How certain must lost profits be for new business damages? Diversified Striping v. Kraus Explained

In Diversified Striping Systems Inc. v. Kraus, the Utah Court of Appeals addressed the critical question of when lost profits damages can be awarded to new businesses lacking established earnings records. This decision provides important guidance for practitioners handling breach of contract and fiduciary duty claims involving startup ventures.

Background and Facts

The dispute involved a joint venture between the Beck parties (80% owners) and Kraus (20% owner) in a pavement striping business called DSS. The parties executed several agreements, including a profit advance agreement providing Kraus $70,000 annually for two years. When the business relationship soured, the Becks excluded Kraus from operations. The district court found the Becks liable for breach of contract and breach of fiduciary duty, awarding Kraus lost profits damages calculated primarily from the $70,000 annual advance figure.

Key Legal Issues

The central issue was whether the district court properly calculated lost profits damages by relying on the profit advance agreement. The Beck parties argued this calculation was speculative and legally insufficient. Secondary issues included joint and several liability, prejudgment interest, and punitive damages standards.

Court’s Analysis and Holding

The Court of Appeals reversed the lost profits award, holding that damages must be established with reasonable certainty rather than speculation. The court explained that while new businesses can recover lost profits without established earnings records, they must prove damages through reasonable assumptions or projections. Here, the $70,000 figure reflected only Kraus’s living expenses, not any profit projection. The court found no evidence that either party conducted profitability analysis or that the advance amount reflected reasonable business expectations.

Practice Implications

This decision reinforces that lost profits claims require more than mechanical calculations from contract terms. Practitioners must establish that damage calculations rest on reasonable business projections rather than personal financial needs. The court’s analysis of prejudgment interest and joint and several liability for fiduciary breaches also provides valuable guidance for complex business litigation. When representing new businesses seeking lost profits, ensure expert testimony or comparable evidence supports damage projections.