Measuring Business Interruption Losses and Other Commercial Damages

Table of Contents

Preface.

1 Introduction.

Development of the Field of Litigation Economics.

Development of the Field of Forensic Accounting.

Lost Profits Business Interruption Analysis Compared to Personal Injury and Employment Litigation.

Qualifications of an Economic Expert.

Qualifications of an Accounting Expert on Damages.

Interdisciplinary Nature of Commercial Damages Analysis.

Difference Between Disciplines of Economics and Finance.

Finding a Damages Expert.

Critically Reviewing a Potential Expert's Curriculum Vitae.

Getting the Damages Expert on Board Early Enough.

Court's Position on Experts on Economic Damages.

Standards for Admissibility of Expert Testimony.

Expert Reports.

Defense Expert as a Testifying Expert, Not Just a Consultant.

Quantitative Research Evidence on the Benefits of Calling a Defense Expert.

Treatment of the Relevant Case Law.

Legal Damage Principles.

Other Types of Damages Cases.

Summary.

References.

2 Economic Framework for the Lost Profits Estimation Process.

Foundation for Damages Testimony.

Role of Assumptions in Damages Analysis.

Hearsay.

Approaches to Proving Damages.

Causality and Damages.

Using Demonstrative Evidence to Help the Client Understand its Losses or Lack of Losses.

Causality and Loss of Customers.

Graphical Sales Analysis and Causality.

Causality and The Special Case of Damages Resulting from Adverse Publicity.

Length of Loss Period: Business Interruption Case.

Length of Loss Period: Plaintiff Goes Out of Business.

Length of Loss Period: Breach of Contract.

Methodological Framework.

Summary.

References.

3 Economic Analysis in Business Interruption Loss Analysis.

Economic Fluctuations and the Volume of Litigation.

Macroeconomic Analysis.

Definition of a Recession.

Measuring Economic Growth and Performance.

Business Cycles and Economic Damages.

Using More Narrowly Defined Economic Aggregates.

Overstatement of Inflation Statistics.

Regional Economic Trends.

International Economic Analysis.

Macroeconomic and Regional Economic Analysis and The Before and After Method.

Summary.

References.

4 Industry Analysis.

Sources of Industry Data.

New North American Industry Classification System.

Retaining an Industry Expert.

Conducting an Industry Analysis.

Relating Industry Growth to The Plaintiff's Growth.

Other Industry Factors.

Yardstick Approach and Industry Analysis.

Summary.

References.

5 Projecting Lost Revenues.

Projections Versus Forecasts: Economic Versus Accounting Terminology.

Using Graphical Analysis as an Aid in the Forecasting Process.

Methods of Projecting Lost Revenues.

Curve-Fitting Methods and Econometric Models.

Understanding Regression Output and Diagnostics.

Common Problems Affecting Regression Models.

Confidence in Forecasted Values.

Frequency of the Use of Econometrics Techniques in Commercial Litigation.

Seasonality and the Forecasting Process.

Capacity Constraints and Forecasts.

Sensibility Check for the Forecasted Values.

Projecting Lost Sales for a New Business.

Projecting Losses for an Unestablished Business.

Summary.

Appendix.

References.

6 Cost Analysis and Profitability.

Presentation of Costs on the Company's Financial Statements.

Measures of Costs.

Profit Margins and Profitability.

Appropriate Measure of Profitability for a Lost Profits Analysis.

Burden of Proof for Demonstrating Costs.

Fixed Versus Variable Costs.

Using Regression Analysis to Estimate Costs as Opposed to More Basic Methods.

Pitfalls of Using Regression Analysis to Measure Incremental Costs.

Possible Nonlinear Nature of Total Costs.

Limitations of Using Unadjusted Accounting Data for Measuring Incremental Costs.

Treatment of Overhead Costs.

Must a Plaintiff Be a Profitable Business to Recover Damages?

Mitigation of Damages.

Cash Flows versus Net Income: Effects ont Discounting Process.

Recasted Profits.

Firm-Specific Financial Analysis.

Cross-Sectional Versus Time Series Analysis.

Summary.

References.

7 Time Value of Money Considerations.

Determination of Interest Rates.

Types of Interest Rates.

Financial Markets: Money Market versus Capital Market.

Money Market Securities and Interest Rates.

Capital Market.

Real Versus Nominal Interest Rates.

Determinants of Interest Rates.

Rejudgment Losses.

Components of The Cost of Capital.

Discounting Projected Future Profits.

Common Errors Made in Discounting by Damages "Experts".

Summary.

References.

8 Business Valuations.

Legal Standard for Business Valuations in Business Interruption and Business Failure Lawsuits.

Lost Profits Versus Lost Business Value.

Business Valuation Framework.

Theoretical Value of a Business.

Public versus Private Companies.

Business Valuation Parameters.

Revenue Ruling 59-60 and Factors to Consider in Valuation.

Valuation Concepts.

Most Commonly Used Valuation Methods.

Capitalization of Earnings.

Comparable Multiples.

Adjustments and Discounts.

Summary.

References.

9 Intellectual Property.

Patents.

Computation of Damages for Patent Infringement.

Legal Requirements Necessary to Prove Lost Profits.

Lost Profits Due to Price Erosion.

Lost Profits Due to Changing Cost Conditions.

Royalty Arrangements

Copyrights.

Measurement of Damages for Copyright Infringement.

Trademarks.

Trade Secrets.

Summary.

References.

10 Securities-Related Damages.

Key Securities Laws.

Damages in Securities Litigation.

Fraud-on-the-Market.

Comparable Index Approach.

Event Study Approach.

Broker Raiding Cases.

Mergers-Related Damages.

History of Mergers in the United States.

Client-Broker Claims.

Churning.

Appendix 10 A: Case Study: In Re Computer Associates, International, Inc.

References.

11 Antitrust.

Antitrust Laws.

Antitrust Enforcement.

Economics of Monopoly.

Changing Pattern of Antitrust Enforcement.

Antitrust and the New Economy.

Monopolization and Attempts at Monopolization.

Market Definition and Microeconomic Analysis.

Market Power.

Measures of Market Concentration.

Common Types of Antitrust Cases.

Summary.

References.

12 The Economics of Punitive Damages.

Evolving Position of the U.S. Supreme Court on Punitive Damages.

Frequency of Punitive Damages.

Frequency of Punitive Damages and the Shadow Effect of Punitive Damages.

Purposes of Punitive Damages.

Punishment of Corporations and Corporate Governance.

Spillover Effects and Punishment of Corporations.

Deterrence Theory and the Changing Litigation Environment.

Deterrence and Regulatory Processes.

Typical Financial Measures Used in the Determination of Punitive Damages.

Net Worth.

Market Capitalization.

The Uncertain Litigation Environment.

Summary.

References.

Index.