Abstract: Business disputes often result in one party losing money. It’s up to the legal system to award economic damages. This article discusses some approaches to quantifying economic damages, including the before-and-after method and the sales projection method. The article also notes potential pitfalls and contentious issues that may arise. The article points out that estimating lost profits is a natural extension of a valuator’s skill set.

Economic damages 101

Business disputes arise every day. A supplier violates a provision of an exclusivity contract. A publisher infringes on a writer’s copyright. A competitor steals a trade secret. These wrongdoings typically result in one party losing money. It’s up to the legal system to restore order — and award economic damages.

Here we discuss some approaches to quantifying economic damages, as well as potential pitfalls and contentious issues that may arise.

Start with causation

A damages calculation starts with a theory that links the actions of the defendant to a loss incurred by the plaintiff. For example, “But for Mr. X’s copyright infringement, ABC Company would have earned ‘x’ amount more in pretax profits from 2008 through 2010.”

Courts award damages to make the plaintiff “whole” again. Generally, damages are calculated on a pretax basis, because plaintiffs typically owe taxes on compensatory damages awards.

Defendants aren’t responsible for losses caused by external factors. For example, damages calculations should exclude losses caused by increased competition in the marketplace or by an economic downturn. In today’s uncertain economy, it can be tricky to separate losses caused by a defendant’s alleged wrongdoing from losses caused by external events.

Use a recognized approach

When persuading the courts to accept a damages calculation, a valuator typically uses one (or more) of several generally accepted methods, such as the:

Yardstick method. Damages under this method are based on how guideline companies performed. Courts perceive industry trends to be an objective indicator of how the plaintiff might have performed, if not for the defendant’s wrongdoing. But the subject company must be sufficiently similar to comparable, or guideline, companies.

Details

Sheri Schultz, CPA, ABV, and CFF at Fiske & Co, is being honored as one of the top “100 Outstanding Women of Broward County” by the Boys & Girls Clubs of Broward County.  The event is intended to “bring the community together to celebrate how far women have come in leadership roles, in business, community and philanthropic fields.”   All proceeds from the event will benefit the Boys & Girls Clubs of Broward County and the Susan B. Anthony Recovery Center. 

Sheri is very involved in the community; she serves on the Board of Trustees for the Jewish Federation of Broward County.  She is also a member of the Board of Governors of FICPA and founding member of the woman’s leadership council from FICPA which helps woman CPA’s advance in their field.  She brings more than 23 years of experience to Fiske & Co. and currently serves as Director of the Valuation Services Department.  Sheri has clearly excelled both professionally and philanthropically.