Since 1936, New Jersey has followed the “new business rule,” which bars claims for lost profits by new businesses on the ground that no such claim can be proven with reasonable certainty. That all changed on August 17, 2022 in the matter Larry Schwartz and NJ 322, LLC v. Nicholas Menas, Esq., et al, etc., A-54/55 No. 085184, where the New Jersey Supreme Court joined the majority of jurisdictions that reject a per se ban on claims by new businesses for lost profits damages, and declined to follow a decades’ long prior ruling that barred such damages claims.
New Jersey Supreme Court Courtroom
The matters before the Court were consolidated appeals arising 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 was undisputed that neither Schwartz nor NJ 322 had ever financed or built a residential development before they sought to construct the housing at issue.
In both cases, defendants moved 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 argued 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 courts in both matters granted the defendants’ motions for summary judgment, holding that the “new business rule” precluded lost profits damages as a matter of law under Weiss.
Plaintiffs appealed the trial courts’ rulings. The Appellate Division acknowledged that a majority of jurisdictions that have considered the issue have rejected the new business rule in favor of a rule that allows a new business to recover lost profits when they can be proven with reasonable certainty. However, the appellate court considered itself constrained to follow Weiss and apply the new business rule.
The New Jersey high court declined to follow Weiss to the extent that it bars any claim by a new business for such damages, thereby joining the majority of jurisdictions that reject a per se ban on claims by new businesses for lost profits damages. The Court noted that lost profits damages – as all damages claims – are governed by the standard of “reasonable certainty.” The Court further noted that it is substantially more difficult for a new business to establish lost profits damages with reasonable certainty than it is for an established business to do so, citing Restatement (Second) of Contracts § 352, cmt. b (Am. L. Inst. 1981). A trial court should therefore 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 that claim unless it can be proven with reasonable certainty. While the “per se” rule against such damages claims has been abolished, the burden of establishing lost profits damages remains high under the “reasonable certainty” standard.
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In future posts, we will examine “profits” and “lost profits” as compensatory damages in IP litigation and the application of the “reasonable certainty” rule on establishing those damages.
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Richard A. Catalina, Jr. is a senior partner and Chair of the Intellectual Property and Complex Litigation Department of Jardim, Meisner and Susser, P.C. Mr. Catalina specializes in litigating patent, trademark, trade secret and related Lanham Act disputes, and inter partes proceedings before the Patent Trial and Appeal Board. Mr. Catalina has been practicing law for more than 33 years and has litigated more than one hundred matters in federal and state courts across the U.S, as well as inter and ex partes matters before the Trademark Trial and Appeal Board and the Patent Trial and Appeal Board.
