Lost Profits Damages Blog

Two new cases consider the appropriate discount rate to apply to future lost income, a subject of continuing interest to attorneys and experts. Low discount rates continue to be the rule, rather than the exception. NCMIC Finance Corp. v. Artino applied a 7.44% discount rate— plaintiff’s weighted average cost of capital. In re Clearwater Natural Resources, LP applied a 15% discount rate— plaintiff’s cost of capital plus a risk premium. The surprisingly limited case law on this subject is collected in Recovery of Damages for Lost Profits 6th and the forthcoming September Supplement.

M & A Technology, Inc. v. iValue Group, Inc. rejected a claim for lost business value arising from the destruction of a business, an issue which intersects lost profits projection and business valuation. Plaintiff disclaimed recovery of lost profits damages at trial. The court held, however, that use of a business valuation approach (which the court analyzed in detail) could not remedy deficiencies in proof of value by methodology dependent on income projection. This case is perhaps the first to explore the relation between damages derived by business valuation and damages derived by lost profits projection. The court correctly concluded that a business valuation based on speculative income projections is subject to the same objections that the income projections would be if a lost profits analysis were done. River Bridge Corp. v. American Somax Ventures considered what was necessary to prove lost profits damages by a “yardstick” approach, developing a lost profits analysis by comparison to data derived from others in the same business. The court found the “yardstick” not to be comparable and rejected plaintiff’s proof.

DuretteBradshaw, P.C. v. MRC Consulting, L.C. explores the limits on a claim for inducing breach of contract. The court held that profits alleged to have been lost on a different contract, dependent on the breached contract, are not recoverable. Citing Restatement, Torts (Second) §766 (1977), the court concluded that interference with a contract is actionable if the interferor knows of and intends to cause a breach of that contract. Others with contractual relations who may be harmed (as MRC here) cannot recover unless the interferor acted intending also to interfere with the other contract.

The recurring question whether lost profits damages are direct damages or consequential damages received searching analysis in Cherokee County Cogeneration Partners, L.P. v. Dynegy Marketing & Trade. After defining direct and consequential damages, the court concluded that the buyer’s lost profits damages for the seller’s failure to deliver goods were direct damages, not consequential damages which were excluded by the contract of sale.

A taxpayer buys a tax shelter program from professionals in the business of selling tax shelters.  The IRS disallows the tax benefits that had been promised the tax shelter buyer.  The tax shelter buyer sues the tax shelter seller for the value of the lost tax benefits, saying, in effect, “You guys were the experts, not me. I want damages for the loss of what I was promised.” Finderne Management Co. v. Barrett, a recent New Jersey case, denied recovery of the tax benefits. The court stated it would not enforce a tax shelter plan found to violate the tax laws by allowing a lost profits damages recovery against the tax shelter seller.  Robert L. Dunn discusses this case in detail in Recovery of Damages for Lost Profits.

Lambert v. Carneghi, a recent California case, held that an expert witness retained to value property in an insurance arbitration proceeding could be sued by the property owner for alleged negligent testimony.  The property owner alleged that the expert had failed to educate the retired judge who was the neutral arbitrator in the proceeding with the result that the valuation of the property owner’s loss came in too low.  The court recognized that ordinarily witnesses cannot be sued for their testimony under California law. But the court carved out an exception for experts. It gets worse. The expert here was not claimed to have made some identifiable professional error.  He was only alleged to have failed to convince the trier of fact of the merit of the property owner’s position. If that is enough to state a cause of action against an expert, then any expert on the losing side of a case can be sued by the party that retained the expert.

The American Institute of Certified Public Accountants has been working for over a year to produce its final word on discounting future damages to present value. The AICPA’s Practice Aid, Discount Rates, Prejudgment Interest and the Time Value of Money in Litigation, originally scheduled to come out in 2009, is still in draft form but expected to come out in 2010.  This is not an easy subject and lawyers and experts will certainly be interested in the Practice Aid when it is published.   Discounting future damages to present value is a topic analyzed in detail, with a complete discussion of the applicable case law, in Recovery of Damages for Lost Profits.

Robert L. Dunn, author of Recovery of Damages for Lost Profits, spoke on May 12 to the regular meeting of the Economic Damages Section of the California Society of  CPAs, on May 21 to the Annual Seminar of the Valuation Round Table of San Francisco (read the coverage on BVWire), and on June 5 to the Annual Consultant’s Conference of the National Association of Certified Valuation Analysts. Each presentation covered two topics.  The first addressed the difficult issues surrounding discounting future damages to present value.  Bob discussed each of the only 11 cases that have considered the appropriate business damages discount rate , focusing particularly on Energy Capital v. United States and Franconia Associates v. United States. Both Energy Capital and Franconia Associates cite and quote from Recovery of Damages for Lost Profits, recognizing the treatise as the authoritative source on legal issues raised by lost profits damages claims. The second segment of the presentation considered whether business valuation techniques can be used to project lost profits damages, cutting-edge theory at the intersection of business valuation and lost income projection. Favorable comments made after all of these presentations indicated that the attendees found the information useful, timely and pertinent.