Lost Profit Damages: Principles, Methods, and Applications

A Review of Everett P. Harry, III and Jeffrey H. Kinrich’s 2022 Second Edition

In 2017, Everett P. Harry, III and Jeffrey H. Kinrich released Lost Profits Damages: Principles, Methods, and Applications. Their purpose in publishing the book was to provide a comprehensive reference guide to cover important topics relevant to determination of lost profit damages. This book review discusses the second edition released in late January 2022.

In 2017, Everett P. Harry, III and Jeffrey H. Kinrich released Lost Profits Damages: Principles, Methods, and Applications. They published this first edition to provide a comprehensive reference guide to cover important topics relevant to determination of lost profit damages. This book review highlights changes that appear in the January 2022 second edition.

The authors’ second edition contains 817 pages; 134 more pages than the first. It also updates the chapters included in the first edition and includes four new chapters. Those new chapters are: Chapter 11, “The Use of Surveys in Lost Profits Analyses”; Chapter 17, “Lost Profits for ‘New Businesses’”; Chapter 22, “Neutralizing Lost Profits Damages for Tax Consequences”; and Chapter 26, “The Admission of Expert Testimony: Daubert and Related Issues”. The original sequence of chapters remains. The chapters progress from an overview of the nature of lost profits damages and the broad legal principles for proof of such loss through the preparation of an expert report, and the broad legal principles for proof of such loss through preparation and of an expert report, if required. The intervening chapters illustrate many alternative methodologies and techniques employed by experts for the determination of lost profit damages, as well as specific issues and types of calculations that will need to be included.

As with the original book, the final chapter addresses typical legal challenges that experts should expect after completion of the report and disclosure. This chapter includes advise on how to be proactive. In short, the authors, again, provide tips and underscore the importance of preparation.

The initial seven chapters are almost identical to those in the first edition. In this second edition, the following changes are evident (if a chapter’s layout and context has minimal changes, it will not be noted below):

• Chapter 8, “Industry and Economic Research” was re-written by Benjamin March, Michael J. Schreck, and Samuel Weglein. The authors commence this chapter discussing the need to conduct research to gain industry context and questions that experts should ask themselves as they assess the engagement.
• Chapter 11, “The Use of Surveys in Lost Profits Analyses”. This is a new chapter written by Rene Befurt, Anne Cai, and Rebecca Kirk Fair. This chapter focuses on the use of surveys for those engagements “where existing data are insufficient [and] surveys can be useful tools for providing empirical evidence of but-for prices, but-for quantities, and but-for market shares.” The chapter is divided into four sections. The first section is an overview of the design and use of surveys in litigation. The second section describes the three types of survey methodologies that are most frequently used in evaluating lost profits damages. The third section discusses how surveys can be applied to various types of lost profits cases. The fourth section outlines some best practices and considerations when designing, implementing, and relying on surveys.
• Chapter 16, “The Ability to Achieve Lost Sales as a Consideration in Damages Analyses”. This chapter was revised by Jonathan C. Borck and Aaron C. Yeater. Much of the older content remains; however, the new authors have included additional footnotes and references for readers to consider and consult.
• Chapter 17, “Lost Profits for ‘New Businesses’” is a new chapter. W. Ira Bowman, David M. Duffus, and Robert P. Gray co-wrote this chapter. As the title suggests, the authors address the challenges experts confront estimating the lost profits for a new business. The authors purpose in writing this chapter is to “address how and to what extent a new business can, in appropriate circumstances, credibly claim damages for lost profits.”
• Chapter 18, “Present Value Concepts and Damages Modeling.” This chapter was re-written by Douglas E. Farrow and Elizabeth Moe. The changes made here are nominal; the exhibits are almost identical to those included in the first edition.
• Chapter 22, “Neutralizing Lost Profits Damages for Tax Consequences.” This is a new chapter written by Kenneth D. Rugeti. Courts often require or allow lost profits damages to be computed on a pre-tax basis. The courts reason that taxes can be ignored in the detailed projection of the lost profits if the resultant damages award will be subject to taxation. This approach may fail to account for many tax determination and timing differences between but-for lost profit damages and the date of an assumed lump-sum damage award. As a consequence, these tax-related issues can result in a plaintiff being made less than or, perhaps, more than whole by a damages award that is not tax neutralized, as appropriate. The recognition of tax neutralization damages adjustments is more established and commonly appreciated for individual losses than for commercial damages. The author discusses neutralization considerations for pass-through entities, C Corporations, and sole proprietorships.
• Chapter 23, Appendix: “Summary of State Prejudgment Interest Parameters”. The authors have updated the state code citations, cases, rates, and notes.
• Chapter 24, “The Expert Report”. This chapter has been slightly updated to reflect changes to the Federal Rules of Civil Procedure.
• Chapter 25, “Expert Reports and Business Valuation Standards”. This chapter has been re-written in parts to reflect changes made by the various business valuation accrediting organizations and USPAP to standards. There  are now more footnotes and updated references to the different standards.
• Chapter 26, “The Admission of Expert Testimony: Daubert and Related Issues”. This is a new chapter co-authored by Doug Branch, Peter Brown, and Saleema Damji. The authors focus on the Rules 701-705 of the Federal Rules of Evidence (FRE), discuss how expert testimony differs from lay testimony, the Daubert challenge process (including the timing and method of Daubert challenges, scope of challenges, strategies), the expert’s role in a Daubert challenge, responding to Daubert challenges, reviewing and challenging an opposing expert, and Daubert challenge trends.

Conclusion

While this writer was a little skeptical about the need—so seemingly soon—for a second edition, the addition of four new chapters and changes summarized above to Lost Profit Damages: Principles, Methods, and Applications provide good reason for aspiring and experienced litigation support practitioners to either update or buy this reference guide. All chapters have been written by accomplished practitioners; their writing is clear, as are their illustrations and insight.

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Roberto H Castro, JD, MBA, MST, CVA, is Managing Member of the Law Office of Roberto H Castro, PLLC and Legal Compliance counsel for Equilus Capital Partners, LLC, a closely held Real Estate Limited Partnership Fund. He is also Technical Editor of QuickRead and a member of NACVA’s CUV team.

Mr. Castro can be contacted at (509) 679-3668 or by e-mail to rcastro@rcastrolaw.com.