Texas law now requires that value determinations calculated from lost profits be proved with the same “reasonable certainty” that proof of lost profits as a measure of consequential damages has long required. See Phillips v. Carlton Energy Grp., LLC, No. 12-0255 (Tex. May 8, 2015)In so holding, the Court unanimously reversed a $66.5 million judgment as overly speculative where 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.” 

Wildcat Investment Gone Awry

This case arose out of a dispute between two parties competing for a concession to explore for coalbed methane in an unproven field in Bulgaria. CBM Energy Limited (“CBM”) acquired the concession and contracted with plaintiff Carlton Energy Group, LLC (“Carlton”) to provide investment backing. The CBM-Carlton contract entitled Carlton to acquire an interest in the project based upon the amount of its investment. To supply the investment backing, Carlton sought out its own investors, including one of the defendants, Gene Phillips (“Phillips”). Carlton offered 10% of its interest to Phillips in exchange for $8.5 million in investment funds (the “Carlton-Phillips contract”). But before executing any contract with Carlton, Phillips supplanted Carlton in the project and contracted directly with CBM through defendant EurEnergy Resources Corp. (“EurEnergy”). CBM, in turn, declared Carlton in default of its agreement for failing to secure the required funding. 

Trial and Appeal

Carlton sued Phillips, EurEnergy and several Phillips-related entities for breach of the Carlton-Phillips contract and tortious interference with the CBM-Carlton agreement. Carlton alleged it was entitled to recover the market value of its lost interest in the project. As evidence, Carlton, through its expert, proffered three damages models ranging from $12.54 million on the low side to $11.305 billion on the high side. The models were intended to value the fair market value of Carlton’s investment measured by the amount of its lost profits. 

The jury sided with Carlton on all claims and awarded it $66.5 million in actual damages. The trial court refused to render judgment on the $66.5 million award. The court of appeals reversed in part and awarded Carlton the jury’s full award holding that Carlton was not required to prove fair market value with the same “reasonable certainty” required in a “lost profits” case. Rather, “it was the jury’s job” to determine the market value of Carlton’s interest based on the substantial evidence presented at trial, including the plaintiff’s expert testimony.

The Texas Supreme Court Held Reasonable Certainty is Required

The Texas Supreme Court agreed with Phillips and the trial court that any evidence of $66.5 million in damages was too speculative to support an award of damages. In so holding, the Court expressly extended the rule that “reasonable certainty of proof” is required when lost profits “are sought as damages themselves” to the determination of “market value of property for which recovery is sought.” The Court noted, however, that “the law should not require greater certainty in projecting those profits than the market itself would.” Applying this rule to the facts at hand, the Court concluded that the two analytic-based damage projections were mere conjecture based on “sweeping assumptions” and paucity of risk analysis and, thus, no evidence of damages. On the other hand, the Court embraced the damage model based on value as determined by market indicators, including offers made by willing buyers and sellers at the time the damage occurred—here, Phillips and Carlton. The Court remanded the case back to the appellate court for a final determination of damages.

This case reminds us that courts are loathe to award damages based on speculative models. But actual valuations made by participants in the marketplace can be used as a “reasonably certain” measure of lost profits as a basis for market value.