and has not proved itself to be a profit making business, it is necessary ... for the plaintiff to prove that he had firm orders."[61] While this dicta has never expressly been disaffirmed, it is questionable how much weight it still carries, if any, based on opinions of Tennessee appellate courts subsequent to the 1956 decision in which it was set forth.[62]

Reasonable Certainty

The most discussed issue in Tennessee case law regarding lost profits damages concerns whether or not such damages have been proven with reasonable certainty. It is an understatement to say that there are few bright line rules in Tennessee law with regard to when lost expected profits are considered, on one hand, proven with reasonable certainty, or, on the other hand, remote, speculative, or not proven with reasonable certainty. Whether the reasonable certainty standard has been met depends on the facts of each case.[63] As with all legal determinations that must be based on particular facts, the results in Tennessee published case law regarding whether lost profits were proven to the reasonable certainty standard are, to some degree, inconsistent and contradictory.

A. Offers from Customers as Proof of Lost Profits
In cases where the plaintiff alleges lost profits from his or her inability to provide goods or services to a third party (a customer) because of the breach or other wrong of the defendant, one certainty is that the plaintiff does not have to show that he or she had a legal contract, either oral or written, with the third party (the plaintiff's customer) in order to recover lost profits.

In Jennings v. Lamb,[64] a 1956 decision of the Tennessee Supreme Court, the appellate court had denied the plaintiff his lost expected profits thta he would have made had the defendant not breached its contract with the plaintiff to deliver 850,000 board feet of unfinished lumber that the plaintiff intended to "finish" and then resell.[65] The court of appeals affirmed the decision of the trial court that the plaintiff was not entitled to recover his lost profits because the plaintiff could not show "firm orders" from customers willing to buy the lumber from the plaintiff once he had finished it.[66] The Tennessee Supreme Court reversed the court of appeals, and held that the plaintiff had proven his lost profits with reasonable certainty.[67] To the Supreme Court, it was enough that the plaintiff had presented the "clear, positive and uncontradicted testimony of two regular customers of [plaintiff] that ... each one of them offered to buy the entire output of finished lumber from [plaintiff] ...."[68]

B. Plaintiff's Testimony Alone as Sufficient to Prove Lost Profits
What if the plaintiff cannot muster the testimony of even one customer willing to say that he or she offered to purchase the goods or services of the plaintiff or would have done so? Even in cases, unlike Jennings, where plaintiffs seeking lost profits have been unable to present testimony from "lost" customers or evidence of a firm contract with a customer, such plaintiffs have recovered lost profits.

For plaintiffs seeking lost profits, it would be hard to argue that there are any two better cases in all Tennessee jurisprudence than two that were decided in favor of farmers. In Fuqua v. Madewell[69] and Ford Motor Company v. Taylor,[70] the plaintiffs were both farmers who claimed lost profits from crops that could, allegedly, have been grown and sold but for, in Fuqua, a breach of a lease for a Putnam County farm and, in Ford Motor Company v. Taylor, a defective tractor.[71] In both cases, the appellate court upheld the award of lost profits from the crops that could not be raised.[72] In neither case did the plaintiff farmer offer any testimony or evidence from third parties as to the market for their crops or testimony from specific buyers who were interested in purchasing their crops. There was no proof, in either of those cases, of offers made for the crops. Nor did the courts in either case express any concern that the vicissitudes of farming (bugs, drought, etc.) might have prevented the crops from even making it to market. The cases of Fuqua and Ford Motor Company v. Taylor remind us that the right kind of plaintiff with the right kind of facts can obtain an award of lost profits based on nothing more than his or her own testimony.

C. Business Records as Sufficient to Prove Lost Profits
In other cases, plaintiffs have recovered lost profits without the testimony of third parties who were potential customers and without evidence of any specific contracts or orders, but where those plaintiffs relied upon, in addition to their own testimony, their business records. In Brandtjen & Kluge Inc. v. Pope,[73] the plaintiff was a printer whose claim was based on the wrongful replevy of a printing press.[74] The court of appeals upheld a jury verdict in favor of the plaintiff for lost profits in the face of the defendant's argument that the damages were "remote, imaginary and speculative."[75] In upholding the jury verdict, the court of appeals noted that the plaintiff testified that he kept a transcript of production during the time he had the printing press in question and for the seven months that it was replevied (and he was without it); that his average daily net loss during the period of replevy was $15.78; and that he had to refuse business almost every day.[76] During cross-examination at trial, the plaintiff in Brandtjen admitted that he had no records of the orders which he turned down or of the value of those orders.[77]

In Ferrell v. Elrod,[78] the plaintiff alleged that she lost profits that she would have made from the operation of her cosmetology school because of the defendant's breach of a lease, which left her with no location to operate for nine months.[79] The trial court's judgment for the plaintiff for lost profits, which was affirmed on appeal, was based exclusively on the corporate profit figures contained in the plaintiff's federal income tax return for the nine-month period beginning when the plaintiff was able to find a new location and begin business.[80] Likewise, in Waggoner Motors,[81] the court of appeals awarded lost profits to an automobile dealership by comparing the dealership's sales figures before and after the wrongful conduct of the defendant.[82] As in Brandtjen and Elrod, there was no proof in Waggoner Motors of specific lost sales or lost customers.

D. Testimony of Persons Other Than Plaintiff or Plaintiff's Customers as Sufficient to Prove Lost Profits
In Cummins v. Brodie,[83] the plaintiff effectively proved up his lost customers, and his resulting lost profits, not with the testimony of those lost customers or by business records, but through the testimony of his booking agents.[84] Based on misrepresentations made by the defendant in the case, the plaintiff, an Elvis impersonator, cancelled several shows and had his two booking agents cease booking shows.[85] At trial, the plaintiff's booking agents testified that they cancelled 15 to 20 shows each.[86] Notably, neither booking agent produced business records to support their testimony, and neither Elvis (the plaintiff), nor the booking agents, could remember exactly how many shows were cancelled.[87] At trial, the plaintiff testified that he had little problem finding work and that his usual fees for a show were between $2,400 and $3,500.[88] There is no indication whatsoever in the opinion that the plaintiff introduced any business records or tax returns to support his claim for lost profits. The trial court awarded the plaintiff $75,000 in lost profits, which amount was based on 25 lost shows at a profit of $3,000 apiece.[89] The court of appeals held that the record "amply" supported the lost profits award in that case.[90]

E. Cases Holding Lost Profits Not Proven with Reasonable Certainty
In other Tennessee cases, plaintiffs who did not have legal contracts or firm orders and who did not present evidence to support the existence of specific "lost" buyers or customers have been denied lost profits. In Burge Ice Machine Company v. Strother,[91] a Tennessee Supreme Court decision that predates Jennings by two years, the plaintiff claimed that he lost profits on the sale of strawberries, meat and turkey as the result of the defendant's delayed and faulty installation of a refrigerating machine.[92] The jury awarded the plaintiff $16,000, which award the court of appeals set aside.[93] The Tennessee Supreme Court affirmed the court of appeals on the grounds that the plaintiff "had no contracts with buyers" and "simply said that he could have sold every one of [the products] at a stated profit."[94] The court also pointed out that the plaintiff's business was "new."[95]

The plaintiff in Anderson-Gregory Company v. Lea,[96] much like the plaintiff in Burge Ice Machine, based his claim for lost profits strictly on his own testimony as to the profits that he would have made if not for the defendant's breach of a contract to supply him with river gravel.[97] The jury awarded the plaintiff $3,672 in lost profits.[98] The court of appeals vacated the jury's award for lost profits stating that the plaintiff "had no information on which to base his estimation of lost profits."[99] It also noted that the plaintiff had a "total lack of experience" as to the profits to be made from furnishing river gravel.[100]

The plaintiff in Morristown Lincoln-Mercury v. Roy N. Lotspeich Publishing Company,[101] like many other plaintiffs, was in a business that made it impracticable for it to offer the testimony, or even the identity, of its "lost" customers. The plaintiff in that case was a car dealership.[102] The defendant in the case was the publisher of the Knoxville Journal.[103] The defendant had agreed, but failed, to print a quarter page advertisement in three daily issues of its paper.[104] The plaintiff alleged that, because the advertisements were not printed, it lost the sale of 20 to 30 new cars.[105] The plaintiff alleged that it would have made a profit of between $300 and $400 per car.[106] The plaintiff's president testified at trial that it would be "hard to say" what would have been the least profit, per car, that the dealership would have made since the profit on a car sale could be from $400 to $1,000.[107] He also testified that "sometimes you lose money on a car."[108] The court of appeals in that case, without much explanation, other than citing the testimony of the plaintiff's president, reversed the jury's award of $3,000 for lost profits on the basis that the damages were not proven with reasonable certainty.[109]

Was it fair for the plaintiff in the Morristown Lincoln-Mercury case to recover nothing when it lost three days of newspaper advertisement? (The appeals court noted in that case that the newspaper in question had "a large circulation throughout the counties of East Tennessee").[110] The testimony of the plaintiff's president in Morristown Lincoln-Mercury, as to the fact that his dealership lost the sale of 20 to 30 cars because of the defendant's omission, was unrebutted, as was his testimony that the dealership made a profit of $300 to $400 per car. Add to those facts the applicable standard of review, which required that the jury's award in that case should have been upheld if there was any material evidence to support it,[111] and the holding in the Morristown Lincoln-Mercury case seems like a throwback to the older, stingier view of lost profits damages. Maybe, if you want to recover lost profits for a client, you can increase your chances by representing farmers instead of car dealers.

Option Contracts

Are the plaintiff's lost profits not reasonably certain where the plaintiff's lost profits are contingent upon a contract that may or may not renew in the future? The published Tennessee cases conflict.

In B & L Corporation v. Thomas,[112] the court found that the defendants had intentionally induced the breach of the plaintiff's contract with a third party.[113] The plaintiff's contract with the third party could, at the option of the plaintiff, be renewed yearly.[114] The trial court awarded the plaintiff lost profits for the year during which the contract was breached by the inducement of the defendant, as well as for the following year, which was the year for which the plaintiff, in its sole discretion, could have renewed or not renewed the contract.[115] The court of appeals reversed the decision of the trial court as to the lost profit award for the profits lost during the renewal period.[116] Why? There was no evidence that the plaintiff would have chosen to renew the contract, said the court of appeals.[117]

The exactly opposite result to that reached in the B & L Corporation case was reached in Ferrell v. Elrod.[118] In that case, the defendant breached a lease agreement with the plaintiff, an operator of a cosmetology school.[119] The plaintiff found a substitute location for which she entered into a new lease.[120] The monthly rental rate for the plaintiff's new location was higher than that contained in the lease that was breached.[121] The court of appeals found that, in addition to lost profits from sales, the plaintiff was entitled to an award for the loss of "prospective profit due to rent increase."[122] While the first lease, the one that was breached by the defendant, was for a 10-year term, the second lease was for a five-year term with an option to renew for a second five-year term.[123] The court of appeals made an award for the lost profits resulting from the rent increase for a 10-year period (the initial five-year term of the lease plus the five-year renewal period).[124] There was no evidence or testimony cited in the opinion as to the plaintiff's intent, or lack of it, to renew the lease for a second five-year term.

Another case involving lost profits which were contingent on the renewal provisions of a contract (in that case, many contracts) is Pinson & Associates Insurance Agency Inc. v. Kreal.[125] The question in Pinson was whether the plaintiff was entitled to commissions from insurance policies for which annual premiums would be paid and received until the policyholders actually cancelled their policies.[126] Thus, Pinson involved lost future profits. The "uncontradicted proof" in Pinson showed that the annual renewal rate for the type of policies at issue was 90 percent.[127] The trial court made an award of lost future commissions based on the total commissions due to the plaintiff for each year the policies were to be in effect, less ten percent each successive year, based on the assumption that ten percent of the policies would not renew each year.[128]

On appeal, the defendant in Pinson argued that the award for lost future commissions was speculative since any or all of the policies could be cancelled at anytime.[129] The court of appeals disagreed with the defendant that the award was based on speculation, and affirmed the trial court.[130] The court of appeals did agree with the defendant that the plaintiff might receive a windfall based on the cancellation rate of the policies, but, it reasoned, the breaching defendant in Pinson was not in a position to complain.[131]

Loss of Profits That Could Have Been Mitigated Except for the Plaintiff's Lack of Funds

Can a plaintiff recover lost profits if the breach of conduct of the defendant left it with insufficient capital to conduct operations necessary to earn profits? The two published Tennessee cases on this issue contradict each other. In Waggoner Motors,[132] the plaintiff, a car dealership, was awarded lost profits based on an incident of negligence that caused Chrysler, its floor plan financier, to reduce its floor plan financing which, in turn, affected the plaintiff's ability to acquire and to sell new and used cars.[133] In that case, the defendant apparently did not argue, and the court certainly did not consider in its opinion, that the lost profits of the plaintiff could have been mitigated if it had possessed the financial wherewithal to fund its own floor plan (automobile purchases).

The underfunded plaintiff in the case of Lance Productions Inc. v. Commerce Union Bank[134] did not fare as well as the plaintiff in Waggoner Motors. The plaintiff in Lance Productions had obtained a bus that it had modified extensively to make it a suitable traveling home for entertainers.[135] The defendant bank wrongfully attached the bus.[136] At trial, there was evidence that "at the time of the conversion, the plaintiff was negotiating with an entertainer for a contract that would have produced a profit of close to $1 million and that the 'deal fell through' because of gossip about the plaintiff's bus being repossessed."[137] According to the plaintiff, people "figured" that he was "broke" since he could not pay for a bus that he had just acquired.[138] The jury was empathetic to the plaintiff to the sum of $750,000, which it awarded.[139]

The court of appeals reversed the jury verdict in Lance Productions, but not on the grounds that the lost profits were speculative or that they were not proven with reasonable certainty. It reversed on the grounds that the plaintiff had failed to show that it could not replace the bus.[140] The court explained: "There is no evidence of the unavailability of another vehicle except lack of funds which is not recognized as an exception to the duty to mitigate damages by obtaining another vehicle."[141]

Recovery of Lost Profits by Individuals in Personal Injury Cases

A. Lost Profits Not Recoverable in Personal Injury Cases
Can a plaintiff who operates his or her own business recover for lost profits of his or her business that were directly related to a personal injury suffered by the plaintiff and caused by the defendant? No. In Tennessee, a plaintiff in a personal injury case, even if the plaintiff is a business owner, may only recover for the loss of earning capacity.[142]

Despite the fact that lost profits, per se, cannot be recovered, under any circumstances, by a plaintiff suing for personal injuries, in many cases, a plaintiff's recovery for loss of earning capacity will, in fact, include an award for lost profits. Why? Because, in some cases, a plaintiff may introduce evidence of the lost profits of his or her business to prove the fact and/or amount of his or her lost earning capacity.

B. Admissibility of Evidence of Lost Profits in Personal Injury Cases
The general rule in Tennessee is that "evidence of the profits of a business in which the plaintiff in a personal injury damage action is interested, which depend for the most part upon the employment of capital, the labor of others, or similar variable factors, is inadmissible ..." to prove the plaintiff's loss of earning capacity.[143] In Dingus v. Cain,[144] the Tennessee Supreme Court held that the trial court had erred in admitting into evidence proof of the lost profits of the plaintiff's business to prove the plaintiff's loss of earning capacity.[145] (The plaintiff in Dingus was an individual, not a business.)[146] To the Dingus court, the general rule applied to the facts before it because the plaintiff, who was injured in a car accident, was the president of a corporation engaged in general contracting which corporation employed eight to 15 people.[147] The court also considered the fact that the record was silent as to the number and type of contracts performed during the periods for which the plaintiff offered proof of lost profits.[148]

While, under the facts before it, the Supreme Court in Dingus applied the general rule that evidence of lost profits is inadmissible to prove loss of earning capacity, it stated that such proof might be allowable in certain cases. In what kind of personal injury cases did the Dingus court say proof of lost profits might be allowed? "In cases where the injured person is the sole operator or partner of the business."[149] Why are those cases outside of the general rule? Because, the Supreme Court reasoned in Dingus, "an injured person's services rather than the capital invested or labor of others is the predominant factor in producing the profits...."[150] In cases where the injured person is the sole operator of the business, in order to be allowed to introduce evidence of lost profits, that person, according to Dingus, "must" also show "that the business was personally conducted by [the injured person] with the profits depending entirely or substantially upon [the injured person's] individual labor and skill and are not derived from investment or labor of others."[151]

The exception to the general rule, that evidence of lost profits is not admissible in personal injury cases, was modified and enlarged substantially in a Tennessee Court of Appeals case, Acuff v. Vinsant,[152] which was decided after Dingus. In Acuff, the plaintiff employed, on average, about 25 people in her moving business.[153] At trial, to support the plaintiff's claim for loss of earning capacity, the plaintiff offered evidence of the lost profits from her moving business.[154] The trial court excluded the evidence.[155]

The court of appeals, in Acuff, discussed the plaintiff's extensive involvement in her business, including all of the crucial managerial and supervisory tasks the plaintiff performed, and concluded that the plaintiff was "the predominant and moving force responsible for [the] business."[156] The court of appeals then reversed the trial court's ruling excluding the evidence of the lost profits of the plaintiff's business.[157] The court of appeals held, in Acuff, that evidence of lost profits is admissible in a personal injury action even where the plaintiff's business involved "considerable but not predominant, use of the invested capital or labor of others, or both" so long as those factors were "only incidental as compared to the personal and predominant contribution of the plaintiff...."[158] If the Supreme Court's decision in Dingus seemed to indicate that the number of employees a plaintiff had might be the determinative factor in deciding whether lost profits evidence was admissible, the Acuff decision dispelled such a conclusion.

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  1. See e.g., Hurley & Son v. Buchi, 78 Tenn. 346, 349-350 (1882) ("If speculative profits or losses of interest upon capital are to be taken into view in the assessment of damages, they should be expressly stipulated for in the contract itself"); Pettee v. Tenn. Mfg. Co., 33 Tenn. 380, 387-88 (1853) (lost profit damages not allowed because such damages considered "too speculative"); Hagan v. Nashville Trust Co., 136 S.W. 993, 994 (Tenn. 1911) ("as a general rule, subject to certain well-established qualifications," lost profits not recoverable); Chisholm & Moore Mfg. Co. v. U.S. Canopy Co., 77 S.W. 1062, 1063 (Tenn. 1903) ("in general, profits cannot be allowed as damages").
  2. See cases cited supra at note 1.
  3. Donnelly v. Jackson Brothers, 2 Tenn. Civ. App. 408, 415 (1911).
  4. See, e.g., Ferrell v. Elrod, 469 S.W.2d 678, 681, 692 (Tenn. App. 1971) (lost profits awarded for breach of lease agreement); Memphis Casting Works v. Bearings & Transmission Co., 243 S.W.2d 145, 146-49 (Tenn. App. 1951) (lost profits awarded for breach of contract for electric motors); Black v. Love & Amos Coal Co., 206 S.W.2d 432, 433, 437 (Tenn. App. 1947) (lost profits awarded for breach of contract to deliver coal).
  5. See, e.g., Waggoner Motors Inc. v. Waverly Church of Christ, 159 S.W.3d 42, 65 (Tenn. App. 2005) (lost profits awarded for paint overspray); Tire Shredders Inc. v. ERM-North Central Inc., 15 S.W.3d 849, 858 (Tenn. App. 1999) (lost profits awarded for negligent destruction of shredding machine); American Buildings Co. v. DBH Attachments Inc., 676 S.W.2d 558, 565 (Tenn. App. 1984) (lost profits awarded for negligent design of roof).
  6. See United Brake Systems Inc. v. American Environmental Protection Inc., 963 S.W.2d 749, 758 (Tenn. App. 1997) (lost profits awarded for conversion of brake pad linings).
  7. See Walgreen Co. v. Walton, 64 S.W.2d 44, 49-50 (Tenn. App. 1932).
  8. See Brandtjen & Kluge Inc. v. Pope, 192 S.W.2d 496, 497, 502 (Tenn. App. 1945).
  9. See Maple Manor Hotel Inc. v. Metropolitan Gov't. of Nashville and Davidson County, 543 S.W.2d 593, 594, 599 (Tenn. App. 1975) (plaintiff awarded lost rent when Metro Council wrongfully enacted bill abandoning street adjacent to plaintiff's property).
  10. See Dorsett Carpet Mills Inc. v. Whitt Tile and Marble Dist. Co., 734 S.W.2d 322, 326 (Tenn. 1987).
  11. See Ferrell v. Elrod, supra, 469 S.W.2d at 690, 692 (lost profits awarded for increased rental rate caused by defendant); American Buildings Co., supra, 676 S.W.2d at 564-65 (lost profit award based on higher labor costs caused by defendant).
  12. Waggoner Motors Inc. supra, 159 S.W.3d at 58; Baker v. Hooper, 50 S.W.3d 463, 470 (Tenn. App 2001); Morristown Lincoln-Mercury Inc. v. Roy N. Lotspeich Publishing Co., 298 S.W.2d 788, 793 (Tenn. App. 1956). Some Tennessee cases state that lost profits can be recovered if they are proven with reasonable certainty and are not remote or speculative. See, e.g., Morristown Lincoln-Mercury, supra, 298 S.W.2d at 793; Black v. Love & Amos Coal Co., supra, 206 S.W.2d at 435. Tennessee courts have made little, if any, distinction between the requirements of proving lost profits damages to a "reasonable certainty" and rebutting or disproving that such damages were "remote or speculative." See, e.g., Waggoner Motors Inc., supra, 159 S.W. 3d at 57-58 (where court states damages may not be based on speculation, then states evidence required to support award of damages need only prove damages with reasonable certainty); Jennings v. Lamb, 296 S.W.2d 828, 831 (Tenn. 1956) (where court cites prior case law using term "speculative," but holds for plaintiff stating "he proved with reasonable certainty" his lost profits); Burge Ice Machine Co.v. Strother, 273 S.W.2d 479, 487 (Tenn. 1954) ( where court states lost profits allowable where "they are not in fact remote or speculative but are proved to a reasonable certainty"). For the Tennessee lawyer, the fact is that, if lost profits can be proven with reasonable certainty, they cannot be considered remote or speculative.
  13. See, e.g., Brandjten & Kluge Inc. v. Pope, supra, 192 S.W.2d at 501 ("absolute certainty is not required"); General Constr. Contractors Ass'n. Inc. v. Greater St. Thomas Baptist Church, 107 S.W.3d 513, 525 (Tenn. App. 2002) (lost profits "need only be proved with reasonable certainty, not with mathematical precision").
  14. See, e.g., Waggoner Motors Inc., supra, 159 S.W.3d at 58; Capital City Office Machines v. Metro Bd. of Ed., 632 S.W.2d 142, 144 (Tenn. App. 1982).
  15. See Waggoner Motors Inc., supra, 159 S.W.3d at 58; Pinson & Associates Ins. Agency Inc. v. Kreal, 800 S.W.2d 486, 488 (Tenn. App. 1990) ("mere uncertainty as to the amount will not prevent recovery" where the fact that damages incurred was "reasonably certain").
  16. See Waggoner Motors Inc., supra, 159 S.W.3d at 57, citing, Church v. Perales, 39 S.W.3d 149, 172 (Tenn. App. 2000); See also, Pinson & Associates, supra, 800 S.W.2d at 488.
  17. See American Bldgs. Co. v. DBH Attachments Inc., 676 S.W.2d 558, 563 (Tenn.App. 1984); Joy Floral Co. v. South Central Bell Tel. Co., 563 S.W.2d 190, 192 (Tenn.App. 1977); Waggoner, supra, 159 S.W.3d at 59.
  18. See cases cited supra note 17.
  19. See Baker v. Hooper, 50 S.W.3d 463, 470 (Tenn. App. 2001) (plaintiff denied lost profits where plaintiff relied upon tax documents showing gross profit, but did not include portions of tax returns setting forth expenses and where plaintiff purposely cut off a portion of tax return exhibits showing profit and loss statement); American Buildings, supra, 676 S.W.2d at 564 (plaintiff denied lost profits under oral lease to rent space because figure offered by plaintiff made no allowance for expenses of taxes and maintenance); Joy Floral Co.v. South Central Bell Telephone Co., supra, 563 S.W.2d at 191 (plaintiff denied lost profits where plaintiff's accountant testified that sales were down $30,000 and offered no proof of expenses or net profits). See also Robert L. Dunn, Recovery of Damages for Lost Profits,  §6.4 (6th ed. 2005).
  20. See cases cited supra at note 19.
  21. See, e.g., Baker v. Hooper, supra 50 S.W.3d at 470, citing, Doughty v. Grills, 260 S.W.2d 379, 391 (Tenn. App. 1952).
  22. See Jennings v. Lamb, supra, 296 S.W.2d at 830-831 (Tenn. 1956) (plaintiff's lost profit award based on deduction of what goods in question would have cost plaintiff); Waggoner Motors Inc., supra, 159 S.W.3d at 59 (Tenn. App. 2004) (net profit must be based on a subtraction of the costs of the goods to plaintiff).
  23. See Waggoner Motors Inc., supra, 159 S.W.3d at 59.
  24. 159 S.W.3d 59 (Tenn. App. 2004).
  25. Id. at 58.
  26. Id. at 59.
  27. Id.
  28. Id. footnote 30. But see, Lamons v. Chamberlain, 909 S.W.2d 795, 801-802 (Tenn. App. 1993) (where court holds that, in order to determine net profit, expenses "required for maintenance of business" must be deducted). While the court in Lamons did not expressly state whether fixed overhead should or should not be deducted, the opinion of the court can be fairly read as requiring the deduction of all overhead, fixed or otherwise.
  29. Id. footnote 31.
  30. See Robert L. Dunn, Recovery of Damages for Lost Profits,  §6.5 at 483 (2005) and cases cited and discussed therein.
  31. 162 S.W.3d 189 (Tenn. App. 2004).
  32. Id. at 193-94.
  33. Id. at 193-94.
  34. Id. at 220-21.
  35. Id. at 221-22.
  36. Id. (the court stated that it would "briefly address" the defendant's argument that the plaintiff's award should not be based on lost gross revenue).
  37. Id. at 223.
  38. Id. at 220.
  39. See Lamons v. Chamberlain, 909 S.W.2d 795, 801 (Tenn. App. 1993) ( "purpose of assessing damages ... is to place plaintiff as nearly as possible in the same position she would have been in" if not for defendant's conduct).
  40. See Apex Metal Stamping Co. v. Alexander & Sawyer Inc., 138 A.2d 568, 573 (N.J. Super. 1958) (it is "plaintiff's burden to disprove" that general overhead expense of salaries of supervisors did not go into production); Boca Developers Inc. v. Fine Decorators Inc., 862 So.2d 803, 805 (Fla. App. 2003) (jury award for lost profits set aside where "there was no testimony...that fixed costs, such as salaries of employees, were not involved" in furnishing the goods in question). See also, S.A. Maxwell Co. v. DeSoto Inc., 392 N.E.2d 33, 38 (Ill. App. 1979) (holding trial court erred in allowing a jury to consider lost profits when plaintiff failed to introduce evidence of overhead expenses).
  41. Buona Sales Inc. v. Chrysler Motors Corp., 449 F.2d 715, 720 (3rd Cir. 1971).
  42. See cases cited supra notes 43 and 52. See also, Empire Shoe Co. v. NICO Industries Inc., 398 S.E.2d 440, 442 (Ga. App. 1990) (plaintiff Subchapter S corporation not allowed to recover lost profits because it had no history of profits because it distributed income to owners in salary); Ad-Vantage Telephone Directory Consultants Inc. v. GTE Directories Corp., 849 F.2d 1336, 1351-52 (11th Cir. 1987) (court rejects plaintiff's argument that it did not have to deduct money withdrawn by owner from gross profits because it was Subchapter S corporation); Hospital Products Inc. v. Sterile Design Inc., 734 F.Supp. 896, 907 (E.D.Mo. 1990), aff'd, 923 F.2d 859 (11th Cir. 1987) (court rejects plaintiff's argument that it was Subchapter S corporation so, even though it had no income, income flowed through to its shareholders).
  43. Waggoner Motors Inc., supra, 159 S.W.3d at 48, footnote 6. The court did not address the question of whether or not the plaintiff, which was a Subchapter S corporation, was barred from recovering lost profits because the issue was not raised at trial. Id.
  44. 884 P.2d 1236 (Utah 1994).
  45. Id. at 1237.
  46. Id.
  47. Id.
  48. Id.
  49. Id.
  50. Id. at 1237.
  51. Id. at 1240-41.
  52. See, Id. at 1238-41.
  53. See, e.g., Bettius & Sanderson, P.C. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 839 F.2d 1009, 1014 (4th Cir. 1988) (because compensation paid to principals of a professional corporation tends to prove corporation's net profits, it is admissible); Sisters of Providence In Washington v. A.A. Pain Clinic Inc., 81 P.3d 989, 1006 (Alaska 2003) (court holds not appropriate to eliminate salary compensation from lost profits determination and adopts reasoning of Bettius & Sanderson).
  54. See cases cited supra note 52.
  55. Waggoner Motors, supra, 159 S.W.3d at 59.
  56. See, e.g., Waggoner Motors Inc., supra at 62-65 (award of lost profits based on comparison of financial performance before and after defendant's negligent act); Brandjten & Kluge Inc. v. Pope 192 S.W.2d 496, 499 (Tenn. App. 1945) (lost profit award based on "records of production" before and after equipment wrongfully replevied); Cummins v. Brodie, 667 S.W.2d 759, 761 (Tenn. App. 1983) (lost profits award based on number of days per year worked before defendant's wrongful conduct and revenue received from that work).
  57. See, e.g., Chisholm & Moore, Mfg. Co. v. U.S. Canopy Co., 77 S.W. 1062, 1068 (Tenn. 1903) (award of lost profits based on profits that would have been made for goods not delivered based on actual price for which plaintiff had contracted to sell goods); Jennings v. Lamb, 296 S.W.2d 828, 830 (Tenn. 1956) (award of lost profits based on price at which plaintiff had orders to resell the goods that defendant failed to deliver); McClain v. Kimbrough Const. Co. Inc., 806 S.W.2d 194, 201 (Tenn. App. 1990) (lost profits award based on formula that considered amount that would have been earned under breached contract less cost to perform); Ferrell v. Elrod, 469 S.W.2d 678, 684-85, 692 (Tenn. App. 1971) (lost profit award based on financial performance of plaintiff subsequent to wrongful conduct of defendant); Maple Manor Hotel Inc. v. Metropolitan Gov't. of Nashville and Davidson County, 543 S.W.2d 593, 596 (Tenn. App. 1975) (lost profits in form of lost rental revenue awarded based on testimony of expert in case where apartments to be rented were never constructed).
  58. Ferrell v. Elrod, supra at 684-85, 692.
  59. See Waggoner Motors Inc., supra, 159 S.W.3d at 60 (where court adopts the general rule that "an injured party is not required to prove a history of profitability to be entitled to recover lost anticipated profits"); Ferrell v. Elrod, supra, 469 S.W. 2d at 684, 692 (where lost profits awarded to a new business with no history of profitability prior to wrongful conduct of defendants).
  60. Burge Ice Machine Co. v. Strother, 273 S.W.2d 479, 482, 487 (Tenn. 1954) (lost profits denied in case where court points out that plaintiff's business was new); General Const. Contractors Ass'n. Inc. v. Greater St. Thomas Baptist Church, 107 S.W.3d 513, 525 (Tenn. App. 2002) (lost profits denied and court relies substantially on "minimal experience" of plaintiff's president); Anderson-Gregory Co. v. Lea, 370 S.W.2d 934, 938 (Tenn. App. 1963) (lost profits denied where court relied on plaintiff's "total lack of experience as to profits to be made").
  61. Jennings v. Lamb, 296 S.W.2d 828, 831 (Tenn. 1956).
  62. Waggoner Motors, supra, 159 S.W.3d at 59-60 (in case where plaintiff car dealership had no firm orders and was not profitable, court rejects argument that it cannot recover lost profits because it was not profitable); Ferrell v. Elrod, supra, 469 S.W.2d at 686 (in case where lost profits award for new business affirmed, court discusses Jennings v. Lamb case, but distinguishes it).
  63. See Waggoner Motors Inc., supra, 159 S.W.3d at 58 (reasonable certainty standard must consider the facts of each case); Ferrell v. Elrod, supra, 469 S.W. 2d at 686 ("Each particular suit for anticipated profits must be decided upon its own peculiar facts").
  64. 296 S.W.2d 828 (Tenn. 1956).
  65. Id. at 830.
  66. Id.
  67. Id. at 831.
  68. Id. at 830.
  69. 153 S.W.2d 133 (Tenn. App. 1941).
  70. 446 S.W.2d 521 (Tenn. App. 1969).
  71. Fuqua, 153 S.W.2d at 134; Ford Motor Co. v. Taylor, 446 S.W.2d at 523.
  72. Fuqua, 153 S.W.2d at 135; Ford Motor Co. v. Taylor, 446 S.W.2d at 531 (affirmed, but modified).
  73. 192 S.W.2d 496 (Tenn. App. 1945).
  74. Id. at 497 (the plaintiff was a cross-plaintiff but is referred to herein, for the sake of simplicity, as the plaintiff).
  75. Id. at 501-502.
  76. Id. at 499.
  77. Id. at 499-500.
  78. 469 S.W.2d 678 (Tenn. App. 1971).
  79. Id. at 681-83.
  80. Id. at 683-84.
  81. 159 S.W.3d 42 (Tenn. App. 2005).
  82. Id. at 63-65.
  83. 667 S.W.2d 759 (Tenn. App. 1983).
  84. Id. at 761-762.
  85. Id. at 761.
  86. Id. at 762.
  87. Id. at 762, 765.
  88. Id. at 761.
  89. Id. at 763.
  90. Id. at 765.
  91. 273 S.W.2d 479 (Tenn. 1954).
  92. Id. at 481, 485-86.
  93. Id. at 481-82.
  94. Id. at 486-87.
  95. Id. at 482.
  96. 370 S.W.2d 934 (Tenn. App. 1963).
  97. Id. at 935.
  98. Id.
  99. Id. at 937.
  100. Id. at 938.
  101. 298 S.W.2d 788 (Tenn. App. 1956).
  102. Id. at 790.
  103. Id.
  104. Id. at 790.
  105. Id. at 792.
  106. Id.
  107. Id. at 794.
  108. Id.
  109. Id. at 794-95.
  110. Id. 791.
  111. Id.
  112. 162 S.W.3d 189 (Tenn. App. 2004).
  113. Id. at 221.
  114. Id. at 218.
  115. Id. at 221.
  116. Id.
  117. Id.
  118. 469 S.W.2d 678 (Tenn. App. 1971).
  119. Id. at 681.
  120. Id. at 684.
  121. Id. at 689.
  122. Id. at 690, 692.
  123. Id. at 681, 689.
  124. Id. at 689.
  125. 800 S.W.2d 486 (Tenn. App. 1990).
  126. Id. at 488.
  127. Id.
  128. Id. The trial court also reduced the future lost commissions to present value. (Id.).
  129. Id. at 488.
  130. Id. at 489.
  131. Id. at 488.
  132. 159 S.W.3d 42 (Tenn. App. 2004).
  133. Id. at 48-49, 64-65.
  134. 764 S.W.2d 207 (Tenn. App. 1988).
  135. Id. at 208.
  136. Id.
  137. Id. at 212.
  138. Id.
  139. Id.
  140. Id. at 213.
  141. Id.
  142. See Dingus v. Cain, 406 S.W.2d 169, 171 (Tenn. 1966).
  143. Id. at 170-71.
  144. 406 S.W.2d 169 (Tenn. 1966).
  145. Id. at 171.
  146. Id. at 170.
  147. Id. at 170, 172.
  148. Id. at 171.
  149. Id.
  150. Id. at 171-72.
  151. Id. at 172.
  152. 443 S.W.2d 669 (Tenn. App. 1969).
  153. Id. at 672.
  154. Id.
  155. Id.
  156. Id.
  157. Id. at 674.
  158. Id.

J. ROSS PEPPER J. ROSS PEPPER is a solo practitioner in Nashville who handles litigation matters with a primary focus on business and commercial cases, personal injury cases and employment related cases. Pepper graduated, with high honors, from the University of Tennessee School of Law in 1990.