By Matthew R. Parker, Esq.

The New Jersey Supreme Court recently granted greater protection to upstart businesses by allowing them to seek damages that were previously barred. In Larry Schwartz v. Nicholas Menas, Esq. (A-54/55-20) (085184), the New Jersey Supreme Court overturned “the new business rule” which had barred new businesses from presenting evidence of lost profits damages. Under Schwartz, new businesses are no longer subjected to a per se ban on seeking lost profit damages and instead will be able to seek such damages so long as they satisfy a heightened reasonable certainty standard.

Schwartz concerned two cases brought by Larry Schwartz, a dry-cleaning owner who had sought to expand into real estate development. In the first case, Schwartz sued two real estate developers alleging their tortious conduct deprived him of the opportunity to construct an affordable housing complex. In the second action, Schwartz sued his former counsel for legal malpractice and breach of contract arising from a proposed residential development of two properties. In both cases, Schwartz sought to introduce expert reports that opined on his lost profit damages despite his inexperience in developing housing. In both cases, defendants moved to bar the testimony of plaintiffs’ damages expert on the ground that plaintiff had no experience in residential construction and was therefore not entitled to seek lost profits damages under the new business rule.

On appeal, the New Jersey Supreme Court joined the majority of jurisdictions in the United States and rejected the per se ban on claims by new businesses for lost profits damages. In reaching this holding, the Court noted that lost profits were recoverable by an established business if they could be established with a reasonable degree of certainty. However, a new business would not be in the same position as an established business, and instead, it would be substantially more difficult for a new business to prove lost profits.

Under the test espoused by the Court, the trial court should carefully scrutinize a new business’s claim that, but for the conduct of the defendant, it would have gained substantial profit in a venture in which it had no experience. If a new business seeks lost profits that are remote, uncertain, or speculative, the trial court should bar the evidence supporting that claim. Only if the trial court determines that plaintiff’s lost profits evidence is sufficient to establish their claim for damages with reasonable certainty despite plaintiff’s inexperience should the court permit such evidence to be introduced.

While Schwartz opens the door for new businesses to seek lost profit damages, establishing such losses will not be easy. Rather, a new business plaintiff will be required to satisfy an intensive fact-specific evaluation before a trial court will permit evidence of lost profit damages at trial. Given the novelty of this holding in New Jersey it is anticipated that further refinement of this fact-specific inquiry will take place at the trial and appellate court levels. The commercial litigation attorneys at Schenck Price stand ready to provide counsel to business clients on the novel damages issues they may encounter after this latest legal development.

For more information, contact Matthew R. Parker, Esq. at mrp@spsk.com or 973-540-8227.

DISCLAIMER: This Alert is designed to keep you aware of recent developments in the law. It is not intended to be legal advice, which can only be given after the attorney understands the facts of a particular matter and the goals of the client.