A company that had yet to make any money in a risky, untested venture used a novel approach to show it stood to lose millions of dollars after two of its employees jumped ship and tried to beat the company to the punch.
Indeck Energy, in an intended partnership with Merced Capital, was hoping to develop so-called peaker plants in Texas as a way to make money by offering additional power when energy demand exceeded normal supply.
Since the plants would only operate at unpredictable times, the income would be volatile and the business risky, making it hard to show how much in future income, if any, the company stood to lose if the deal didn't move forward.
After two of Indeck’s employees left and launched a company with Merced to build the plants before Indeck could, Indeck sued on the grounds the new competitor was trying to profit off its confidential planning material.
Previous cases show how hard it can be for a company that has yet to make any money on a venture to show it’s entitled to lost profits as damages, since any models it introduces are necessarily speculative no matter how detailed they are.
But Indeck was able to succeed in court by introducing a standard discounted cash flow model that was based on Merced’s own internal due diligence on the deal, according to an analysis of the case by Reid Skibell and Nathan Ades of Glenn Agre Bergman & Fuentes LLP.
Since the due diligence was prepared in the normal course of business and wasn’t the kind of overly optimistic projection that’s often used in sales pitches, the trial court reasoned it was a de facto reliable picture of what a sophisticated investor thought of the deal’s potential, Skibell and Ades say in their analysis, published in Law360.
“It is the defendant's use of the projections that is the lodestar of reliability,” the two lawyers wrote. Skibell is a partner and Ades an associate in the New York office of Glenn Agre.
In a twist, the lawyers said, the capital partner was forced into arguing against the reliability of its own internal models.
“It flipped the script,” the lawyers said. “Instead of the plaintiff having to present evidence demonstrating lost profits to a strict standard, the defendant was placed in the nearly impossible situation of having to attack the reliability of its own projections. Unsurprisingly, the trial court found Merced's attempt to do that was ‘not probative or credible.’”
Indeck was awarded $16 million plus 9% interest in projected lost revenue.
The analysis by Skibell and Ades looked at the case in the context of previous cases taken up in New York courts, including a 1986 case, Kenford Co. v. Erie, considered a landmark because it shows how hard it can be to calculate lost profits in an untested venture. But the winning approach in Indeck Energy v. Merced Capital could provide a path for other cases going forward, no matter the state.
The ruling, the lawyers said, “paves the way for the decision to be more widely cited. And the logic of the decision has wide applicability. While the business projections that proved so pivotal in Indeck were created by the defendant, the trial court's reasoning suggests that any business projections can be utilized to prove lost future profits with reasonable certainty if the projections were relied upon by the defendant in the regular course of business.”