Bell Atlantic Network Services, Inc. v. P.M. Video Corp.

322 N.J. Super. 74, 730 A.2d 406 (App. Div. 1999)
  • Opinion Date: June 11, 1999

CONTRACTS; DAMAGES; NEW BUSINESS RULE—The “new business rule” still bars recovery of damages where the new business’ proofs are too speculative.

An employee of a subsidiary of a regional telephone company was responsible for creating and implementing a business plan to indirectly provide services that could not be directly provided, at that time, by a regional telephone company. In furtherance of that activity, the employee engaged a contractor, as a service provider, to participate in the business venture. At trial, a jury found that the telephone company employee had caused the telephone company’s subsidiary to enter into a non-contingent contract with the service provider and also found that at the time of that contract the employee and the telephone company were aware that a change in the law would allow the telephone company to conduct the business directly. Notwithstanding that knowledge, and a possible change in the telephone company’s business plans, the telephone company’s employee proceeded to deal with the service provider as if their relationship would continue. In reliance on that contract and on the telephone company’s representations, the service provider did a considerable amount of work and delivered some of its own proprietary information to the telephone company. A time came when the telephone company advised the service provider that it would not be needed for the business venture and the service company sued for breach of contract and for punitive damages based on what it argued to be the egregious fraudulent conduct of the telephone company acting through its employee. The jury awarded an amount equal to what the telephone company had agreed to pay the provider for the first two phases of a three phase contract. It also awarded substantial punitive damages. The lower court judge, however, would not allow the service provider to prove further damages based on the profit it claimed it would have earned had the telephone company proceeded with the third phase of the business arrangement. This gave rise to the central issue in the appeal that followed. Under a 1936 case, Weiss v. Revenue Bldg. and Loan Ass’n., 116 N.J.L. 208 (E. & A. 1936), such a damage claim is too speculative for consideration by a jury. In essence, the Weiss case described a “new business rule” with respect to damages. Under that case, “[t]here is a well established distinction, in respect of the ascertainment of future probable profits, between a new business or venture and one in actual operation. In the first, the prospective profits are too remote, contingent and speculative to meet the legal standard of reasonable certainty; while in the second, the provable data furnished by actual experience provides the basis for an estimation of the quantum of such profits with a satisfactory degree of definiteness.” The “new business rule” was rejected as a statement of the law of New Jersey by the Third Circuit in 1990. That court, after noting the modern trend towards rejection of this once generally accepted rule, predicted that the New Jersey Supreme Court, given the chance, would “no longer follow a per se rule precluding all new businesses from recovering any damage for lost profits.” In a 1992 case, the New Jersey Supreme Court upheld an arbitration award even though the “new business rule” may have been violated. In 1993, the Third Circuit again said “New Jersey no longer adheres to its ‛new business rule… .’”

In this case, the Appellate Division viewed the trend of New Jersey law differently than the Third Circuit and distinguished the upholding of an arbitration award from the rules that a New Jersey court would be required to follow with respect to new businesses. It found that although more recent decisions of the New Jersey Supreme Court may have undermined the authority of the Weiss decision, none expressly overruled it. “While the arguments for abandonment of the ‛new business rule’ appear to be persuasive, those arguments are not supported by a majority opinion of the Supreme Court; rather, they appear only in the plurality opinion. ” which involved only arbitration and was itself overruled on other grounds. Citing a Texas opinion with favor, the Court said “[t]he fact that a business is new is but one consideration in applying the ‛reasonable certainty’ test. ... [But the] mere hope for success for an untried enterprise, even when that hope is realistic, is not enough for recovery of lost profits. When there are firmer reasons to expect a business to yield a profit, the enterprise is not prohibited from recovering merely because it is new.” Consequently, the Court found no basis for disturbing the lower court judge’s determination that the service company’s proofs were too speculative to permit their consideration by a jury.