Wyoming Supreme Court Reverses Lost Profits Damages Award
Selecting the right expert is one of a litigator’s most important challenges. Selecting the wrong expert can destroy a perfectly potent case. Failing to engage an expert can result in no damages. This is a synopsis of what happened in a recent decision when the plaintiff chose not to retain an expert on lost profits.
In Homax Oil Sales, Inc. v. Downs, 2018 WY 71 (Wyo. 2018), the Supreme Court of Wyoming reversed the district court’s award to plaintiff Homax Oil Sales, Inc. (“Homax”) for lost profits damages. The bases for the Court’s reversal was that Homax did not comply with its obligation under Rule 26 to disclose its computation of damages and documents supporting its damages claim, and that the evidence that Homax introduced at trial did not comply with the standard that damages must be proven with reasonable certainty.
Third-party RKI Exploration & Production (“RKI”) had oil and gas operations on a ranch owned by the defendant Robert Downs in Converse County, Wyoming. Homax sells refined petroleum products, such as gasoline, diesel, and lubricants, including selling and delivering petroleum products to RKI’s operations on Mr. Downs’ ranch (the “Downs Ranch”). When Homax drove a fuel truck on a private road within the Downs Ranch, without permission or authority to do so, Mr. Downs’ daughter Amanda Horr hand-delivered a trespass bill of $1,500 to Homax, which Homax’s President Darin Homer refused to pay. Ms. Horr informed RKI that she had been treated rudely by Mr. Homer and RKI terminated its business relationship with Homax. Homax brought a claim against Mr. Downs for tortious interference with its prospective contractual relationship.
In the State of Wyoming, the proper measure of damages for tortious interference with prospective contractual relation is net lost profits. After trial, the district court ruled in favor of Homax and awarded lost profits of $250,000, calculated at $25,000 per month over 10 months. The 10-month period was based on testimony from one of Homax’s employees as to when RKI’s interests in Converse County were acquired by Devon Energy. The district court ruled that Homax failed to present evidence regarding the agreements it had with Devon Energy, or the sales or profits of the services provided by Devon Energy. The district court therefore declined to award lost profits to Homax beyond the time that Devon Energy acquired Homax’s interests in Converse County.
At trial, although Homax did not comply with its obligation under Rule 26 to disclose its computation of damages and documents supporting its damages claim, Homax produced an exhibit showing its monthly sales, cost of sales, profit percentage, profits, and cash received in connection with all sales to RKI in 2014 and 2015. Mr. Homer, Homax’s President, testified regarding the amount of “gross profits” that Homax earned from its sales to RKI in 2014 and 2015, which Mr. Homer calculated by deducting the “cost of goods” from total sales. Mr. Homer further testified that “gross profits” differs from “net profits” in that, to calculate net profits, “all associated expenses” had to be deducted from gross profits. He testified that he did not produce a list of “all associated expenses” to the defense because they were never asked for. He identified what he believed to be “associated expenses” as “wages, utilities, truck expenses, advertising, bank charges, cash over short, credit card fees, insurance, laundry and uniform expenses, lease expense, office expense, and payroll tax expense”.
When asked about the specific expenses incurred by Homax for its business with RKI, Mr. Homer admitted that he did not have that information and explained that he calculated Homax’s net profits by applying “a gross profit to net income percentage” for Homax’s entire operation in Douglas, Wyoming. The district court accepted Homax’s trial exhibit and Mr. Homer’s testimony, and awarded Homax $250,000 in lost profits damages based on $25,000 per month over 10 months.
The Supreme Court of Wyoming reversed the district court’s lost profits award because Homax did not comply with its Rule 26 obligation to disclose its computation of damages and documents supporting its damages claim, and the evidence that Homax introduced at trial did not meet the reasonable certainty standard. The Wyoming Supreme Court held that net profits, not gross profits, is the proper measure of damages, and evidence regarding “associated expenses” was necessary to determine Homax’s lost net profits.
The Wyoming Supreme Court rejected Homax’s calculation of net lost profits, in which Homax applied a net profit percentage to gross profits, ruling that it did not comply with the reasonable certainty requirement. The Court further held that, in calculating net lost profits, it was necessary for Homax to introduce evidence of its “associated expenses” and to pro rate those expenses to its business with RKI.
Homax should have had a credible expert testify about its lost profits.
At Rosenfarb LLC we produce well-supported, well-reasoned and well-communicated damage calculations that withstand the rigors of litigation. We are a firm of forensic accounting and valuation experts. We understand business, have keen insights and always connect the dots. We understand the litigation process. We frame the issues simply and in alignment with the litigation strategy. We use logic to support our opinions, while creating compelling stories. We are sincere, professional, and credible. We are accounting experts with legal acumen.
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