The Supreme Court Overrules New Jersey’s “New Business” Rule That Barred New Businesses From Seeking Lost Profits Damages

Schwartz v. Menas, 251 N.J. 556 (2022). [Disclosure: I argued this case for the successful plaintiffs, having handled the appeal along with co-counsel, Giovanni DePierro of DePierro Radding]. In 1936, the Court of Errors and Appeals decided Weiss v. Revenue Building & Loan Ass’n, 116 N.J.L. 208 (E. & A. 1936). That case held that a new business could never claim lost profits as an element of damages in a lawsuit and established in New Jersey what has been called the “new business rule.” Though the Appellate Division had severely and repeatedly criticized that ruling and had urged the Supreme Court to overrule Weiss, and though most other jurisdictions had abandoned their own similar new business rules, our Supreme Court did not do so.

Today, however, in a unanimous opinion by Justice Patterson that applied de novo review to the issue of the continued viability of the new business rule, the Supreme Court overturned that rule. In its place is the same “reasonable certainty” standard for proof of lost profits that applies to established businesses.

The appeal involved two different cases in which plaintiffs alleged that defendants had deprived them of profits from real estate developments that defendants had brought plaintiffs into. Plaintiffs produced expert reports in both cases that estimated their lost profits damages. The Law Division and the Appellate Division, believing themselves constrained by Weiss, barred the expert testimony and then granted summary judgment to defendants in both cases since plaintiffs could not prove damages. Plaintiffs obtained Supreme Court review, asking that the Court overrule Weiss.

Justice Patterson carefully went through the history of post-Weiss jurisprudence regarding the new business rule in New Jersey. She also cataloged at length the law in other jurisdictions, noting that “the majority of courts” now “reject a per se bar for lost profits claims by new businesses and instead carefully scrutinize such claims, treating a new business’s inexperience as an important factor in the reasonable certainty standard.” The Court joined those other jurisdictions and “depart[ed]” from the per se bar to lost profits claims by new businesses announced in Weiss.

Justice Patterson was careful to state, in dicta, that it may be more difficult for a new business to prove lost profits to a reasonable degree of certainty than for an established business to do so. Quoting a comment to the Restatement (Second) of Contracts, she said that “if the business is a new one or if it is a speculative one that is subject to great fluctuations in volume, costs or prices, proof will be more difficult. Nevertheless, damages may be established with reasonable certainty with the aid of expert testimony, economic and financial data, market surveys and analyses, business records of similar enterprises, and the like.” That offers new businesses a roadmap to proving lost profits damages.

The result was that the Court reversed the summary judgments for defendants and remanded to the Law Division in both cases to consider plaintiffs’ evidence of lost profits damages under the reasonable certainty standard. A Law Division judge had actually done that earlier in one of the cases and had concluded that plaintiffs in that case met the reasonable certainty standard. Nonetheless, now that the Supreme Court has changed the law to make that standard the governing one, the Law Division in both cases will address the issue anew.

This is a watershed decision for New Jersey damages law. It was a long time coming. With modern accounting and econometric methods that did not exist in 1936, new businesses seeking lost profits damages should not have been barred from seeking them. The Court rightly corrected that injustice today.

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