In Larry Schwartz v. Nicholas Menas, Esq. (A-54/55-20/085184) (Decided August 17, 2022), the Supreme Court of New Jersey rejected a per se ban on claims by new businesses for lost profits damages. According to the court, claims for lost profits damages are governed by the standard of reasonable certainty and require a fact-sensitive analysis.
Facts of Schwartz v. Menas
These consolidated appeals arise from two actions. In the first, plaintiffs Larry Schwartz and NJ 322, LLC sued their former legal counsel, two real estate developers, and executives employed by the developers, alleging that the defendants’ tortious conduct deprived plaintiffs of the opportunity to construct an affordable housing complex. In the second, Schwartz sued his former counsel for legal malpractice and breach of contract arising from another proposed residential development.
It is undisputed that neither Schwartz nor NJ 322 had ever financed or built a residential development before they sought to construct the housing at issue. Based on the foregoing, the defendants in both cases sought to bar the testimony of plaintiffs’ damages expert on the ground that plaintiffs had no experience in residential construction and thus were not entitled to seek lost profits damages. Citing Weiss v. Revenue Building & Loan Association, 116 N.J.L. 208 (E. & A. 1936), defendants maintained that New Jersey courts apply the “new business rule,” which imposes a per se ban on a new business’s claims for lost profits on the ground that no such claim can be proven with reasonable certainty.
The trial court deemed the real estate ventures at issue in both cases to constitute new businesses, barred the testimony of plaintiffs’ expert on damages, and granted summary judgment to defendants. The Appellate Division affirmed in both cases. According to the appeals court, it was constrained to follow Weiss and apply the new business rule. The Appellate Division further held that, even if the new business rule did not apply, the expert’s opinions were too speculative to meet the standard of reasonable certainty required for lost profits damages.
NJ Supreme Court Decision in Schwartz v. Menas
The New Jersey Supreme Court reversed. The court joined the majority of jurisdictions in rejecting a per se ban on claims by new businesses for lost profits damages, and declined to follow Weiss to the extent that it bars any claim by a new business for such damages.
In reaching its decision, the New Jersey Supreme Court noted that a majority of courts in other jurisdictions have recognized that, although it is difficult for a new business to meet the standard of reasonable certainty, a per se ban on any claims for lost profits damages by a new business is unwarranted. It also cited the approach of the Restatement (Second) of Contracts, which recognizes that it is “more difficult” but still possible to prove loss of profits for new businesses “with the aid of expert testimony, economic and financial data, market surveys and analyses, business records of similar enterprises, and the like.”
According to the New Jersey Court, claims for lost profits damages are governed by the standard of reasonable certainty and require a fact-sensitive analysis. However, the court also emphasized that it does not view a new business to be in the same position as an established business with respect to damages claims.
“In its role as gatekeeper, a 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,” the court wrote. “If a new business seeks lost profits that are remote, uncertain, or speculative, the trial court should bar the evidence supporting that claim and should enter summary judgment pursuant to Rule 4:46-2.”
The New Jersey Supreme Court remanded the cases back to the trial court with instructions to decide defendants’ motions in accordance with the proper standard. “We concur with the trial court and the Appellate Division that the development projects that gave rise to both cases constituted new businesses. Nonetheless, so that these matters can be decided under the correct standard, we reverse the Appellate Division’s decision and remand these matters to the trial court for consideration of defendants’ motions to bar plaintiffs’ proofs of lost profits damages and for summary judgment,” the court wrote. “We make no suggestion that the lost profits proofs presented to the trial court in either case meet the standard of reasonable certainty; we remand solely for the purpose of ensuring that the trial court evaluates plaintiffs’ lost profits claims in accordance with the governing test.”