Legal Definitions - lost profits

Lost profits refers to the financial gains a person or business would have reasonably expected to earn but did not, due to another party's wrongful actions. It represents the income that was anticipated but never materialized because of a breach of contract, infringement of intellectual property, or other unlawful conduct.

This concept is commonly applied in two main legal areas:

• In Contract Law: When one party breaches a contract, the other party may seek lost profits as a form of damages. For a seller, this often means recovering the profit they would have made on a sale if the buyer had not broken the agreement. This is particularly relevant when the seller has an unlimited supply of the goods and could have made the breached sale in addition to any other sales they completed.

• In Patent Law: A patent holder whose invention has been illegally used or copied by another party (an infringer) can claim lost profits. To successfully claim these damages, the patent holder typically needs to demonstrate that there was a strong market demand for their patented product, that they had the capacity to meet that demand, and that there were no acceptable non-infringing alternatives available to customers in the market.

Here are some examples illustrating how lost profits are applied:

• Example 1 (Contract Breach): "GreenThumb Landscaping" secured a contract to design and install a large garden for a new luxury apartment complex, "The Residences," for $150,000. GreenThumb had already purchased specialized plants and allocated a team for the project. Two weeks before work was scheduled to begin, The Residences unexpectedly canceled the contract, stating they decided to use an in-house team instead. GreenThumb was able to reassign its team to another project but lost the profit margin it would have earned from The Residences' contract, which was a unique, high-value project that would not have prevented them from taking on other work.

  Explanation: GreenThumb Landscaping can claim lost profits. Since they had the capacity to take on both The Residences' project and their other work, the profit they would have made from the canceled contract is considered lost. The damages would aim to compensate GreenThumb for the net profit they missed out on due to The Residences' breach, putting them in the financial position they would have been in had the contract been fulfilled.

• Example 2 (Patent Infringement): "MediTech Innovations" holds a patent for a groundbreaking surgical instrument that significantly reduces recovery time for a specific procedure. They are the sole manufacturer and supplier of this instrument, which is in high demand globally, and they have the manufacturing capability to meet all orders. A competitor, "SurgiCo," begins selling a nearly identical instrument that infringes on MediTech's patent. As a result, several hospitals that previously purchased exclusively from MediTech switch to SurgiCo's cheaper, infringing product, causing MediTech's sales to drop significantly.

  Explanation: MediTech Innovations can seek lost profits from SurgiCo. MediTech can demonstrate that their patented instrument was in high demand, they had the capacity to fulfill all orders, and there were no other non-infringing alternatives that hospitals would have chosen. Therefore, the profits MediTech lost from the sales that went to SurgiCo are directly attributable to SurgiCo's patent infringement. The court would aim to compensate MediTech for the profits they would have earned if SurgiCo had not illegally copied their invention.