Legal Definitions - new-business rule

The new-business rule is a legal principle that often prevents a business from recovering damages for lost profits if it is too new, or has not been consistently profitable, to provide a reliable basis for calculating those losses. Courts typically consider claims for lost profits from such businesses to be too uncertain or "speculative" because there isn't a proven track record of earnings to project future income.

Here are some examples illustrating the new-business rule:

• Scenario: A Brand-New Boutique

  Imagine a fashion designer who opens a new boutique in a trendy neighborhood. After only two months of operation, a major water pipe bursts in the building due to faulty construction, forcing the boutique to close for extensive repairs for three months. The designer sues the construction company for negligence and seeks to recover the profits she believes she would have made during the closure.

  How it illustrates the rule: Because the boutique had only been open for a very short time and had not yet established a consistent record of sales or profitability, a court would likely apply the new-business rule. Any projection of profits the boutique might have earned during the three-month closure would be considered speculative, as there's no reliable history to demonstrate its earning capacity.

• Scenario: A Startup Tech Company

  A group of entrepreneurs launches a tech startup developing an innovative mobile application. They secure initial funding and spend a year in development, but before they can officially launch the app and begin generating revenue, a former employee steals their proprietary code and sells it to a competitor. The startup sues the former employee and the competitor for intellectual property theft and seeks damages for the lost profits they anticipated earning from their app.

  How it illustrates the rule: The new-business rule would likely apply here. Even though the app might have significant potential, the startup has not yet launched commercially or generated any revenue. Without a history of sales, customer acquisition, or profit margins, any claim of future lost profits would be highly speculative and difficult to prove with reasonable certainty.

• Scenario: An Established Company's New Venture

  A well-established manufacturing company, profitable for decades, decides to diversify by opening a completely new division focused on producing high-end organic pet food. This new division operates as a separate entity within the company. Shortly after launching its first product line, a key ingredient supplier breaches its contract, causing a significant delay in production and distribution for several months. The manufacturing company seeks to recover lost profits specifically for this new pet food division.

  How it illustrates the rule: While the parent manufacturing company is profitable, the organic pet food division is a *new business venture* without its own independent track record of profitability. The new-business rule would likely apply to the claims for lost profits from this specific new division, as its future success and profit margins are still unproven, making any profit projections speculative.