Just How Certain Do You Have To Be To Recover Lost Profits?
Posted in Court Decisions

On January 19, 2012, the California Court of Appeal issued an unpublished decision addressing this very question.  Specifically, in Flying J, Inc. v. Department of Transportation, Case No. F060545, the Court of Appeal affirmed the dismissal of plaintiff's claim for lost profits, finding that plaintiff's evidence was not sufficiently comparable in character and its calculations relied on too much conjecture about future events.      

Plaintiff Flying J operates truck stops.  In 1997, it purchased an 18.8 acre parcel adjacent to State Routes 14 and 58 in the Mojave Desert for a new facility.  Prior to commencing construction, Caltrans sued to condemn a 4.43 acre strip of the property for a highway improvement project.

In 2001, Flying J and Caltrans settled for $14,800, with one key twist: The agreement also called for Caltrans to deliver to Flying J – subject to the approval of the California Transportation Commission – a deed for a 20.57 acre parcel located adjacent to the remaining portion of Flying J's property in exchange for a payment by Flying J of approximately $88,000. 

Shortly thereafter, Flying J delivered a grant deed for the 4.43 acre parcel and a payment of approximately $87,954.  Then things went sideways. The California Transportation Commission refused to approve the transfer of the 20.57 acre parcel to Flying J, and instead voted to put the property up for public auction.  In May 2004, after Flying J had filed a breach of contract action against Caltrans, a competitor of Flying J purchased the 20.57 acre property at public auction. 

In the lawsuit, Flying J claimed that Caltrans breached the settlement agreement and that the breach resulted in a loss of approximately $60 million in profits: $13 million directly attributable to the inability to open the Mojave truck stop, plus another $47 million attributable to a purported synergistic effect that the Mojave truck stop would have had on Flying J's other locations (Flying J eventually abandoned this claim of synergistic effect). 

At trial, in support of the $13 million in direct lost profits, Flying J presented testimony by a certified public accountant and an expert in the trucking and travel plaza industry.  Specifically, averaging the annual profits from five "comparable" truck stops that Flying J's trucking and travel plaza industry expert had identified, the accountant concluded that the breach resulted in approximately $13 million in lost profits. 

Caltrans moved for partial nonsuit as to Flying J's claim for lost profits, and the trial court granted the motion and instructed the jury that lost profits were no longer at issue.  After approximately two weeks of deliberations, the jury found that Caltrans had breached the settlement agreement and awarded damages of $991,824.  Flying J timely appealed the trial court's order granting partial nonsuit.

On appeal, the Court found that lost profits are recoverable as consequential damages so long as they can be proven to be reasonably certain both as to their occurrence and their extent.  Reviewing the testimony of Flying J's two experts, the Court found that lost profits had not been proven with sufficient certainty.  Specifically, the Court found that the five "comparable" locations identified and relied on by Flying J's experts were not "substantially similar" to the proposed Mojave location, and therefore could not be used to calculate lost profits.  The Court also noted numerous contingencies that would affect both the existence and extent of lost profits, and that in order to reach the $13 million figure, Flying J's experts had to make a number of favorable assumptions.  Accordingly, the Court affirmed the trial court's order granting partial nonsuit.

Flying J, Inc. v. Department of Transportation is a bit of a mixed-bag.  While the Court confirmed that lost profits are potentially available to a plaintiff seeking consequential damages, it also placed a number of constraints on their recovery, some of which may be particularly difficult to overcome, especially with respect to a new or unique business.  Nonetheless, one of the clear takeaways from this decision is the need for a robust comparables analysis in order to justify any claim of lost profits.

  • Benjamin Z. Rubin
    Partner

    Ben Rubin assists developers, public agencies, landowners and corporate clients on a variety of complex land use and environmental matters. He counsels clients on matters dealing with the Federal and State Endangered Species Act ...

California Eminent Domain Report is a one-stop resource for everything new and noteworthy in eminent domain in California. We cover all aspects of eminent domain in California, including condemnation, inverse condemnation, and regulatory takings. We also keep track of current cases, project announcements, budget issues, legislative reform efforts, and report on all major California eminent domain conferences and seminars.

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