Opinion ID: 2752194
Heading Depth: 1
Heading Rank: 2

Heading: The Lost Gross Profit Issue

Text: HCC’s policy provided coverage for, “Loss of GROSS PROFIT incurred as a result of an ascertainable reduction in sales revenue caused solely and directly by an ACCIDENTAL PRODUCT CONTAMINATION.” The policy defined gross profit as the difference between: -9- a) the revenue that could have been reasonably projected, but which has been lost solely and directly as a result of an ACCIDENTAL PRODUCT CONTAMINATION, and b) the variable cost that would have been incurred, but which ha[s] been saved as a result of not making these sales (including the cost of raw materials, and all other saved costs). At trial, Hot Stuff sought to recover lost gross profit of $199,604.02 attributable to “recall products” (products that were recalled) and $733,623.22 attributable to new products whose introduction and sale were allegedly hampered by the recall. The jury awarded Hot Stuff $200,000 for its claim of Lost Gross Profit. On appeal, HCC argues the district court erred in denying judgment as a matter of law on the $200,000 lost gross profit award because the evidence was insufficient to allow the jury to determine lost profits “with reasonable or sufficient certainty.” Olson v. Aldren, 170 N.W.2d 891, 895 (S.D. 1969).3 HCC mounts a lengthy, detailed attack on Hot Stuff’s method of estimating lost gross profit. But like the district court we must apply the standard of review the Supreme Court of South Dakota would apply in reviewing the sufficiency of a jury verdict. Parkhurst v. Belt, 567 F.3d 995, 1001 (8th Cir. 2009). Thus, we “determine only if there is competent and substantial evidence to support the verdict,” viewing “the evidence and testimony in a light most favorable to the verdict.” Bertelsen v. Allstate Ins. Co., 833 N.W.2d 545, 554 (S.D. 2013) (quotation omitted). Under South Dakota law, whether damages have been proven with reasonable certainty is a question for the trier of fact. Von Sternberg v. Caffee, 692 N.W.2d 549, 555 (S.D. 2005). “Any reasonable method of estimating a prospective profit is acceptable.” Olson, 170 N.W.2d at 895. 3 HCC does not appeal the jury’s separately itemized award of $755,268.07 for Hot Stuff’s “Recall Expense and Crisis Response/Consultant Expenses.” -10- At trial, Steve Watkins, Hot Stuff’s president and former CFO, presented Hot Stuff’s lost gross profit claims and explained the method by which the amounts were calculated for the recall and new product categories. For recall products, Hot Stuff compared its 2010 and 2011 profits for each customer, “time adjusting” the 2010 figures for customers who bought for the first time during 2010. Hot Stuff then determined total lost gross profit by aggregating the profit differences for all customers whose 2010 time-adjusted profits exceeded their 2011 profits, excluding 2010 purchasers who were not ongoing customers. For new products, Hot Stuff compared actual 2011 gross profits with its projected profits for those new products. Watkins explained that the 2011 new product projections were developed at the end of 2010 as part of an annual, five-months-long planning process, based on consultations with customers, brokers, and distributors and reviewed by outside analysts before being approved by Hot Stuff’s Board of Directors. In practice, Watkins testified, Hot Stuff’s projections were accurate to within three or four percentage points. Noting that Watkins was a lay witness, not an expert, HCC argues this testimony was inadmissible because it was based on “unsupported inferences and innuendo from a spreadsheet created for this litigation,” rather than conclusions “based on the perception of the witness.” See Fed. R. Evid. 701(a) (lay witness “testimony in the form of an opinion is limited to one that is: (a) rationally based on the witness’s perception”). Like most courts, including the Supreme Court of South Dakota, we will not reverse a district court for admitting testimony by a business owner or officer regarding lost profits when his “experience in the business provided the foundation for all the specifics to which he testified.” Diesel Mach., Inc. v. B.R. Lee Indus., Inc., 418 F.3d 820, 837 (8th Cir. 2005); see Olson, 170 N.W.2d at 895; Fed. R. Evid. 701 advisory committee’s note. Here, Watkins had substantial business experience and intimate knowledge of Hot Stuff’s operations. The district court did not abuse its discretion in admitting Watkins’s lay testimony and opinions. See Allied Sys., Ltd. v. Teamsters Local 604, 304 F.3d 785, 792 (8th Cir. 2002). Watkins -11- was thoroughly cross examined, and the jury then determined what weight to afford his opinions in substantially reducing Hot Stuff’s lost gross profit claim. HCC’s other challenges go to the weight of Hot Stuff’s gross profit evidence, not its sufficiency. For recall products, HCC argues that Hot Stuff’s claim was baseless because its 2011 profits exceeded overall 2010 profits and projected 2011 profits. However, HCC’s policy defined covered losses to include lost gross profits from sales “that could have been reasonably projected.” An overall increase in 2011 profits did not preclude the jury from finding that Hot Stuff nonetheless lost additional sales and gross profit due to the recall. Hot Stuff’s central regional sales manager testified that some customers temporarily ceased ordering because of the recall. HCC also challenges Hot Stuff’s method of “time adjusting” 2010 profits.4 Making adjustments to compare part-year purchases in 2010 with full-year purchases in 2011 was a “reasonable method of estimating a prospective profit.” Olson, 170 N.W.2d at 895. It was for the jury to decide what weight that method deserved. For new products, HCC argues that Hot Stuff’s sales projections were too speculative to support a lost profits determination. We disagree. Hot Stuff compared actual sales during and after the recall with sales projections that were part of its normal planning process. The projections were based on the company’s evaluation of customer needs, were assessed by outside analysts, and had proved accurate in the past. Hot Stuff managers testified that most of the “new” products were slightly modified versions of well-established products with proven sales records. Second, HCC contends that Hot Stuff failed to show direct causation between the recall and lost gross profit on new products, as the policy required, because the 4 Hot Stuff determined the average monthly purchases following a customer’s first purchase in 2010, then multiplied that average by twelve to estimate the full year’s gross profit that it compared to the customer’s full-year gross profit in 2011. -12- “supposed ripple effects of a recall of unrelated products . . . is, at best, a theory of indirect causation.” This is false semantics. Hot Stuff presented evidence that the recall crisis forced employees to delay the introduction of new products and frustrated critical marketing efforts. If believed, that was evidence of a “direct” causal connection. The alleged “ripple effects” were supported by two regional sales managers, who testified that all employees needed to assist with the recall, preventing the company from adequately marketing at important trade shows, which led to reduced sales. As the district court observed in denying judgment as a matter of law, “it was an issue for the jury to decide.” HCC’s vigorous cross examination of Hot Stuff’s lost gross profit witnesses was obviously not lost on the jury, because it severely discounted Hot Stuff’s lost profit calculations. After careful review of the four-day trial record, we conclude the district court did not err when it denied HCC’s motion for judgment as a matter of law.