Lost Profits Damages Blog

In the latest issue of Dunn on Damages—The Economic Damages Report for Litigators and Experts, edited by Robert L. Dunn, an article appears that may overturn a key settled assumption made by experts in discounting future damages to present value. In “Future Damages—Before and After Tax Discount Rates,” by Everett Harry, the author considers the general assumption that if before-tax damages are discounted at a before-tax discount rate and the same after-tax damages are discounted at an after-tax discount rate the calculations will always reach the same result.  He demonstrates mathematically that this is not correct.  The article is a must-read for any damages litigator or expert.  The next supplement to Recovery of Damages for Lost Profits will have a reference to the article.

The economic loss rule, in one formulation or another, has been adopted in every jurisdiction where the question has arisen whether damages for economic loss can be recovered on a tort claim. But how far does the economic loss rule go?  Two recent cases call a halt to expansion of the economic loss rule.

• In Sharyland Water Supply Co. v. City of Alton, 354 S.W.3d 407 (Tex. 2011), the Texas Supreme Court called a halt when the intermediate appellate court applied an economic loss rule “that says you can never recover economic damages for a tort claim.” The Court found it necessary to catalog the recognized tort causes of action including, for example, fraud and negligent misrepresentation, that would virtually disappear under this expansive and oversimplified rule.  But the court declined to define the proper scope of the economic loss rule holding only that it did not apply to a negligence claim against a defendant not in contractual privity with the plaintiff merely because the defendant caused a loss not related to its contract with someone else.
• In Lesiak v. Central Valley AG Cooperative, 283 Neb. 103, 808 N.W.2d 67 (2012), the Nebraska Supreme  Court collected academic and judicial criticism of the economic loss rule.  In contrast to the often-quoted statement that contract law should not drown in a sea of tort, the court remarked that “the doctrine should not be expanded to allow traditional tort remedies to drown in a sea of contract.”  In an action alleging a claim of crop damage due to negligent over-application of herbicide, the court limited the rule to product liability cases in which a breach of warranty was the proper remedy and permitted this action to go forward.

ATA Airlines, Inc. v. Federal Express Corp., 665 F.3d 882 (7th Cir. 2011) (Posner, J.), is noteworthy for the extended discussion of regression analysis in the court’s opinion. The court rejected expert testimony to lost profits damages based on regression analysis in a breach of contract action.   It was not enough, the court stated, that regression analysis is an accepted analytical technique; the proponent must also show that the analysis was properly performed.  The court warned that the lawyer for the proponent must be able to understand the testimony and that unintelligible evidence should not be presented to the trier of fact.

Two recent cases take different approaches in analyzing this evidence—producing very different results. Both are analyzed in the March 2012 supplement to Recovery of Damages for Lost Profits. Gary’s Implement, Inc. v. Bridgeport Tractor Parts, Inc., 281 Neb. 281, 799 N.W.2d 249 (2011), a claim by Bridgeport of breach of its agreement not to compete with Gary’s Implement, concluded that any weakness in the expert testimony arising from the assertion that the data from Bridgeport’s other business locations was not comparable was a matter for the jury to consider. The court affirmed a substantial judgment for Bridgeport on its claim. But in Blinds to Go (U.S.), Inc. v. Times Plaza Development, L.P., 88 A.D.3d 838, 931 NY.S.2d 105 (2011), a claim for breach of lease, the court reversed a multimillion judgment for lost profits in favor of the tenant against its landlord and remanded for a new trial on damages. The court found differences in the locations that the tenant (through its expert witness) used as comparable locations to the leased location in issue. These differences were substantial enough that, in the court’s view, the evidence did not support the jury verdict at trial.

In Fail-Safe, L.L.C. v. A.O. Smith Corp. 744 F. Supp. 2d 870 (E.D Wis. 2010), the court rejected expert testimony to a discount rate that was only, the court stated, a “bottom line number.” The court concluded that the expert did not substantiate each element of his discount rate conclusion. It appears that expert witnesses do not always explain the basis for each element of their calculations of the discount rate, relying instead on their standing as experts. The strong language in this opinion will no doubt be cited in opposition to future testimony of this kind. This case is analyzed in detail in the March 2012 supplement to Recovery of Damages for Lost Profits.

Bob Dunn thinks this is a terrible idea and many cases agree. But other cases do not. In Columbia Park Golf Course, Inc. v. City of Kennewick, 160 Wash. App. 66, 248 P.3d 1067 (2011), a majority of the court held damages for breach of an agreement recoverable, measured by the value of the “lost asset’ that was allegedly destroyed when defendant repudiated a development option agreement. The value of the asset was proven at trial by discounting the future projected profits from it to present value. A strong dissent would have limited recoverable damages to reliance damages; in the view of the dissent, the result was nothing more than permitting, under a different name, recovery of lost profits damages for breach of an agreement that was never entered into. The case is discussed in detail in the March 2012 supplement to Recovery of Damages for Lost Profits. The supplement and text also collect the important cases on both sides of this hotly debated question.

Strange to say, this basic question is unresolved by the case law. Intergraph Corp. v. Bentley Systems Inc., 58 So. 3d 63 (Ala. 2010), is an example of a successful approach to the problem by one plaintiff. On Bentley’s claim that Intergraph had breached its agreement to sell software maintenance contracts to Bentley, the court held expert testimony to the causes of the loss was sufficient. Bentley did not have to offer, contract by contract, evidence of the reasons why the contracts were not renewed. Bentley also did not have to rebut all other possible reasons why the contracts were not renewed with Bentley. Intergraph was required to go forward with some evidence that these causes were implicated. This decision is discussed in detail in the March 2012 supplement to Recovery of Damages for Lost Profits. The text collects the important decisions dealing with proof of causation of lost profits — not all of which reach comparable conclusions to Bentley Systems.

Dunn on Damages has completed its first year of providing valuable damages analysis to its readers with the delivery of its fourth issue to subscribers on September 10 and has moved into its second year of publication with the December 10 issue. Each issue features an article by Bob Dunn. The September 10 and December 10 issues include the two parts of a must-read analysis: “Sue Your Expert—Liability of Expert Witnesses for Damages.” The forthcoming March 10 issue will contain Bob’s invaluable discussion of “The Ten Key Economic Damages Cases of 2011.” For further information contact http://valuationproducts.com/dunn.html.

The third issue of Dunn on Damages, edited by Robert L. Dunn, was delivered electronically to subscribers on June 10. The highlights are Bob Dunn’s article on Projecting Future Economic Damages through Business Valuation Methodology; two articles analyzing damages in patent litigation:  Mike Wagner’s Book of Wisdom—Is it Fact or Fiction? and Reasonable Royalties by the New Rules, written by Douglas Kidder and Vincent O’Brien; Bob Schubert contributes Major Decision Expected from the Delaware Supreme Court; Mike Alerding writes on new Rule 26,  Mike Ueltzen and John Barrett add Deepening Insolvency: A Primer; and Bill Moran describes Courtroom Insight.  Quite a package. . . .  For further information contact http://www.valuationproducts.com/dunn.html.

Consolidated Companies, Inc. v. Lexington Insurance Co., 616 F.3d 422 (5th Cir. 2010), was a claim on a business interruption insurance policy for lost profits caused by Hurricane Katrina.  The insurer argued that plaintiff’s income losses would have occurred in some part even if its property had not been damaged, simply because of the adverse business climate after Hurricane Katrina, and that plaintiff was required to allocate its losses.  The court rejected the argument and, affirming the award at trial,  held that plaintiff was not required to distinguish between damages arising from property damage—the loss—and damages arising from market conditions caused by Hurricane Katrina—the occurrence.  This case will have impact on resolution of the thousands of Katrina insurance claims still pending.  The decision is discussed in detail in the September supplement to Recovery of Damages for Lost Profits.