Part 1 discussed the Sales Projections (But-For) Approach to the quantification of economic damages and provided areas where the cross-examiner can discredit plaintiff's lost-profits damages expert. Part 2 discusses two other generally-accepted methodologies and identifies the various areas for cross-examination of plaintiff's expert.
As noted in Part 1, plaintiff's expert must support a reasonable approach to the quantification of economic damages so that proof can be made to demonstrate to the court that the losses have been quantified with reasonable certainty or reasonable probability. Exactitude is not required.
This approach is generally best suited to a business having an established track record of operations or pattern of activity. It compares actual (adversely-affected) operating results during the damage period to normalized, but-for results. Adopting this approach, the expert estimates, or extrapolates, plaintiff's but-for results during the damage period based on (a) normalized actual results experienced by plaintiff prior to defendant's alleged damaging acts and (b) normalized actual results after the injurious effects of the event have subsided. The plaintiff's adversely-affected, actual results during the damage period are compared to the pre- and post-damage periods' actual results, which serve as "benchmarks", considering seasonality, cyclicality, and any non-recurring or unusual items, as applicable. Often, in practice, only the "before period" is available for purposes of projecting plaintiff's but-for results in the damage period.
When plaintiff's past operating activity is used in projecting the but-for results in the damage period, the assumptions underlying the but-for projections must be reasonable and supportable. Courts typically reject speculation, conjecture, double-counting, and "leaps of faith".
Some Matters for the Cross-Examiner to Address
- The "Before" (pre-damage) period that was used to determine plaintiff's actual results prior to defendant's alleged damaging act(s).
- Any adjustments made to "normalize" the pre-damage, "Before", results, and the related, material underlying assumptions.
- The "After", or "back-to-normal", period used subsequent to the damage period.
- Any adjustments made to the post-damage, "After", results.
- Whether any interpolation by the expert (averaging "Before" and "After" revenues) is meaningful or representative.
- Whether plaintiff's "Before", "After" and/or "But- For" periods had possibly been affected by, or were a function of, seasonal and/or cyclical factors.
- "Normalization" adjustments, if any, made to the "Before" and "After" damage period results, particularly with respect to subjective and judgmental factors.
- Whether there might have been new competitors that entered the marketplace during the damage period.
- Whether substitute, alternative, or competitive products had been introduced in the marketplace during the damage period, possibly rendering the pre-damage period results to be unrepresentative, on a goingforward basis, for purposes of estimating plaintiff's but-for results.
Yardstick (Comparable) Approach
The Yardstick Approach might be suitable if the plaintiff's business does not have a sufficiently long historical track record and, consequently, the Before-and-After Approach is not feasible.
Adopting the former approach, the damages expert compares the plaintiff's adversely-affected results during the damage period to those of similar businesses ("comparable businesses"), if available, or to industry performance which may serve as a yardstick, and reconstructs the operating data of the plaintiff on a but-for basis. In this regard, the expert analyzes available financial and operating data of the guideline companies. Adjustments are then made, as appropriate, to the respective financial data of the plaintiff's business and those of the guideline companies, so as to minimize any material differences in the accounting policies or practices as well as business or industry conditions. Non-recurring, unusual, extraordinary, and discretionary items are also adjusted, as necessary.
The difficulty with the Yardstick Approach lies in (a) properly identifying similar, comparable businesses or industries that would serve as meaningful yardsticks or "comparables", and (b) demonstrating that the lost profits claimed by plaintiff, appropriately adjusted, would be comparable to the profits generated by the guideline (peer) businesses.
In some cases, a comparable, but unaffected, division or branch of the plaintiff may provide the necessary yardstick. For example, a plaintiff operating a chain of retail stores in which Store A has been injuriously affected might consider the operations of one of its other (unaffected) outlets, Store B, assuming that Store B has similar characteristics with respect to size, demographics, strategic location, competitive environment, floor space, parking facilities, and so forth. In such a case, the regression analysis technique referred to in Part 1 may prove useful in forecasting but-for sales of damaged Store A.
Some Matters for the Cross-Examiner to Address
- "Comparability" of the guideline (comparable) businesses used by plaintiff's expert in making his or her projections.
- Reliability of the statistical industry data used in estimating plaintiff's but-for results, including considerations regarding geographical dispersion.
- Appropriateness of the adjustments made to the financial data of the plaintiff and to those of the com parable businesses to minimize any major differences in their respective accounting treatments.
- Whether the time period(s), or timeframe(s), relating to the underlying source data used in making projections are compatible (e.g., automobile dealer sales in May vs. November or department store sales in December vs. March).
- Similarities between each of the guideline businesses used as a yardstick and that of the plaintiff, such as size, product mix, geographic location, customer base and diversity, intellectual-property protection, demographics, capital structure, profit margins, maturity of the business, off-balance-sheet assets and liabilities, depth and experience of management, regulatory issues, etc.
- Whether, or the extent to which, the respective notes to the financial statements of the comparable businesses can have an effect on the interpretation of the results that were used by the expert in performing his/her calculations vis-à-vis the plaintiff's business.
- Whether there were any material customer, supplier, labour, and/or other contracts in force that would render the comparable-company results inappropriate for application to plaintiff's business.
- Whether any related-party transactions involving the comparable businesses might distort their results for use as yardsticks or "comparables".
- Steps taken to verify the comparability of the guideline businesses and the source data extracted from them.
- Underlying assumptions that were made, and the support therefor.
While the facts, circumstances and evidence of each situation will differ, there are enough areas relating to the plaintiff's expert's lost-profits damages quantification that can be challenged by defendant's counsel in crossexamination, so as to discredit, or at least cause the court to place less weight on, the expert's opinion. In most cases, the cross-examiner will have had the benefit of his or her own damage expert's professional input.
Previously published by The Montreal Lawyer
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.