Proving Lost Profits in Arizona Legal Malpractice Cases

Sometimes, a lawyer’s negligence causes a client’s business to lose sales.  There are a specific set of rules governing proof of lost profits.

The first question is whether this is a new business with no profits yet or whether it is an existing business with a record of sales.  It is possible to recover lost profits for a new business with no record of sales, but it is very difficult. See, Rancho Pescado v. Northwestern Mutual Life, 680 P.2d 1235, 140 Ariz. 174 (App. 1984).

If the business has some history of sales, the court will conclude damages are non speculative. Lininger v. Dine Out Corp., 639 P.2d 350, 131 Ariz. 160 (App. 1981).  However, plaintiff must also prove them to a reasonable certainty.

Establishing Reasonable Certainty of Lost Profits

A business can establish reasonable certainty of lost profits by the following means:

  • a) the business shows that it has a profits history (see, Felder v. Physiotherapy Associates, 158 P. 3d 877, 215 Ariz. 154 (App. 2007), Harris Cattle Co. v. Paradise Motors, Inc., 448 P.2d 866 (Ariz. 1968));
  • b) the business shows that it has records of previous transactions (Id.; Id.);
  • c) the owners have successfully operated an enterprise in this field for multiple years (Short v. Riley, 724 P.2d 1252, 150 Ariz. 583, 586 (App. 1986));
  • d) an expert appraises the value of the property (Rhue v. Dawson, 841 P.2d 215, 173 Ariz. 220 (App. 1992));
  • e) an interested buyer testifies as to what he would have paid (U.S. Fidelity & Guarantee Co. v. Davis, 413 P.2d 590, 3 Ariz. App. 259 (App. 1966), Great Western Bank v. LJC Dev., 362 P.3d 1037, 238 Ariz. 470 (App. 2015));
  • f) there is evidence of sales under a previous contract and an expert interprets the same (Lininger v. Dine Out Corp., 639 P.2d 350, 131 Ariz. 160 (App. 1981)); or
  • g) oral commitments from customers and prices obtained by potential competitors in the field (County of La Paz v. Yakima Compost Co., 233 P.3d 1169 (App. 2010)).

When Courts Find the Evidence Too Speculative to Prove Lost Profits

On the other hand, in some instances, the courts find the evidence too speculative to prove lost profits.  The following have been found inadequate to establish lost profits with reasonable certainty:

  • a) an expert said a brand new business could raise and sell twenty times as much fish as the leading fish farmer in the country and another company said they would have purchased the full supply. Shortly thereafter, the other company that said they would purchase the supply went bankrupt (Rancho Pescado v. Northwestern Mutual Life, 680 P.2d 1235, 140 Ariz. 174 (App. 1984));
  • b) no testimony of any kind or evidence from anyone regarding lost sales of farm equipment (Earle M. Jorgensen Co. v. Tesmer Manufacturing Co., 10 Ariz. App. 445, 459 P.2d 533 (Ariz. 1969)); or
  • c) garbled and confused testimony from plaintiffs, with no documents, that they felt they would have sold the real estate for a huge sum (Gilmore v. Cohen, 386 P. 2d 81, 95 Ariz. 34, 36-37 (Ariz. 1963)).

As a final matter, do not deduct taxes from a lost profits calculation. U-Haul v. Jartran, 601 F.Supp. 1140 (D. Ariz. 1984).