A company can sometimes recover profits it would have earned if another party had not breached a contract, committed fraud, or otherwise caused legally compensable harm. But a business cannot simply point to an optimistic projection and ask a jury to award the difference. In California, lost profits generally must be proven with reasonable certainty and supported by a reasonable basis for calculating the loss. The lost profits cannot be speculative.
Lost Profits Are Often the Largest Part of a Business Claim
In many commercial disputes, the unpaid invoice is only the beginning. A supplier may have failed to deliver a critical component, causing a manufacturer to lose customer orders. A competitor may have interfered with an important relationship. A seller may have misrepresented facts that caused the buyer of a business to overpay and then lose expected revenue. In cases like these, the economic harm can extend well beyond money that was immediately due.
California law generally permits contract damages that compensate the injured party for detriment proximately caused by the breach or that would ordinarily be expected to result from it. California law also requires contract damages to be sufficiently ascertainable in their nature and origin. In practical terms, a plaintiff must connect the defendant’s conduct to the claimed loss and provide a credible way to measure it.
What Must a Business Prove to Recover Lost Profits?
California’s civil jury instructions explain the core concept: the plaintiff must prove that it is reasonably certain the profits would have been earned but for the defendant’s conduct. The amount does not have to be calculated with mathematical precision, but there must be a reasonable basis for computing it. The usual calculation starts with the gross revenue the business would have received and subtracts the expenses that would have been incurred to earn that revenue.
That creates two distinct questions. First, would the business probably have earned the revenue at all? Second, if so, how much actual profit would have remained after the associated costs? A strong lost-profits case answers both with documents, witnesses, and a methodology that can withstand scrutiny.
The Best Evidence of Lost Profits
Existing businesses often have an advantage because they can point to a track record. Helpful evidence may include historical income statements, tax returns, sales reports, customer contracts, purchase orders, recurring-revenue data, pipeline records, gross-margin history, budgets prepared before the dispute, industry data, and testimony from customers or employees. Contemporaneous records are usually more persuasive than projections created after a lawsuit begins.
The closer the claimed future performance resembles the company’s proven past performance, the easier it may be to build a reliable model. For example, a company that sold the same product to the same customer every month for three years is in a different position from a startup claiming it would have captured a new market based only on a pitch deck.
New Businesses Are Not Automatically Barred
A newer business may still be able to prove lost profits, but the evidentiary challenge is often greater. Courts look for objective evidence that makes the claimed profits more than speculation. Signed customer agreements, committed orders, comparable operating data, a proven founder track record, reliable market information, and evidence from similarly situated businesses can matter. The precise evidence depends on the business and the claim.
Causation Can Be as Important as the Math
A damages model may be mathematically elegant and still fail if the defendant can show that something else caused the loss. Defendants commonly point to market downturns, a major customer’s independent decision, competition, supply constraints, staffing problems, pricing changes, or the plaintiff’s own business decisions.
For that reason, lost-profits analysis should not begin and end with a spreadsheet. The legal team and any damages expert should identify alternative causes early and determine whether the evidence can separate the defendant’s conduct from unrelated business conditions.
What We Look at When Evaluating a Lost-Profits Claim
For a substantial business claim, we would typically want to understand the company’s historical revenue and margins, how long it had operated, the reliability of its accounting records, the specific event that caused the loss, how the projected revenue was expected to materialize, whether customers or counterparties can corroborate the projection, what costs would have been incurred, and whether an expert economist or forensic accountant may be required.
We also evaluate collectability. A strong damages model has limited practical value if the defendant has no realistic ability to satisfy a settlement or judgment. In contingency-fee commercial litigation, liability, damages, evidence, litigation cost, and collectability all affect whether a case is economically viable.
A Simple Example
Assume a distributor had a signed one-year contract to supply 10,000 units per month at a known margin, and a third party wrongfully caused the customer to terminate that relationship after two months. If prior performance, the contract, purchase history, production capacity, and margin records support the remaining ten months of expected business, the lost-profit claim may be capable of a grounded calculation. By contrast, a claim based only on a hoped-for customer that never committed to buy anything is much more vulnerable to a speculation argument.
Preserve the Evidence Before It Disappears
Businesses considering a lost-profits claim should preserve accounting records, CRM data, customer communications, contracts, forecasts, board materials, sales reports, and other electronically stored information. Do not rewrite projections after the fact or delete unfavorable records. A credible damages presentation depends on a complete and defensible evidentiary record.
Can a Lost-Profits Case Be Handled on Contingency?
Potentially. A significant lost-profits claim can be well suited to contingency representation when liability is strong, the damages can be supported with reliable evidence, and the defendant has the ability to pay. Melmed Law Group evaluates substantial business disputes for contingency-fee representation. If there is no recovery, the firm does not charge an attorney fee under the contingency arrangement; the written fee agreement governs fees, costs, and other terms.
Discuss Your Case with Melmed Law Group
If your business lost substantial profits because another party breached a contract, committed fraud, or interfered with an important business relationship, contact Melmed Law Group to discuss whether the claim may be suitable for contingency-fee representation. To discuss a matter, call (310) 742-0882 for a free case evaluation.