Beverly Hills Concepts, Inc. v. Schatz & Schatz, Ribicoff & Kotkin
717 A.2d 724, 1998 Conn. LEXIS 341, 247 Conn. 48 (1998)
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Rule of Law:
While a new or unestablished business may recover damages for lost future profits, it bears the burden of proving the extent of those damages with reasonable certainty. Damages based on speculative assumptions or for an unreasonably long and arbitrary period are not recoverable.
Facts:
- In April 1987, Charles Remington, Wayne Steidle, and Jeannie Leitao incorporated Beverly Hills Concepts, Inc. (plaintiff) to sell fitness equipment and a plan for operating women's fitness clubs.
- In August 1987, the plaintiff incorporated in Connecticut and began licensing its concept and selling distributorships, which involved selling fitness club packages.
- In October 1987, the plaintiff retained the law firm Schatz & Schatz, Ribicoff and Kotkin (defendants) for a trademark issue and general legal affairs related to franchising.
- A partner, Stanford Goldman, incorrectly assumed the plaintiff's pending trademark application exempted it from registering as a 'business opportunity' under the Connecticut Business Opportunity Investment Act (act).
- Goldman represented that the firm had expertise in franchising but turned the file over to a junior associate, Jane Seidl, and a contract lawyer, Ira Dansky, neither of whom had expertise in the field.
- Despite being asked for guidance, Schatz & Schatz failed to advise the plaintiff that it was violating the act by selling its club packages without registering with the state banking commissioner.
- In February 1988, firm attorneys learned definitively that the plaintiff was not exempt from the act's registration requirements but did not inform the plaintiff.
- On September 15, 1988, the state banking commissioner notified the plaintiff that it was violating the act, leading the plaintiff to cease all sales and advertising, which ultimately resulted in the business's failure.
Procedural Posture:
- Beverly Hills Concepts, Inc. sued the law firm Schatz & Schatz, Ribicoff and Kotkin and several of its attorneys in a Connecticut superior court (trial court).
- The complaint included counts of legal malpractice, breach of contract, negligent misrepresentation, and breach of fiduciary duty.
- After a trial to the court, the judge trial referee found for the plaintiff on the legal malpractice, breach of contract, and other counts.
- The trial court awarded the plaintiff damages in the amount of $15,931,289.
- The defendants filed a motion to set aside the judgment, which the trial court denied.
- The defendants appealed the judgment to the Connecticut Appellate Court, and the plaintiff filed a cross appeal.
- The Connecticut Supreme Court transferred the appeal and cross appeal to itself for decision.
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Issue:
Did the trial court err in awarding approximately $15.9 million in lost profits to a new, unestablished business whose destruction was caused by legal malpractice, when the damage calculation was based on speculative assumptions and projected over a twelve-year period?
Opinions:
Majority - Katz, J.
Yes, the trial court erred. Although lost profits may be an appropriate measure of damages for the destruction of a new business, the plaintiff must prove such damages with reasonable certainty. Here, the plaintiff failed to meet this burden because its expert's projections were based on speculative and unreasonable assumptions. The expert improperly extrapolated future franchise sales from past sales of a different, cheaper product; ignored the plaintiff's insolvency, poor credit, and inability to sell a single franchise; and used a non-comparable business (World Gym) as a model. Furthermore, the twelve-year period for lost profits was arbitrary and not tied to any objective evidence, such as a contract term, making the entire damages award an abuse of the trial court's discretion.
Dissenting - Peters, J.
No, the trial court did not err. The majority fails to give proper deference to the trial court's role as fact-finder and allows the defendants, whose egregious malpractice caused the plaintiff's demise, to escape responsibility. The defendants' misconduct created the very difficulty the plaintiff faced in proving its damages with precision. The trial court reasonably found the plaintiff's expert testimony credible, and its assumptions were not so speculative as to constitute an abuse of discretion. Requiring a high level of proof of damages from a new business that was destroyed by a defendant's own wrongdoing turns the law of professional responsibility on its head.
Analysis:
This decision is significant for formally rejecting the old 'new business rule,' which categorically barred unestablished enterprises from recovering lost profits. The court adopts the modern, flexible view that new businesses can recover such damages, but it tempers this by strictly enforcing the 'reasonable certainty' standard of proof. The case establishes that while the measure of damages is flexible, the proof required is not; speculative projections based on unreasonable assumptions will fail. For legal malpractice cases involving failed businesses, this ruling underscores that proving causation and breach is insufficient without concrete, defensible evidence of the actual damages sustained.
