Federal Evidence Review

Eighth Circuit affirms exclusion of lay testimony by company president about the lost profits suffered as a result of a breach of its contract because the witness failed to show any objective basis for his lay opinion, such as an analysis of the market for the contracted solar salt that it would have sold had the salt been delivered under the contract, in US Salt, Inc. v. Broken Arrow, Inc., 563 F.3d 687 (8th Cir. April 20, 2009) (Nos. 08-2423, 08-2465)

As a general matter, “most courts have permitted the owner or officer of a business to testify to the value or projected profits of the business” as lay testimony. ACN FRE 701 (2000 Amendment). However, this lay testimony must be based on the “particularized knowledge that the witness has by virtue of his or her position in the business.” ACN (2000 Amendment). The Eighth Circuit recently considered whether a sufficient foundation was met under FRE 701 for a corporate president's “particularized knowledge” gained “by virtue of his or her position in the business” to provide a lay opinion on profits lost by the company in a contract dispute.

In the case, plaintiff US Salt charged that defendant Broken Arrow had breached a contract to sell the plaintiff a minimum of 15,000 tons a year of “solar salt to be used in water conditioners.” The price was set at $20/ton which included different grades for “extra coarse, coarse, medium, and fine.” However, US Salt later indicated that “it only wanted to purchase extra coarse salt.” US Salt, 563 F.3d at 688. US Salt then filed a breach of contract claim in state court, which Broken Arrow removed to federal court. The district court granted summary judgment for US Salt that Broken Arrow had breached the contract, but left the issue of damages, if any, for jury determination.

In a pretrial conference, the trial court granted defendant Broken Arrow's motion to exclude the plaintiff's expert on lost profits as unreliable under FRE 702. In addition, the court also excluded lay testimony by US Salt's president on lost profits since the president's “assumptions and estimates as to US Salt's expected sales were nothing more than optimistic projections.” US Salt, 563 F.3d at 689. In light of the exclusion of this testimony as to lost profits, US Salt was unable to prove any lost profits and appealed the exclusion of the president's lay testimony.

The Eighth Circuit affirmed, explaining that the “proposed testimony regarding lost profits amounts to speculation and conjecture because he failed to perform any analysis of a viable market for the solar salt he expected to receive from Broken Arrow and he lacked relevant and recent activity in the solar salt market.” As an example of this failure, the circuit noted that the president “could not identify any customer interested in buying from US Salt a specific amount of solar salt at a specific price and that US Salt had not been active in the solar salt market since the late 1980s.” US Salt, 563 F.3d at 690.

These conclusions were bolstered by Eighth Circuit Case law, in particular by:

• Marvin Lumber & Cedar Co. v. PPG Indus., Inc., 401 F.3d 901, 914 (8th Cir. 2005) (damages based on future lost profits may not be “remote, speculative, or conjectural” and “must be proved with a reasonable degree of certainty and exactness”; “[a]bsolute exactitude” of future losses is not required) (internal quotations omitted)
• Mostly Media, Inc. v. U.S. W. Commc'ns, 186 F.3d 864, 866-67 (8th Cir. 1999) (business owner's proof of damages was too speculative where business owner merely relied upon anticipated profit of business without any underlying supportive data)
• Hammann v. 1-800 Ideas.com, Inc., 455 F.Supp.2d 942, 948 (D. Minn. 2006) (“Damages for lost profits, especially for a relatively new business venture, must be supported by specific, concrete evidence, not by mere speculation and conjecture.”) (internal quotations omitted)

The circuit dismissed US Salt's claim that the general rule was that “a business owner” could “give lay opinion testimony as to lost profit damages.” US Salt cited Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1175-76 (3rd Cir. 1993) (no abuse of discretion in permitting the plaintiff's owner to give lay opinion testimony as to damages, as it was based on his knowledge and participation in the day-to-day affairs of the business) as supporting this contention. As explained by the Eighth Circuit, unlike the business owner in Lightning Lube, the plaintiff's president had not “shown any written commitments from any customer as to the price it would pay for solar salt; he does not have recent experience within the relevant market; and he has not presented any objective market research, a cost analysis, or a business plan.” (citation omitted). In this light, the district court's conclusion that the lay testimony was “nothing more than optimistic projections” was not an abuse of discretion. US Salt, 563 F.3d at 689.

The US Salt case suggests that merely the experience of being a corporate officer does not automatically qualify a witness to be a lay opinion witness as to the lost profits of the business. In addition to the office from which personal observation may be made as to the business's financial position, the witness must show an objective basis for a lay opinion as to the losses that were incurred or that will be incurred.