“Before and After” Method Permitted for Calculating Lost Profits Caused by an Officer’s Improper Business Dealings

Advanced Nano Coatings, Inc., et al. v. Hanafin
Case No. 13-20109
United States Court of Appeals, Fifth Circuit: Opinion Delivered February 19, 2014

On November 15, 2005, Joseph Hanafin (“Hanafin”) entered into an employment agreement with Vado AG (“Vado”). During the term of his employment, Hanafin was required to devote 100% of his professional time and effort to Vado or its subsidiary, Advanced Nano Coatings, Inc. (“ANC”), and he was precluded from engaging in certain business dealings with ANC’s customers after the term. While employed, Hanafin was President and a director of ANC, a director of Vado, and the Director of Technology of Intumescents Associates Group (“IAG”), an entity affiliated with Vado. On February 2, 2009, Hanafin resigned from those positions.

In April 2009, after Hanafin’s resignation, Vado, ANC, and IAG (“Plaintiffs”) discovered that Hanafin had improperly engaged in post-resignation business dealings with ANC’s customers, and the entities filed suit in the United States District Court for the Southern District of Texas, bringing claims against Hanafin for breach of contract, breach of fiduciary duty, and tortious interference with prospective contracts, seeking both monetary damages and injunctive relief.

On August 30, 2010, Hanafin filed a motion for summary judgment arguing that the breach of contract claim was meritless and that Plaintiffs did not have standing to bring suit. The district court granted Hanafin’s motion. Plaintiffs appealed arguing they had standing and there were genuine issues of material fact regarding whether or not Hanafin breached his employment contract or torturously interfered with Plaintiffs’ prospective business contracts. The Fifth Circuit vacated the district court’s ruling on summary judgment and remanded the case to the district court for further proceedings.

Upon remand, a bench trial was conducted and the district court found that Hanafin had breached his employment contract and his fiduciary duties as an officer of the companies. The district court awarded Plaintiffs damages for lost profits. The district court also awarded Plaintiffs attorneys fees of $417,688, and an additional $57,000 in appellate attorney’s fees in the event Plaintiffs prevailed in an appeal filed by Hanafin. The attorney’s fees awards were based on a provision in the employment agreement calling for prevailing party attorney’s fees.

Hanafin filed an appeal, but only challenged the amounts of damages and attorney’s fees awarded by the district court.

In affirming the district court’s rulings, the Fifth Circuit reasoned that the district court based its calculations on lost profits on record evidence that showed ANC’s profits before and after Hanafin’s resignation. Hanafin himself testified regarding the amount of profits that ANC generated from sales before his resignation, and Craig Scott, who took over as President of ANC after Hanafin resigned, testified regarding ANC’s sales before the resignation and its drop in sales post-resignation.

The Fifth Circuit rejected Hanafin’s objection to the methodology employed by the district court to calculate lost profits holding that, under Texas law, a reviewing court must determine “whether competent evidence establishe[d] th[e] amount [of lost profits] with reasonable certainty.” (Citations omitted.) Quoting the Texas Supreme Court, the Fifth Circuit stated in its decision that “[c]ontrasting revenue from a time period immediately before the period at issue is an established method of proving revenue for a lost profit damages calculation.” (Citations omitted.)

The Fifth Circuit further cited to the Texas Supreme Court’s decision in Texas Instruments, Inc. v. Teletron Energy Mgmt., 877 S.W.2d 276, 279 (Tex. 1994), which held that “[i]n order that a recovery may be had on account of lost profits . . . [i]t is permissible to show the amount of business done by the plaintiff in a corresponding period of time not too remote, and the business during the time for which recovery is sought.”

Reasoning that since the district court relied on competent evidence by two officers of ANC, Hanafin himself and Craig Scott, to calculate lost profits with reasonable certainty, the Fifth Circuit found there was no clear error in the district court’s damages award.

The Fifth Circuit also found no abuse of discretion in the district court’s attorney’s fees awards, holding that, with respect to the district court’s award of $57,000 in appellate attorney’s fees in the event Plaintiffs prevailed on appeal, the “trier of fact, in its discretion, may allow a fee to an attorney for an appeal, but is not required to do so.” (Citations omitted.)

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