A business can suffer economic damages arising from a variety of illegal conduct. Common examples include breach of contract, patent infringement and commercial negligence. Is your company finding itself in heading to court in hope to recovering business losses, diminished business value or both? If so, it’s important to know how the damages might be determined.
The goal of any economic damages case is to recover business losses and make your company, the plaintiff, “whole” again. In other words, one critical question must be answered: Where would your business be today “but for” the defendant’s alleged wrongdoing? When financial experts calculate economic damages, they generally rely on the following methods:
Here, the expert assumes that, if it hadn’t been for the breach or other tortious act, the company’s operating trends would be continuing in pace with past performance. In other words, damages equal the difference between expected and actual performance. A similar approach quantifies damages as the difference between the company’s value before and after the alleged “tort” (damaging incident) occurred.
Under this recovering business losses technique, the expert benchmarks a damaged company’s performance to external sources. This includes publicly traded comparables or industry guidelines. The presumption is that the company’s performance would have been mimicking that of its competitors if not for the tortious act.
Projections or forecasts of the company’s expected cash flow serves as the basis for damages under this method. Damages involving niche players and start-ups often call for the sales projection method. The reason being is because they have limited operating history and few meaningful comparables.
An expert considers the specific circumstances of the case to determine the appropriate valuation method (or methods) for that situation.
After financial experts do the estimates for recovering business losses, they discount their estimates to present value. Some jurisdictions can prescribe discount rates. However, in many instances, experts subjectively determine the discount rate based on their professional opinions about risk. Small differences in the discount rate can generate large differences in final conclusions. As a result, the subjective discount rate is often a contentious issue.
The final step is to address mitigating factors. What could the damaged party have done to minimize its loss? Most jurisdictions hold plaintiffs at least partially responsible for mitigating their own damages. Like discount rates, this subjective adjustment often triggers widely divergent opinions among the parties involved.
You probably don’t relish the thought of heading to court to fight for recovering business losses. But these situations can occur — often quite unexpectedly — and it’s better to be prepared than surprised. Contact us for more information.