Lost Profit Calculations Must be based on Objective Facts, Figures, or Data From Which the Amount of Lost Profits Can be Ascertained

Nationwide Recovery Systems, Ltd. v. HHT Limited Company and Michael Malone, Jr., No. 05-11-1058-cv, Court of Appeals of Texas, Fifth District: Opinion Delivered May 31, 2013

A jury awarded damages for lost profits to Nationwide Recovery Systems, Ltd. (“Nationwide”), a commercial debt collector, resulting from a former Nationwide employee’s breach of a non-solicitation clause. Defendant Michael Malone, Jr. left Nationwide’s employ to work for a competitor, HHT Limited Company (“HHT”), and solicited three other Nationwide employees to work for HHT, each of whom diverted Nationwide customers to HHT. On appeal, the defendants HHT and Mr. Malone (“Defendants”) contended that the evidence presented at trial was insufficient to support the jury’s award for lost profits. The Texas Court of Appeals disagreed and affirmed the award.

In their appeal, Defendants contended that the evidence presented at trial was speculative because it did not account for expenses, Nationwide did not show lost profits as one calculation, and Nationwide did not show actual future contracts to establish any lost profits. The Court of Appeals described the standard for determining the legal sufficiency of evidence presented in support of lost profit calculations as follows: “opinions or estimates of lost profits must be based on objective facts, figures, or data from which the amount of lost profits can be ascertained.” By examining the evidence presented at trial and applying it to that standard, the Court of Appeals concluded that the evidence presented by Nationwide was sufficient to support the jury’s lost profits award.

At trial, Nationwide presented evidence demonstrating that it takes 2 years to replace an experienced collector and that its net profit on revenues was approximately 20%. That evidence consisted of: (i) summaries of revenue generated from customers served by the employees solicited away by the Defendants for the year prior to and the year after the employees left Nationwide; (ii) testimony by Nationwide’s president, Chris Mathews, that the industry norm for net profit margin was 20%, calculated as the revenue generated from collection accounts deducting expenses for salaries, telephone, postage, and rent; and (iii) evidence demonstrating that Nationwide is an established business in the collections industry, that it normally takes Nationwide 2 years to train a replacement for an experienced collector, and that Nationwide normally retains its customers for at least 2 years.

To calculate its lost profits for one year, Nationwide summarized the revenues lost for each of the employees solicited away by Defendants and applied the estimated 20% net profit margin. Nationwide then multiplied that calculation by two based on evidence that it normally takes Nationwide 2 years to train a replacement for an experienced collector and that Nationwide normally retains its customers for at least 2 years.

In affirming the jury’s award for lost profits, the Court of Appeals found that Nationwide used objective data from its business records to support its revenue estimates and applied an appropriate net profit margin to estimate lost profits. The court further found that Nationwide presented sufficient objective evidence to support its claim for two years of lost profits and that, as president, Mr. Mathews was competent to testify to Nationwide’s estimated 20% net profit margin.

It is remarkable that a case with such complexities was won without the use of experts. Expert involvement would have included considering whether it is reasonable to assume that all employees are equal, and whether applying average results (such as those applied by Mr. Mathews) to these Defendants could be “speculative” – which, if so, would result in lost profits attributable to these particular Defendants to be zero.