Company President’s Testimony On Lost Profits Inadmissible As Speculative For a New Product

In a contract dispute, lay testimony of company president’s about lost profits was excluded under FRE 701 as not founded on personal knowledge or experience for a complex market involving a product that had never been sold, in Von der Ruhr v. Immtech Intern., Inc., 570 F.3d 858 (7th Cir. June 30, 2009) (No. 08-1496, 08-1956, 08-1971)

Generally, a business owner is permitted to provide lay testimony about lost profits based on his or her personal knowledge of the business operations. A recent case shows that this rule does not permit lay testimony matters lacking a sufficient basis for personal knowledge, such as a new product in a complex market.

In the case, plaintiff Von der Ruhr founded a number of medical technologies, including Septech, Inc., and Immtech, Inc. Immtech had developed and patented a modified human protein (mCRP) which it believed could help treat the sepsis disease. Septech claimed to hold an assignment of rights for the mCRP patent, including an exclusive right to license and purchase mCRP. Von der Ruhr served as the president of Septech. After Von der Ruhr resigned from Immtech, Septech tried to exercise its rights under the licensing agreement. Von der Ruhr sued Immtech for breaching his option contract to purchase Immtech stock. At trial, the district court excluded Von der Ruhr’s lay opinion testimony concerning anticipated lost profits from the licensing agreement, which he estimated was $42 discounted to their present value. The jury found breach of contract and tortious interference with an option contract. However, the company was unable to prove lost profits based on the exclusion of the company president’s testimony.

The Seventh Circuit affirmed the exclusion of the lost profit testimony. The circuit noted the general rule that lay opinion testimony of a company official may be used to show lost profits under FRE 701 when it is based on the personal knowledge of the company operations. See, e.g., Compania Administradora de Recuperacion de Activos Administradora de Fondos de Inversion Sociedad Anonima v. Titan Int’l, Inc., 533 F.3d 555, 560 (7th Cir. 2008) (lay testimony is permitted “only because that testimony is tied to [the witness’] personal knowledge . . . .”); FRE 701 ACN (noting a business owner may testify about anticipated profits when the lay opinion is based on his “knowledge and participation in the day-to-day affairs of [his] business”) (quoting Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153 (3d Cir. 1993)). The circuit framed the burden for the plaintiff on the issue:

“Septech attempts a difficult task in this case: (1) to prove lost profits damages (2) in a complex market (3) from a product that has never been sold (4) without any expert testimony. And on appeal it is burdened with the additional weight of (5) proving that the district court’s decision on this issue was an abuse of discretion.”
Von der Ruhr, 570 F.3d at 862. The plaintiff failed to show sufficient personal knowledge to support the lost profits with lay testimony. The market for the product was not yet established and there were too many contingencies yet to be established:
“[H]e intended to testify to his expectation of millions of dollars in profits from a brand new drug, which had not been approved by the FDA, which still needed a corporate partner, and for which no competitive market analysis had been conducted. It is difficult to imagine how anyone in this situation could possess the necessary personal knowledge to give a useful lay opinion based on his perception and it is clear that Von der Ruhr did not have such knowledge.

The company president’s familiarity with licensing agreements may have permitted him to “explain how a licensing model is designed to work once a corporate partner is found” but this background “did not give Von der Ruhr any insight into whether a major pharmaceutical company would have entered into a licensing agreement with Septech for this new sepsis drug.” Von der Ruhr, 570 F.3d at 863.

Significantly, the Seventh Circuit clarified that it was not holding that expert testimony must be offered to established lost profits. Instead, the circuit concluded that the lay testimony offered was inadequate: “we merely observe that Von der Ruhr was not the appropriate agent to introduce this evidence.” Von der Ruhr, 570 F.3d at 865 n.3.

For a prior post concerning the admissibility of lost profit lay testimony, see Lost Profit Lay Testimony By Company President Was Inadmissible Absent Showing Of Its Objective Basis.

Federal Rules of Evidence