What Constitutes Best Evidence to Support Claims of Economic Damages? by Scott Bouchner, CMA, CVA, CFE, CIRA
Attorneys involved in economic damages cases understand that they have an obligation to prove lost profits with “reasonable certainty” based on their use of “best evidence.” However, the courts have not agreed on one universally accepted standard or criteria for what specifically constitutes best evidence; such decisions inevitably rely on the facts and circumstances of each individual case. Therefore, two courts faced with similar issues may reach entirely different opinions when deciding whether a plaintiff has supported its damage claim using the best evidence.
In Eastern Fireproofing Co. v. United States Gypsum Co., No. 57-938-G (US District Court Mass., 1970), the court stated:
“a plaintiff may not conjure up favorable estimations and hold back more solid but less favorable evidence otherwise available. And the admissibility of a particular class of evidence will depend to a degree upon the availability of less speculative evidence. On the other hand, there is no rule of law that only the best available evidence may be used. This would necessarily imply a determination of what class of evidence is best and it seems that such a determination cannot be made without infringing on the proper function of the jury as the finder of fact.”
With this in mind, attorneys have an opportunity to strengthen damages cases when they focus on reliable facts and sound methodology that other experts have attempted to use to meet or fail to meet the reasonable certainty standard. Following are just some of the factors that attorneys should consider when proving or disproving economic damages.
Use of Plaintiffs / Defendants Historical Financial Data
Supporting claims for economic damages in a commercial dispute typical starts with an historical review of a plaintiff and/or defendant’s financial data that preceded the alleged bad act of the other party. This assessment can include historical revenue, costs and profits/losses in the years leading up to a point in time and compare it to the same facts that occurred during and after the alleged damages period. Yet, experts should also consider whether or not there are factors other than the defendant’s alleged bad acts that could have caused a change in the injured party’s financial results. This may include changes in the economy, competition, technology, governmental regulation, the introduction of alternative products, etc.
Use of Contemporaneous Third-Party Market Data
The availability of contemporaneous, third-party market data can potentially help a plaintiff’s expert establish claims for damages. Conversely, defendants’ experts have been successful using contradictory data to demonstrate flaws in the plaintiffs’ analyses. Therefore, expert witnesses should tread carefully and consider the credibility and relevance of the data they use as a foundation for their testimony and make efforts to consider how other information could potentially lead to different conclusions. Moreover, they should be prepared to explain how they weighed alternative sources of data and the reasons why one set of data was preferable or more reliable than an other.
Use of Plaintiffs Other Businesses
When a plaintiff’s business does not have a sufficient track record to establish evidence of profitable operations, its historical financial data may not be an appropriate basis for estimating future profitability. Under these circumstances, some courts have accepted the historical data of a plaintiff’s other businesses as a benchmark or yardstick to establish economic damages.
However, the plaintiff ultimately bears the responsibility to demonstrate sufficient comparability between the subject business and the other benchmark businesses and make adjustments to account for differences to the extent applicable.
Reliance on Specific Customer Sales Data
Ideally, the identification of specific lost sales caused by the defendant’s bad acts helps to substantiate a claim for lost profits and can be very persuasive to a jury. With this in mind, it is generally a useful exercise to review historical sales patterns, analyze communications with customers and attempt to demonstrate sales that a plaintiff would have made but for the defendant’s actions. From a practical standpoint, however, it is rare that the plaintiff can identify the name of the customer, along with the date, amount of the would-be sale and the reasons for the loss. When it is not possible to identify these specific lost sales, some plaintiffs have been able to overcome this lack of direct information by analyzing changes in customer behavior and sales patterns, and demonstrating their connection to the specific allegations.
Use of Contemporaneous Pre-Litigation Projections and Transactions
The court’s decision in Reese Schonfeld vs. Russ Hilliard, Les Hilliard and International News Network, Inc., 218 F.3d 164; 2000 U.S. App. LEXIS 15684 is frequently cited in economic damages cases to demonstrate that a plaintiff’s contemporaneous, arm’s-length transactions involving investments in or the sale of ownership interests in the subject company may provide more reliable evidence of damages than lost profit calculations, especially when the lack of a track record would require the development of potentially “speculative assumptions.”
Similarly, the courts have often found that financial projections prepared by one or both parties prior to any litigation to be more persuasive than those prepared solely for, or in response to, litigation.
With this in mind, attorneys should be prepared to share with their experts their clients’ accounting and operational data, budgets, financial forecasts and projections, pre-trial business and marketing plans, sales and pricing agreements, memorandums of understanding and other transactional contracts, all of which may be useful to identify and substantiate assumptions used to quantify damages.
Use of Multiple Regression Analysis / Statistical Analyses
Multiple regression analysis, sampling methodologies and other statistical analyses have become increasingly common and accepted methods used to establish reasonable certainty in damages calculations. However, the effectiveness of such statistical approaches are dependent on an expert’s understanding of how to conduct them properly, based on verifiable facts, to avoid common errors that could invalidate the results.
Plaintiffs, along with their counsel and retained experts, should work collaboratively to identify the best evidence available to establish with reasonable certainty a defensible claim for economic damages. In determining what constitutes best evidence, it generally is advisable that the parties identify other information that may be contrary to the data they relied upon and that they be prepared to explain how they considered this additional information in the preparation of the damages claim.
About the Author: Scott Bouchner, CMA, CVA, CFE, CIRA, is a director with Berkowitz Pollack Brant’s Forensic Accounting and Business Valuation Services practice, where he serves as a litigation consultant, expert witness, court-appointed expert and forensic investigator on a number of high-profile cases. He can be reached at the CPA firm’s Miami office as (305) 379-7000 or via email at firstname.lastname@example.org.