Applying the Modern New Business Rule in Real Life

Overview of an Expert’s Testimony in a Precedent Setting Texas Court Case

The author had the opportunity of being the economic expert for the plaintiff in the initial case in the Business Court of Texas Eighth Division. This assignment provided the author with an opportunity to argue the modern new business rule as the basis for the lost profits calculations prepared in connection with the case. It provided the first Daubert (Robinson in Texas courts) challenge in business court and the first judge’s ruling on a motion to exclude an expert’s testimony for the business court. This article reviews the case, the judge’s ruling, and the outcome of the litigation.

Two years ago, the State of Texas created Texas Business Courts to “resolve certain complex business disputes.”[1] Texas is divided into 11 judicial divisions. Not all divisions received business courts. Only five divisions that contained major cities were selected for the initial business courts. I had the opportunity of being the economic expert for the plaintiff in the initial case in the Business Court of Texas Eighth Division.[2] The litigation provided one of the complex business cases that the business courts were created to serve. This assignment also provided me with an opportunity to argue the modern new business rule as the basis for my lost profits calculations. It provided the first Daubert (Robinson in Texas courts) challenge in business court and the first judge’s ruling on a motion to exclude an expert’s testimony for the business court. This article reviews the case, the judge’s ruling, and the outcome of the litigation.

Overview of the Case

The story leading to the litigation was complex and twisted. The plaintiff was an engineer working in the food processing industry. He developed, installed, and oversaw food processing automated lines. He was hired to find a warehouse building to house a food processing and packaging operation. After a national search, he found such a warehouse in Nebraska.

The engineer formed a partnership with an investor. They bought the building and the engineer began to renovate and improve the facility. In 2017, close to the completion of the renovation work, vandals entered the 230,000 square foot building and stole all the copper wiring along with many of the electrical circuit boards.

A dispute arose with the insurance company covering the building. This dispute and litigation were not resolved until 2024. During the interim, the bank holding the note on the property called the loan because the property was no longer insured. The investor entered bankruptcy and the engineer filed mechanics’ liens worth approximately $3 million for his work on the property.

The building was to be auctioned as a part of the bankruptcy. A new group of investors contacted the engineer offering to work with him to purchase the building and turn it into a cold storage facility. One of their conditions for them working with him was that he would not bid his mechanics’ lien to obtain ownership of the building. He agreed and the new investors acquired the building.

The new owners offered the engineer the opportunity for 20% ownership in the building and the ongoing cold storage enterprise. To obtain 20% ownership, title on the building needed to be transferred to the new owner, the cold storage equipment be installed, and through his network of food processing relationships, the engineer help the new investors achieve 75% occupancy for the cold storage unit.

Prior to and after the acquisition of the building by the new investors, the engineer argued for 50,000 square feet of cold storage and 180,000 square feet of food processing (in this situation, pet food processing). Part of the new ownership held out for 230,000 square feet of cold storage. In the end, the new owners made no effort to improve the building, create a cold storage area, or set up a food processing area.

The new owners also reneged on other promises made to the engineer, who ultimately lost his home and entered bankruptcy due to the new investors not making promised payments to him. At this point, the engineer sought counsel and filed suit for loss of ownership in the building and lost profits from the operations, which were to be part of the completed buildings.

Assignment

I was hired as the plaintiff’s economic expert by the engineer’s legal counsel. My assignment was to estimate the engineer’s 20% value of the building, which was to rent space to two new enterprises. One, the cold storage was to be part of the building’s operations. The building owners would report its profits as a part of the building’s revenue and profits. The pet food processing operation was to be a renter. The engineer had discussed partnering with potential investors to create a pet food processing business which would process pet food for large pet food retailers. He was to receive up to 49% of enterprise for his designing, installing, and managing the pet food processing line.

The building had been appraised on several occasions. The most recent appraisal occurred while the building was under renovation. The appraisers reported that when completed and stabilized, the building would be worth $13,040,000. The appraisers anticipated the building being stabilized in 2022. Based on data from the Nebraska Department of Revenue, Property Assessment Division, this value was assumed to be accurate for 2025. The value was used to estimate the engineer’s 20% ownership of the building which was $2,608,000.

Modern New Business Rule

The other two losses were measured by lost profits. As noted earlier, the building was vandalized in 2017 with all the electoral wiring and some of the circuits stolen. The previous owner did not settle with the insurance company until 2024. The new owners did nothing to upgrade or renovate the building. So, it remained in disrepair in 2025 when I received the assignment.

I spoke with the plaintiff’s attorneys and discussed the difficulty in measuring lost profits for two businesses that never existed. One set of helpful items was the numerous pro-formas that had been created for the cold storage area. These covered several years and were made by various individuals in the new investors group. For the pet food processing, only one pro-forma existed but it was very detailed.

Before making any lost profits calculations, I felt the report needed a section specifically addressing that these businesses never existed except on paper and that the only way to make a lost profits calculation was to ensure the facts complied with the modern new business rule. The following is from my report’s modern new business rule section.

Until the latter part of the 20^th century, courts followed what was called the new business rule. This rule stated that lost profits for a new or unestablished business could not be recovered. During the last quarter of the 20^th century, courts moved more to a new position called the modern new business rule.

“As noted in the National Association of Certified Valuators and Analysts (NACVA) publication QuickRead, ‘Fewer and fewer states apply the new business rule for denying recovery of lost profits by a new or unestablished business. Most jurisdictions have moved to the modern new business rule. The modern new business rule allows new or unestablished businesses to recover lost profits when they have been proven with reasonable certainty.’”[3]

The movement to the modern new business rule has received support from courts in several cases. One of the most prominent is Energy Capital.[4] In the Energy Capital case, the defendant argued that the court should have denied lost profits based on the new business rule. “The defendant argues that because Energy Capital was engaged in a new business, any measure of lost profits is unreliable and speculative. The defendant relies on the first decision by the Court of Claims in Neely v. United States, 285 F.2d 438, 443, 152 Ct. Cl. 137, 146 (1961). ‘Profits are uncertain; they depend on so many contingencies, especially in a new enterprise, that it is, in most cases, impossible to say that the breach was the proximate cause of the loss of them, or that a profit would have been realized, in any event; nor is there any basis to determine what they might have amounted to.’”[5]

The court went on to express support for the modern new business rule in its decision. “A new venture must establish its entitlement to lost profits by showing the same elements that any business shows: (1) causation, (2) foreseeability, and (3) reasonable certainty. A new business will probably encounter more difficulty in establishing that its lost profits were reasonably certain. … ‘The development of the law has been to find damages for lost profits of an unestablished business recoverable when they can be adequately proved with reasonable certainty. … What was once the rule of law has been converted to the rule of evidence.’”[6]

The question then becomes “how can an expert show lost profits with reasonable certainty under the modern new business rule?” Two Texas decisions may shed light on helping experts make such calculations. In 2013, a Texas appellant court stated that to meet the reasonable certainty standard inquiry, one should focus on the experience of the people involved, the nature of the business activity, and its relevant market.[7] The prior year a Texas appellant court said, “Where estimates are based on objective facts or data and there are firm reasons to expect a business to yield a profit, recovery is not prohibited simply because the enterprise is new.”[8]

To complete my modern new business rule section, I discussed nine factors showing how these enterprises “more likely than not” could be successful. The first four factors discussed the success and growth of the cold storage and pet food processing industries from 2017 through 2025 and then the anticipated continued growth in both industries. Data from research firms offering industry and market forecasting provided the foundations for these arguments.

The next two sections discussed the expertise of the engineer in the areas of food processing and the cold storage of food. They emphasized his experience, education, and training that would assist him in guiding these two entities through start-up and early growth.

Another section explained the numerous projections (pro-formas) that had gone through several renditions by several individuals in the new investors group, showing the collaboration among the parties involved in this project. The final section discussed what appeared to be the adequate capital funding available from the new investors for the building renovation and cold storage completion. The same was shown for the investors in the pet food processing venture. These showed management, capital funding, and opportunity were in place for successful operations.

Daubert Challenge

I was deposed in this matter. It was a lengthy deposition, which was only 15 minutes short of the Texas maximum time to depose an expert, which is six hours “on the record.” Not soon after a Daubert motion was filed.[9]

The hearing was limited to attorneys only. I was asked to prepare a lengthy affidavit which outlined my report but added additional resources discussing the modern new business rule. During the oral arguments regarding the motion, the defendant argued that my opinions were speculative and unreliable because they depended on untested or hypothetical business ventures. The plaintiff argued I used accepted economic methodologies and that any disagreement with my assumptions went to the weight, not the admissibility of my opinions. The judge agreed with the plaintiff and the motion was denied.

To deny the motion to exclude, the judge’s order was seven pages and very detailed. The judge wrote that the motion conflated the sufficiency of evidence with its admissibility.

Judge Stagner wrote, “It is not the Court’s role to exclude expert testimony in advance merely because there are doubts whether all the evidence, taken together, will ultimately be sufficient to sustain a verdict.”[10]

“The reality is that Dr. Needham employed standard valuation and economic-loss methodologies using available data, including industry growth studies, appraisals, and projected operations. Disagreement with his assumptions—such as the viability of the proposed ventures or the availability of renovation funds—does not render his approach unreliable, even if those assumptions are debatable. These are matters for cross-examination and competing expert testimony, not exclusion.”[11]

He went on to address other arguments over my use of the real estate appraisal and my use of internal investment worksheets (which were created by the defendants).

“This treatment is analytically defensible within accepted economic practice. Defendants’ own expert may disagree with this approach, but the Court’s gatekeeping role does not extend to deciding which of two competing accounting treatments is ‘right.’

The remaining objections likewise concern factual assumptions rather than methodological defects.”[12]

The judge’s closing explains why the motion to exclude failed.

“Ultimately, Defendants’ criticisms reflect a broader view that lost profits from unestablished businesses are inherently speculative. Texas law, however, does not impose a per se bar. As one court explained, lost profits from new enterprises are recoverable when supported by the participants’ experience, the nature of the business activity, and relevant market data. Dr. Needham considered precisely those factors. The credibility of his projections is for the jury to assess. Cross-examinations, presentation of contrary evidence, and appropriate jury instructions remain the best safeguards for reliability.”[13]

Outcome of Case

This case was scheduled to go to trial in early January 2026. It was to be the first trial in the Texas Business Courts. Trial prep began the first full week in January. Three days prior to the trial, I was informed the parties had settled. The settlement was confidential, but I was assured the plaintiff received a “large” settlement.

During the first week of February, I read a news bulletin which reported the first trial in the new business courts was about to begin in Houston Texas.  

Conclusion

This assignment confirmed that even with complex issues when estimating losses for an unestablished business, an expert may calculate lost profits and protect the integrity of his or her report by using the modern new business rule. Each state may have different wording on how experts must present information regarding the participants’ experience, the nature of the business activity, and relevant market data. But these standards, if addressed and met, should allow an expert to move forward to trial.

Losses for unestablished businesses are a challenge but not a hill too high to climb for an expert willing to put in the time to address the modern new business rule standards. This can provide a benefit to the expert’s client and demonstrate the expert’s expertise in commercial damages assessment.

[1] About the Texas Business Court, www.txcourts.gov/buisnesscourt/.

[2] CRS Mechanical, et. al. v Norfolk Cold Storage, LLC, et. al., 25-BC08B-0001.

[3] Lost Profits: Fifth Circuit Decision Clarifies Reasonable Certainty, Allyn Needham, 2/27/2019, QuickRead, https://quickreadbuzz.com/2019/02/27/litigation-needham-lost-profits/.

[4] Energy Capital Corp. v United States, 47 Fed. Ct. 382, (2000).

[5] Ibid, 393.

[6] Ibid, 394.

[7] Peterson Group, Inc. v. PLTQ Lotus Group, 417 S.W.3d 46 (Tex. App, 2013).

[8] DaimlerChrysler Motors, Co. v. Manuel, 362 S.W.3d 160, 191 (Tex. App. 2012).

[9] In Texas, a Daubert challenge is called a Robinson challenge being named for the case whose decision made Texas a Daubert standard state. E.I. du Pont Nemours and Co., Inc. v Robinson, 923 S.W.2d 549 (1995).

[10] Order Denying Defendants’ Motion to Exclude Needham Testimony, 11/14/2025, Cause 25-BC08B-0001, p. 4.

[11] Ibid, 4–5.

[12] Ibid, 5.

[13] Ibid, 6.

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Allyn Needham, PhD, CEA, is a partner at Shipp Needham Economic Analysis, LLC, a Fort Worth-based litigation support consulting expert services and economic research firm. Prior to joining Shipp Needham Economic Analysis, he was in the banking, finance, and insurance industries for over 20 years. As an expert, he has testified on various matters relating to commercial damages, personal damages, business bankruptcy, and business valuation. Dr. Needham has published articles in the areas of financial and forensic economics, and provided continuing education presentations at professional economic, vocational rehabilitation, and bar association meetings. In 2021, Dr. Needham received a NACVA Outstanding Member Award. He is also a member of NACVA’s QuickRead Editorial Board.

Dr. Needham can be contacted at (817) 348-0213 or by e-mail to aneedham@shippneedham.com.