Florida appellate courts regularly scrutinize the methodology used by financial experts in their calculation of lost profits. Parties are often incentivized to inflate their calculation of lost profits they seek. Expert witnesses who specialize in damages calculations sometimes testify at trial using damages methodologies that misconstrue the requirements of Florida law. For example, in State Dep/t of Transp. v. Manoli, 645 So.2d 1093 (Fla. 4th DCA 2008), Florida’s Fourth District Court of Appeal reversed a judgment for lost profits because the damages expert’s opinion “was … based on a misconception of the law and was therefore not admissible.” In that case, the damages expert failed to deduct wages for the services the owner was performing for the business before reaching his lost profits calculation. Because lost profits are established by proving income and expenses, the expert’s exclusion of valid expenses from his calculation had the effect of inflating his conclusion of lost profits. Whether representing a plaintiff or defendant, it is obviously critical to carefully assess the method used to calculate lost profits. Peter Mavrick is a Fort Lauderdale business litigation lawyer, and represents clients in business litigation in Miami, Boca Raton, and Palm Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment law, and other legal disputes in federal and state courts and in arbitration.
Fundamentally, the concept of lost profits seems simple because it measures the contract price less the expenses involved in performance of the contract. Florida courts sometimes rely on Black’s Law Dictionary, which defines profits in the following way: “In commerce, it means the advance in the price of good sold beyond the cost of purchase. In distinction from the wages of labor, it is well understood to imply the net return to the capital of the stock employed, after deducting all the expenses, including not only the wages of those employed by the capitalist, but the wages of the capitalist himself for superintending the employment of his capital or stock.” Florida courts generally require that all costs and expenses needed to perform the contract should be deducted from the balance owing on the contract price. Indian River Colony Club, Inc. v. Schopke Construction & Engineering, Inc., the appellate court stated in pertinent part: “In arriving at its deductible expenses and costs to determine lost profits, Schopke must deduct the actual supervisory salary paid or, if no salary is paid, the reasonable value of the supervisory services that would have been attributable to performing the contract. Additionally, Schopke must also deduct any other operating expenses and costs, such as its home office expenses and overhead, which were not reimbursable.”
Florida courts have wrestled with whether fixed costs must be included in the business litigation damages methodology to determine lost profits. In Boca Developers, Inc. v. Fine Decorators, Inc., 862 So.2d 803 (Fla. 4th DCA 2003), Florida’s Fourth District Court of Appeal held that fixed costs had to be allocated to the lost profits calculation because there was no evidence indicating that the fixed costs were not involved in performance of the contract. The appellate court, however, explained that fixed costs are not always part of a valid lost profit calculation. “This is not to say that a party seeking lost profits is precluded from proving that some endeavors are more profitable than others, because, for example they are less labor intensive. Fine, however, did not have that type of proof. In the absence of such, our case law requires that overhead be deducted.” In Boca Developers, the appellate court explained that the trial judge erred by not ruling that overhead had to be deducted. The appellate court reversed the trial court and explained that: “It appears from the record, however, that if the judge had correctly ruled that overhead had to be deducted, Fine would have been able to establish the amount of that overhead … Fine should be given the opportunity to do so. We therefore reverse and remand for a new trial on all issues.”
Peter Mavrick is a Fort Lauderdale business litigation attorney, and represents business litigation clients in Miami, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.