Fifth Circuit Sheds Light on Requirements for New Ventures to Recover Lost Profits

In an October 2018 decision in Al-Saud v. Youtoo Media, LP & Christopher Wyatt, 2018 U.S. App. LEXIS 29680, the Fifth Circuit Court of Appeals affirmed the district court’s dismissal of Youtoo’s counterclaims for breach of contract, breach of fiduciary duty, and fraud as a matter of law on the ground that Youtoo’s evidence of lost profits, including the testimony of Youtoo’s damages expert, was speculative.

Youtoo developed technology that blended social media and television to allow viewers to actively participate in broadcasts by sending text messages, photos, and videos that networks could insert into programs. Youtoo also developed a “sweepstakes platform” that would allow viewers to compete for cash and other prizes while viewing game shows and sporting events. However, to sell the platform to U.S. broadcasters, Youtoo had to demonstrate success in other markets, and to do that it needed capital.

Youtoo’s CEO, Christopher Wyatt, discussed initiating operations in the Middle East and selling a stake in the company to Mansour Bin Abdullah Al-Saud, a member of the Saudi royal family, and to his advisor. The parties signed a Letter of Intent in October 2013, and Al-Saud gave Youtoo $3 million as a down payment for short-term costs. Al-Saud had three months to decide “in his sole discretion” whether to buy a stake in the company. If he declined, Youtoo was obligated to reimburse the down payment. The LOI also created Youtoo Middle East, a joint venture that would market the Youtoo’s interactive platform in the region.

Al-Saud ultimately declined to purchase an interest in Youtoo. However, because Wyatt needed cash to continue operations, Al-Saud agreed to loan Youtoo $310,000. A March 2014 Facility Agreement memorialized the loan.

Youtoo’s primary lender eventually forced the company to sell its intellectual property and assets to cover outstanding debts.  Al-Saud asked for repayment of the down payment and loan. Youtoo refused to repay.    Al-Saud sued Youtoo and Wyatt for breach of contract, and Youtoo counterclaimed for breach of contract, breach of fiduciary duty, and fraud.

At trial in the Northern District of Texas, the jury found Youtoo and Wyatt liable for breaching the LOI and awarded Al-Saud $3 million in damages for the down payment that was not returned. The jury also found Youtoo liable for breaching the Facility Agreement, but awarded Al-Saud only $6,820, representing the accrued interest on the loan. The district court further entered judgment as a matter of law dismissing Youtoo’s counterclaims on the ground that the testimony of Youtoo’s damages expert was too speculative.  Wyatt appealed the judgment entered against him for breaching the LOI, and Youtoo appealed the district court’s dismissal of its counterclaims.

Although the Fifth Circuit affirmed the dismissal of Youtoo’s counterclaims – holding that Youtoo’s evidence of lost profits was speculative and violated the reasonable certainty standard – it confirmed that new and unestablished businesses without a profit history are not precluded from recovering lost profits. (Citation omitted.) However, “the ‘mere hope of success of an untried enterprise, even when that hope is realistic, is not enough for recovery of lost profits.’” (Citations omitted.) The Fifth Circuit stated that for new ventures to recover lost profits, they must show evidence that the venture had a good chance of succeeding. (Citation omitted.) Such evidence may include the experience of those involved, the nature of the activity, and the relevant market. (Citation omitted.)

With respect to Youtoo Middle East, the Fifth Circuit stated that was a new venture with no history of profitability, few signed agreements, and its damages estimates relied primarily on hoped for partnerships and speculation of the profits those partnerships would generate. (Citation omitted.) “The profit calculations [that Youtoo Middle East] would have presented at trial were ‘projections that were presented to investors,’ calculations which Texas courts have held insufficient when not supported with more reliable indicators of profitability.” (Citations omitted.) The Fifth Circuit found a lack of reasonable certainty to project damages “for a new venture when no working model of the product existed, its viability was in doubt, and the company that was supposed to produce it had never operated at a profit.” (Citation omitted.)

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