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Energy Law Exchange

July 16, 2015

Texas Supreme Court Holds that “Reasonable Certainty” Requirement Applies to Claims for “Lost Market Value”

Texas law is well-settled that lost profits can be recovered only when the amount can be proven with reasonable certainty. A recent Texas Supreme Court case has made clear that this requirement cannot be circumvented by seeking the lost market value of a venture that is determined based on lost profits.

Trial and Appellate Courts Reject Reasonable Certainty Requirement

In Phillips v. Carlton Energy Group, LLC, No. 12-0255, 2015 WL 2148951 (Tex. May 8, 2015), Carlton Energy Group, LLC (Carlton) brought suit against entrepreneur Gene Phillips and other entities for the alleged tortious interference with Carltons attempts to acquire an interest in an unproven coalbed methane exploration prospect in Bulgaria. Rather than seeking lost profits as damages in the case, Carlton sought the lost market value of its interests. Carlton argued it was entitled to the market value of its lost interest in the project and presented expert testimony regarding the fair market value of the investment. Carltons expert offered three damages models, ranging from $12.54 million to as high as $11.305 billion. The expert estimated fair market value largely by the amount of lost profits. The jury found Phillips liable and awarded $66.5 million in actual damages and $8.5 million in exemplary damages.

On appeal, the First District Court of Appeals in Houston upheld the jurys award. The court of appeals concluded that Carlton had presented sufficient expert testimony and documentary evidence to support a broad range of values for the jury to consider in determining the fair market value of Carltons interest. It thus held that Carlton was not required to prove any lost profits to recover actual damages. The court of appeals concluded that it was the jurys job, as fact determine the fair market value of Carltons interest[.]

Texas Supreme Court Holds Reasonable Certainty is Required

The Texas Supreme Court disagreed and unanimously reversed the damages award as impermissibly speculative because there was no evidence that the amount awarded was based on objective facts, figures, or data from which the amount of lost profits [could] be ascertained. The Court noted that [w]hile we have never spoken to whether this requirement of reasonable certainty of proof should apply when lost profits are not sought as damages themselves but are used to determine the market value of property for which recovery is sought, it clearly must. Thus, the Court made clear that the reasonable certainty standard applies, and may not be avoided simply by seeking market value damages derived from lost profits, rather than seeking lost profit damages themselves.

The Court, however, did not categorically reject the prospect of recovery for lost market value in this situation. It concluded that when evidence of potential profits is used to prove the market value of an income-producing asset, the law should not require greater certainty in projecting those profits than the market itself would. The reasonable certainty requirement thus should not be used to deny a claimant damages equal to the value the market would have placed on the property. The Court accordingly approved use of a lower market value damages model determined by market indicators, including offers that were made by willing buyers and sellers. The Court then remanded the case for a final determination of damages.

This case reminds us that Texas law is skeptical of lost profits claims arising out of untested ventures, but also establishes that actual valuations made by participants in the marketplace can be used as a reasonably certain measure of damages in cases seeking lost market value.