Economic damages
What the conduct cost, stated as a number that holds up
A damages opinion has to survive three separate attacks: that the loss was caused by something else, that the method is not accepted, and that the arithmetic rests on assumptions the record does not support.
The but-for analysis
Lost profits are the difference between the results the business would have achieved but for the conduct and the results it actually achieved, net of the costs it avoided by not making the sales. Stated that way it sounds arithmetic. In practice each of the three lines is contested, and the credibility of the opinion rests on how the but-for figure was derived: from the subject’s own history before and after, from a comparable operation or market as a yardstick, or from a specific lost contract or customer.
| Revenue but for the breach | 14,820,000 |
|---|---|
| Actual revenue | (9,640,000) |
| Lost revenue | 5,180,000 |
| Variable cost avoided on lost sales | (3,367,000) |
| Lost profits before interest | $1,813,000 |
The period of loss, mitigation, and prejudgment interest all move the result materially, and each is addressed explicitly rather than buried in a spreadsheet.
So does cost treatment, and the question there is not which costs are labeled variable but which costs were actually avoided at the relevant volume. Costs that behave as variable across a normal range can be fixed over the range at issue, step costs move only at thresholds, and overhead absorbed into cost of sales by the company’s own accountants frequently does not vary at all. This requires cost behavior analysis, not a reclassification of the income statement.
Damages and valuation also differ in what the analyst is permitted to know. For lost profits, courts commonly admit information developed through the date of trial even where the measurement date is earlier. A retrospective valuation, by contrast, is normally confined to what was known or knowable at the valuation date. The same expert, on the same company, in the same year, is therefore held to two different information sets depending on which question is asked — and models that quietly mix them are vulnerable.
When profits are not the right measure
Where conduct destroys or permanently impairs a business rather than costing it a period of sales, the measure is the diminution in the value of the business itself.
For the same period of loss the two measures are alternatives, and claiming both for that period is a common and easily exploited error. The measures are not always mutually exclusive, however. Where a business operated for a period after the conduct and then failed, lost profits up to the date of cessation and the diminution in value as of that date are successive losses rather than duplicative ones, because interim losses are not captured in a going-concern value determined at the date of failure.
Some examples of quantifications of lost business value include matters where operations were rendered impossible by physical damage to premises, where a supplier or franchisor terminated a relationship the business depended on, and where misappropriation left an otherwise viable company unable to continue.
Lost earnings and earning capacity
For personal injury, wrongful death, and employment matters, we calculate lost earnings and lost earning capacity, including self-employment income, fringe benefits, worklife expectancy, and reduction to present value at a rate supported by published data.
Testing the other side’s model
We are regularly retained to test a damages model rather than to build one, and it is often the most efficient way to spend an expert budget. That work, and what we look for, is described under rebuttal.