New Jersey Supreme Court Ruling Clarifies the Standard for Lost Profit Claims on Behalf of New Business

On August 17, 2022, the New Jersey Supreme Court issued its opinion in Larry Schwartz and NJ 322, LLC v. Cooper Levenson and Pulte Homes. In the opinion, Justice Patterson wrote that New Jersey would now join the majority of jurisdictions that reject a per se ban on claims by new businesses for lost profit damages approaching $8.5 million. However, the Supreme Court followed Jack Slimm’s argument that New Jersey, if it intended to clarify New Jersey’s New Business Rule, should follow the New York Rule, which makes it more difficult for a new business to establish lost profit damages with reasonable certainty.

The case arose out of an action filed by the plaintiffs against their former attorneys and a large home builder, alleging that the defendants’ tortious conduct deprived the plaintiffs of the opportunity to construct an affordable housing complex. However, the plaintiffs had never financed or built a residential development before they sought to construct the housing at issue. At the trial level, the defense successfully barred the testimony of the plaintiffs’ damages expert on the ground that the plaintiffs had no experience in residential construction and, thus, were not entitled to seek lost profit damages under the then existing New Business Rule. At the time, the New Business Rule imposed a per se ban on a new business’s claim for lost profits on the ground that no such claim could be proven with reasonable certainty.

The trial court ruled that the real estate ventures were new businesses, barred the testimony of the plaintiffs’ expert on damages, and granted summary judgment. The Appellate Division affirmed the trial court’s determination. The Supreme Court granted the plaintiffs’ petition for certification, and in the opinion, joined the majority of jurisdictions that reject a per se ban on claims by new businesses for lost profit damages. However, in the decision, Justice Patterson held that a trial court must carefully scrutinize a new business’s claim that a defendant’s tortious conduct or breach of contract prevented it from profiting from an enterprise in which it has no experience, and should bar the claim unless the plaintiffs can prove the claim with reasonable certainty.

Accordingly, the New Jersey Supreme Court remanded the case back to the trial court so that the trial judge could decide the defendants’ summary judgment motions under this standard. The Supreme Court ruled that if the trial judge, on remand, does not view the plaintiffs’ proofs to meet the standard, then the trial court should grant the motions and dismiss the complaints. The Supreme Court agreed that when a business venture constitutes a new business, the trial court should conduct a fact-sensitive analysis of the evidence and decide whether the plaintiffs can prove their lost profit damages with reasonable certainty. The Supreme Court ruled that, as gatekeeper, 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 the venture in which it had no experience. The court ruled that if a business seeks lost profits that are remote, uncertain or speculative, the trial court should bar the evidence supporting that claim and enter summary judgment.

This decision is vitally important to companies, businesses, developers and law firms defending against claims of new businesses for loss of profits in New Jersey. This decision recognizes that it is substantially more difficult for a new business than for an experienced business to prove lost profits with reasonable certainty. 

Should you have any questions regarding this recent ruling, please contact Jack Slimm at 856-414-6021 or Jeremy Zacharias at 856-779-6103.
 

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