Understanding and applying Florida's flexibility theory of damages.

• Author: Coleman, Jonathan S.

Florida courts have led the nation with the so-called "flexibility theory of damages," which means that plaintiffs in contract and tort may seek reimbursement of out-of-pocket expenses, or reasonable future lost profits, but not both. The "flexibility theory" is more accurately a doctrine limiting the availability of damages. While the concept has been consistently and frequently applied around the country, the term itself is surprisingly scarce. Florida first adopted the principle underlying the "flexibility theory" in 1970, and applied the doctrine in several 2005 appellate decisions. Yet, only three reported opinions, beginning in 1970 and ending in 2004, have referred to it by name. (1)

The author recommends that Florida practitioners regularly invoke the term in their motion practice and appellate briefing to clarify the doctrine's use and avoid confusion that can lead to trial court reversals and unnecessary appeals. Proper application is important because plaintiffs who seek inappropriate damages risk derailment of their cases through summary judgment, new trial orders, dismissals, or appellate reversals. Likewise, defendants who fail to recognize (and challenge) inappropriate trial rulings flirt with malpractice and otherwise do their clients a disservice through the risk of inappropriate verdicts or waiver of appellate issues.

Florida First Adopted the Flexibility Theory

Florida, beginning in 1970, and Maryland, a year later, are the only two states employing the term "flexibility theory," using it 11 times. (2) Even if the label is not widespread, the doctrine is ubiquitous. State courts in Oregon and Texas, and federal courts in Kansas, New York, and elsewhere have all applied the flexibility theory's principles. (3)

The first Florida decision to use the term "flexibility theory" was DuPuis v. 79th St. Hotel, Inc., 231 So. 2d 532 (Fla. 3d DCA 1970). In that tort case, the trial court approved a jury instruction which allowed the jury to consider awarding both "benefit of the bargain" and "out-of-pocket" damages. The appellate court reversed this liberal interpretation of damage availability, and instead adopted the flexibility theory as outlined in 37 Am. Jur. 2d, Fraud and Deceit [section]352. (4) DuPuis is also noteworthy for foreshadowing a related damage concept--recovery of lost profits carries a higher burden of proof than does restitution of out-of-pocket expenses; lost profits require "sufficient certainty." (5)

Florida courts have routinely applied the bedrock principles of the flexibility theory as adopted in DuPuis up through the present. An early but frequently cited application of the flexibility theory (minus the term) is Beefy Trail, Inc. v. Beefy King International, Inc., 267 So. 2d 852 (Fla. 4th DCA 1972), which confirmed that future lost profits and recovery of out-of-pocket reliance expenditures present a clear either/or scenario:

If a party seeks the remedy of damages two alternative methods for determining recovery are available: (1) he may prove the gains he would have made had the defendant performed in full as the contract required subtracting therefrom the costs of the operations necessary to realize those gains, i.e., the injured party may seek lost profits and in such case the interest he seeks to protect is his "expectation interest"; (2) he may omit an attempt to show lost profits and prove instead his actual expenditures made before the repudiation or nonperformance by the defendant insofar as those expenditures were reasonably to have been foreseen, i.e., expenditures made in preparation for performance or in part performance and in such case the interest the plaintiff seeks to protect is his "reliance interest." (6)

Beefy Trail is consistent with DuPuis; reliance damages are the only alternative when lost profits "may be too speculative to form a part of any damage award." (7)

Florida's Third District (which decided DuPuis) again applied the flexibility theory (minus the term) in Sundie v. Livesay, 166 So. 2d 152 (Fla. 3d DCA 1974). Sundie confirmed that while a plaintiff may seek restitution of expenses paid or future lost profits, those methods are alternative, inconsistent, and mutually exclusive theories of recovery. (8) The same result occurred more than a decade later in Resorts International, Inc. v. Carter Air Center, Inc., 503 So. 2d 1293, 1296 (Fla. 3d DCA 1987), where allowing damages "for both its lost profits and its expenditures made" was reversible error; "[T]hese measures are alternate remedies [and] the injured party must make an election in regard to which method he seeks to recover, and pursue that method only." (9)

The Third District applied the flexibility theory again in 1991 in Pathway Financial v. Miami Int'l Realty Co., 588 So. 2d 1000 (Fla. 3d DCA 1991), which set aside a verdict because of the trial court's error in awarding both the plaintiff's out-of-pocket expenses and "prospective" profits. Such double recovery is disallowed: "The plaintiffs are not entitled to both reliance and benefit of the bargain damages; these remedies are mutually exclusive and cannot both be the natural result of the breach." (10)

A lengthy gap--no less than 23 years--elapsed between DuPuis' initial use of the term "flexibility theory" in 1970, and its 1993 appearance in Nordyne, Inc. v. Fla. Mobile Home Supply, Inc., 625 So. 2d 1283, 1286-87 (Fla. 1st DCA 1993). Nordyne was a business tort case alleging, among other things, fraud and tortious interference. Nordyne, following a jury verdict for compensatory and punitive damages, argued on appeal that future profits could only be awarded under the "benefit of the bargain" rule, which was limited to contract claims. The appellate court disagreed; under the flexibility theory, a court can use either an out-of-pocket or a benefit of the bargain analysis, depending upon which would more fully compensate the injured party. (11) The jury, therefore, properly considered awarding future lost profits. (12)

Nordyne is noteworthy not only because it is only the second use of the term, but also because it confirms that the flexibility theory applies to tort as well as contract cases. (13)

Eleven years passed between Nordyne and the 2004 application of the flexibility theory in Totale, Inc. v. Smith, 877 So. 2d 813 (Fla. 4th DCA 2004). Totale confirmed DuPuis as well; the preferred method of awarding damages is restoration of a plaintiffs out-of-pocket disbursements. If proof of future lost profit damages is unreasonably vague or speculative, they cannot be recovered. (14)

Florida courts following Totale continue to apply the flexibility theory, but for some reason courts continue to avoid the label. One recent example is State of Florida, Department of Corrections v. Brooks, 891 So. 2d 1 (Fla. 1st DCA 2005), which confirmed that plaintiffs cannot recover both reliance and expectation damages; they are "alternate, and mutually exclusive, remedies." (15) Another recent example is Meadows v. English, McCaughan & O'Bryan P.A., 909 So. 2d 926 (Fla. 4th DCA 2005), citing Totale with...