Modern New Business Rule and How it Has Been Applied by the Courts Earlier this year, the author published two articles that appeared in QuickRead discussing calculating lost profits and defense responses for lost profits calculations in cases falling under the modern new business rule. The foundation for the article on defense strategies was an article published by Victor Goldberg. Following publication, the author was contacted by Mr. Goldberg, who recommended additional reading on this topic. That has led to this article. Under the new business rule, a new or unestablished business could not recover lost profits. This rule was…
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in Economic Damages Calculations (Part I of III) The AICPA has issued two practice aids, one on 2015 and most recently in November 2018, focused on the calculation of economic profits and damages. The purpose of this article—the first of three on this topic—is to provide the reader with an understanding of Chapter 1 (Revenue and Growth Rates) of the 2018 Practice Aid as well as certain other publications containing a body of knowledge on the best practices for developing “but for” revenues and revenue growth issues in lost profits models. Later articles will deal with Chapter 2 (Costs) and…
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and Defense Strategies Beyond Reasonable Certainty Experts estimating lost profits under the modern new business rule know that lost profit estimates in these cases are held to a higher reasonable certainty standard than calculations for lost profits in cases with established businesses. Failing to meet this higher standard may cause an expert’s calculations to be ruled as speculative. To this level of greater scrutiny, Victor Goldberg has introduced additional defense strategies for reviewing new or unestablished businesses claims. His strategies move the focus away from assessing what revenues and profits would have been “but for” the wrongful act to non-cash…
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and an Expert Witness While there are hundreds of Daubert decisions issued every week, only a few go a long way in shaping the way experts are screened by judges in the future. And even fewer times, a multimillion-dollar verdict is hinged solely on the expert witness testimony! In this article, the author discusses the district and appellate court decision in Alaska Rent-A-Car v. Avis Budget Group.
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Ex ante, Ex post, and Hybrid Methodologies January 2019 will be the twentieth anniversary of one of the seminal articles written on discounting lost profits, Peter Schulman’s Economic Damages: Discounting Concepts and Alternatives. This article addresses the concepts and complexities of discounting lost profits that were discussed in the Schulman article and advances and additional methodology for discounting lost profits.
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Reliability of Client’s Data This article discusses how experts can handle the unique situation of receiving unreliable data. Litigation and appraisal literature will be reviewed as will the author’s handling of unreliable data in a recent lost profits case. In the end, warning signs will be reviewed to alert the expert to potential problems with the projected data.
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In Measuring Trustee Breach of Fiduciary Duty Damages (Part II of II) The second part of this article focuses on the methodologies employed to quantify the economic damages when a fiduciary breach is claimed.
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In Measuring Trustee Breach of Fiduciary Duty Damages (Part I of II) The prudent investment of trust assets can minimize the potential for trustee fiduciary litigation risk, in addition to maximizing the trust beneficiaries’ economic interest in the trust. However, trust beneficiaries may initiate a breach of fiduciary duty tort claim when they feel that the trustee has breached any investment management fiduciary duties to the trust. For trust beneficiaries, and their legal counsel, who have brought breach of fiduciary duty tort claims against a trustee, one of the issues is how to measure the “damage” to the beneficiaries because…
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Case Study of a Real Estate Developer For most lost profits cases, the losses begin at the date of the harmful act and end when the injured party is returned to the position it would have had “but for” the alleged damaging act of the defendant. However, not every lost profit matter is a breach of contract where beginning and ending dates can be easily defined. Sometimes losses may not occur until a period in the future. This situation requires the expert to assess the facts of the case and anticipate the market and economic environment when calculating these future…
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The Objective and Subjective Tests Used to Determine Foreseeability To recover lost profits in a commercial damages case, three standards must be met. They are proximate cause, foreseeability, and reasonable certainty. Of these three, foreseeability is the lost profits standard in which a financial expert will have the least involvement. But this does not mean the expert’s work would not benefit the trier-of-fact in assessing foreseeability. This article will review the foreseeability standard and discuss how financial experts may be able to assist the trier-of-fact in considering this standard through their work addressing proximate cause and reasonable certainty.
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The Role of the Forensic Accountant There are a number of instances where damage estimates are uncertain and where a customer is lost. What should one do in these instances? Losses sometimes require reasonable estimates, as well as a reasonable forecasting of the market—both for the generation of revenues and for mitigation. In the case where there is greater perceived loss than a single contract, a forecast is necessary to determine the long-term future lost net profits for the value of the lost customer. Dr. Kreuter shares his views on how to address these more complicated engagements.
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For Calculating Future Lost Profits Robert Dunn and Everett Harry published their oft cited Modeling and Discounting Future Damages in 2002. The article laid out the process for assessing future lost profits and discounting them to present value. They argued modeling future losses reduced the uncertainty related to the loss calculation and therefore reduced the risk premium to be included in the discount rate. They also argued modeling future losses and using a risk-reduced, relatively low discount rate was easier for judges and juries to understand. While their discussion on a risk-adjusted discount rate has been somewhat controversial, the need…
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A Case Study (Part II of II) This is the second of a two-part article. In the first part, Dr. Needham provided factual background regarding this commercial damages case where he served as plaintiff’s damages expert—the case ultimately went to trial. In this second part, Dr. Needham describes the financial data, discovery challenges, the Daubert motion to disqualify him, how the case was decided, and then settled. QuickRead thanks Dr. Needham for sharing this case.
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A Case Study (Part I of II) Most commercial damages assignments call for the calculation of lost profits or lost business value. However, some cases, particularly those relating to lost profits, contain elements of additional economic damages. These situations require the expert to focus on multiple areas of loss while insuring each element does not contain losses claimed by another. In this two-part article, Dr. Needham shares how he approached a case that went from report preparation to deposition, and ultimately trial testimony. In the second part of this article, Dr. Needham discusses the jury verdict and settlement. The purpose…
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Advise for Budding and Experienced Experts The third edition of The Comprehensive Guide to Lost Profits and Other Commercial Damages is marked departure from the prior editions. This two-volume set is replete with valuable information and insight from experienced practitioners.
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Differences Between the Two Values Damages remedies often focus on lost profits and lost business value, with such remedies typically calculated by financial experts. There continues to be a trend in the courts to preclude experts from testifying, or to disregard them altogether because their opinion does not meet the reasonable certainty standard. Either of these outcomes can be a devastating result for the client. These results occur, in part, from a lack in understanding of the proper calculation of lost profits or lost value. A relevant and reliable opinion, able to withstand the court’s scrutiny in litigation, needs to…
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Prepare, Verify, and Excel at Trial In order to recover lost profits in a commercial damage case, three standards must be met. First, plaintiff must show proximate cause; second, the foreseeability; and third, reasonable certainty. This article will focus on the third standard, reasonable certainty. Experts seeking to provide realistic lost profit estimates must be aware of this standard. The following discussion will review literature, court decisions, and practical efforts that may assist experts in addressing reasonable certainty.
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The Present Value of Future Lost Profits, and the Time Value of Money Experts estimating the present value of a business’ future lost profits have much less direction from the courts than their counterparts estimating the present value of a person’s lost earning capacity. Professional literature has attempted to fill this gap providing many articles discussing the differing methods for analyzing lost profits (e.g., yardstick, before-and-after, but for) or how to determine the discount rate by applying a weighted cost of average capital, equity rates of return, or some form of risk premium build-up. This article moves away from these…
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While the vast majority of jurisdictions have moved away from the new business rule and adopted the modern new business rule, by which new/unestablished businesses can recover damages, such adoption does not diminish the requirements under the reasonable certainty standard. Given the lack of historical financial performance data and under the lens of the reasonable certainty standard, estimates of lost profits damages to new/unestablished businesses are subject to a higher level of scrutiny. This article focuses on new/unestablished businesses and the importance of post-incident business-specific data/facts to isolate the effects of the disputed event, and to establish a measure of…
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Part 1: Find Industry and Location-Specific Data Courts standards require that damages analysis results be within “reasonable certainty”, and objective rather than speculative. And while the terms “reasonable certainty” and “speculative” are more terms of art than science, given these standards, it is of vital importance to analyze all relevant factors to the extent permitted by the best data available. And it is the responsibility of the damages expert to present an analysis that is both reasonably certain and objective by engaging in reasonable effort to request and/or research the best data available. The expert that is unable to isolate…