Lost Profit Cases (Series: Common Commercial Conflicts)

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DISCLAIMER
The material in this webinar is for informational purposes only. It
should not be considered legal, financial or other professional advice.
You should consult with an attorney or other appropriate professional
to determine what may be best for your individual needs. While
Financial Poise™ takes reasonable steps to ensure the information it
publishes is accurate, Financial Poise™ makes no guaranty in this
regard.
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MEET THE FACULTY
Moderator:
Leland Chait – Leland Chait, Esq.
Panelists:
John Levitske – Ankura
Shawn Fox – Sikich LLP
Michael D. Pakter – Gould & Pakter Associates LLP
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ABOUT THIS WEBINAR:
Lost Profit Cases
Business does not always go as planned. When a vendor breaches their contract to supply key
parts, a lender reneges on their loan commitment, or a fire decimates a central distribution
facility, the impacted business may have grounds to seek compensation in the form of the profits
it would have earned had everything just gone smoothly. In order to successfully win (or defend
against) any such claim, one must compile and analyze certain types of documents and
information, understand and apply appropriate methodologies, and present their case in a
manner consistent with that which the court or trier of fact requires. In this webinar, the expert
panel discusses the circumstances that warrant lost profits claims, key considerations for both
the claimant and defendant, and how such claims will ultimately be evaluated.
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ABOUT THIS SERIES:
Common Commercial Conflicts 2019
This webinar series focuses on the legal and financial realities that accompany unanticipated adverse events, soured
business relationships, and failing organizations. Whether you are a general litigator, business owner, aspiring
shareholder, or insurance claims analyst, this webinar series will help you to understand and prioritize key concepts
associated with business breakups, shareholder disputes, claims for lost profits, and bankruptcy avoidance actions.
As with every Financial Poise Webinar, each episode is delivered in Plain English understandable to investors, business
owners, and executives without much background in these areas, yet is of primary value to attorneys, accountants, and
other seasoned professionals. And, as with every Financial Poise Webinar, each episode brings you into engaging,
sometimes humorous, conversations designed to entertain as it teaches. Each episode in the series is designed to be
viewed independently of the other episodes so that participants will enhance their knowledge of this area whether they
attend one, some, or all episodes.
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EPISODES IN THIS SERIES
2/5/19 Episode #1:
Business Breakups
2/26/19 Episode #2:
Lost Profit Cases
3/26/19 Episode #3:
Resolving Shareholder Disputes
4/23/19 Episode #4:
Defending Against Bankruptcy Avoidance Actions
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Dates shown are premiere dates.
All webinars will be available
On Demand approximately 4 weeks
after they premiere.

EPISODE #2:
LOST PROFIT CASES
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WHAT ARE LOST PROFITS?
• Revenues that would have been earned but for the wrongful act (‘but
for’ revenues)
LESS
• Incremental costs necessary to derive these revenues
EQUALS
• Lost Profits

WHAT ARE LOST PROFITS? (cont’d)
Economic damages caused by disruption of a business.
Causes:
(1) Breach of contract
(2)Liability due to accident or damage to property
(3)Intellectual property infringement

The factual or “but for” causation showing needed for recovery of lost
profits damages -- as with all damages -- requires a plaintiff to prove
by a preponderance of the evidence that there is ‘some reasonable
connection between the act or omission of the defendant and the
damage which the plaintiff has suffered.’
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• Profits must be shown to have been factually and legally caused by --
and a reasonably foreseeable result of -- the defendant’s wrongful
conduct.
• Further, a plaintiff must prove his or her estimate of lost profits to a
“reasonable certainty,” establishing such damages through an
adequate evidentiary foundation.
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WHAT IS THE DIFFERENCE BETWEEN LOST
PROFITS AND LOST VALUE?
• Lost Profits = Incremental profits the company would had have
earned but for the wrongful act
• Diminution in Value = The present value of lost profits over the life
of the company discounted at the appropriate risk adjusted rate of
return
• How do you decide which analysis to utilize?
• When lost profits extend over the life of the company
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STANDARD FOR PROVING LOST PROFITS
Tort or Contract must have:
• Causation - Some reasonable connection between the act or omission
of the defendant and the damage which the plaintiff has suffered.
• Reasonable foreseeability – Lost profits must be shown to have been
factually and legally caused by the defendant’s wrongful conduct.
• Reasonable certainty - Establishing such damages through an adequate
evidentiary foundation; applies only to the fact of damages, not to the
amount of damages
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ESTABLISHED BUSINESSES
• Provides evidence of a successful past track record of business,
along with evidence establishing anticipated future net profits, offer
the greatest likelihood of recovering lost profits
• Use expert testimony based upon a solid evidentiary foundation
addressing the underlying economic data quantifying gross revenue
and variable expenses
• May use outside or inside expert testimony
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WHAT ABOUT RECENTLY ESTABLISHED OR
NEW BUSINESSES?
• Most states allow for recovery of lost profits for newly established
business; however, the level of scrutiny may be increased.
• The New Business Rule (NBR) applies to new businesses as well as
new products. However, despite the newness of a given company or
enterprise, courts will allow discovery on the lost profits question.
The longer the parties’ contractual relationship, the less likely the
NBR will defeat a lost profits claim.
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NEW BUSINESSES? (cont’d)
• May use alternative forms of proof to establish lost profits, such as
industry averages, governmental standards
• Must still meet the “reasonable certainty” standard
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• Actual Case example: There was a five-year relationship between the wall
furnishings manufacturer and designer wall furnishings as well as a
multi-year history of contracts the designer had with “big box”
retailers . the court held it was premature to dismiss the designer’s
counterclaim without allowing the designer to take oral and written
discovery to support the damages claim. Williamson Co. v. Ill-Eagle
Enterprises, Ltd., 2015 WL 802250,
• Damages for lost profits are confined to the period in which it would be
reasonable to replace the profits
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• The longer the parties’ contractual relationship, the less likely the
New Business Rule will defeat a lost profits claim
• E.g. Williamson Co. v. Ill-Eagle Enterprises, Ltd., 2015 WL 802250
• AICPA practice aid, “Attaining Reasonable Certainty in Economic
Damage Calculations,” includes an entire chapter (chapter 4) on
proving damages for newly established businesses.
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• Alternative Tools
• The Wrongdoer Rule
• Lost Opportunity
o Loss of Chance Doctrine
o Loss of Earnings Opportunity
o Loss of Business Opportunity
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GENERAL FLOW OF CALCULATING LOST
PROFITS
• Understand which lost profits damages model is appropriate
• Use evidentiary standards
• Calculate lost profits
• Develop the causal economic link between defendant’s action
(event) and the loss
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GENERAL FLOW OF CALCULATING LOST
PROFITS (cont’d)
• Select the period to examine
• Estimate the relevant lost revenues and associated costs
• Utilize assumptions that have reasonable certainty
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LOST PROFIT METHODS
• Before-and-After Approach
• Yardstick Approach
• Sales Projection Approach
• Market Share Approach
• Alternative methodologies
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BEFORE AND AFTER APPROACH: HISTORICAL
DAMAGES WITH FULL RECOVERY
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BEFORE-AND-AFTER APPROACH (cont’d)
• Method
• Estimate of lost profits based on the plaintiff’s sales (and sales
trends) before the damaging event with a projection of sales
(based on sales and sales trends) that would have been achieved
had the damaging act not occurred (“but for” sales) reduced by
incremental costs
• Incremental costs: costs that rise and fall with sales; sales fall,
have to deduct those costs that decrease because of the sales fall
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• When Appropriate
• When reliable historical data exists
• When growth trends are steady and predictable
• In relatively stable economic environments
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BEFORE AND AFTER APPROACH:
HISTORICAL & FUTURE DAMAGES (cont’d)
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• Strengths
• Relies on plaintiff’s actual, historical financial results as basis for
comparison to estimated future results
• Courts often favor financial projections based on past results
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• Limitations
• Requires sufficient historical data
• May not account for industry changes that occur subsequent to
damages date
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Plaintiff Company - Sales
1998 1999 2000 2001
E
V
E
N
T
2002 2003 2004
Actual Sales $180,000 $219,000 $262,000 $317,000 $298,000 $295,000 $302,000
Actual Growth Rate 21.70% 19.60% 21.00% -6.00% -1.00% 2.40%
Assumed or But For
Growth Rate - - - - 21.0% 21.0% 21.0%
Projected Sales 380,400 460,240 556,890
Lost Sales - - - - ($82,400) ($165,240) ($254,890)
Total Lost Sales ($502,530)
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YARDSTICK APPROACH
• Method
• Estimate of the plaintiff’s profits based on a yardstick – e.g., a
comparable company, division or industry benchmark - that is
not affected by the damaging act
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YARDSTICK APPROACH (cont’d)
• When a reliable yardstick exists
• With newly established firms
• Accounts for differences in time periods
• When market conditions may have changed subsequent to the
damages event date
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• Strengths
• Can provide objective, reliable benchmark for estimating
• Yardstick is independent of damaging act, but able to reflect its
effects
• Accounts for changes in the industry or market that may have
occurred subsequent to the damages event date
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• Limitations
• Lack of comparability between plaintiff and yardstick (e.g., size,
sales channels)
• Yardstick data may not be available
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MARKET SHARE APPROACH
• Method
• Calculates lost profits based on the difference between the
plaintiff’s “but-for” market share and its market share after the
damaging act.
• When reliable market share data exists
• When plaintiff company products/services fit within “market”
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MARKET SHARE APPROACH (cont’d)
• Strengths
• Can provide objective, reliable basis for estimating
• Other companies in “market” are independent of damaging act
• Accounts for changes in the industry during relevant period
• Limitations
• Difficult to determine market share – lack of data, comparability
• May be difficult to assess due to dynamic markets
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SALES PROJECTION APPROACH
• Method
• Utilizes company-specific forecasts the company has prepared in
the ordinary course of business or for some purpose other than
the litigation
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SALES PROJECTION APPROACH (cont’d)
• If plaintiff has prepared the documentation contemporaneously
or prior to the occurrence of the alleged harmful event
• When projections have been historically reliable
• When calculation is for expert who is not engaged by party who
has made the projections
• If no other approach is reliable
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SALES PROJECTION APPROACH: EXPECTED
IMPAIRMENT OF FCFS (cont’d)
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• Strengths
• May allow the expert to incorporate more easily the effects of
other factors (beyond the harmful act) that might increase or
decrease the estimated economic damages
• Can be very effective if used by expert for party opposing the
party who made the projection
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• Limitations
• Does not control for market events that may have occurred
subsequent to the damages event
• Difficult to independently support the underlying foundation for
the projections
• Speculative or nothing more than a “wish list”
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ESTIMATING INCREMENTAL COSTS
• Costs should only be those costs related to the lost incremental revenues
(“Avoidable or incremental Costs”)
• Examples of Incremental Costs
• Direct costs that change with amounts of sales (materials,
commissions, royalties)
• Other variable or semi-variable costs
Salaries
Infrastructure (rent, utilities)
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ESTIMATING INCREMENTAL COSTS
(cont’d)
• Examples of costs that should not be included
• Corporate overhead
• Other fixed costs (depreciation, amortization)
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EVIDENTIARY SUPPORT
• Informed opinion - Lost profits may be established by evidence of
past experience or expert testimony sufficient to quantify the extent
of loss, either of which must be properly supported by admissible
evidence.
• Judgmental approximation - Plaintiff's owner provided evidence of
the company's past experience and lost profits; owner has
substantial experience.
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EVIDENTIARY SUPPORT (cont’d)
• Credible evidence – Industry averages, governmental information,
official statistics, etc.
• IMPORTANT: Must determine how to get this non-company-
specific data into evidence.
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WHAT EVIDENCE IS NECESSARY?
• “The Company’s profits would have been $XXX,XXX, based on…”
• Examine financial statements for history
• Demand for product
• Consistent pricing trends over time
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WHAT EVIDENCE IS NECESSARY? (cont’d)
• Industry trends over time
• Competitive risk is low
• Technology risk is low
• Customer retention is constant/high
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• “The risk the Company would NOT achieve $XXX,XXX in profits is
very low, based on …”
• Customer and product demand
• Low risk of product/service obsolescence
• Industry trends that support achievability
• Backlog orders
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• “The Company’s profits are now only $X,XXX, due to …”
• Customer cancellations of orders or contracts
• Lost customer or documented market share
• Lost productivity
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• “The Defendant’s actions are directly responsible for the loss in
profits, based on …”
• Customers lost as a direct result of the defendant’s actions
o Cancellation documentation/letters
• Inability to gain new customers
o Documentation of futile efforts
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• “No other factors contributed the Company’s ability to earn
$XXX,XXX in profits, as proved by …”
• Industry stability
• Economic stability
• No new competitive entrants into market place
• No new governmental or regulatory issues
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QUALIFIED EXPERT
• Must be a qualified expert, experienced in field (highly recommend
credentialed individual)
• Accounting Professional (CPA)
• Valuation expert (ASA, ABV, CFA)
• Economist
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QUALIFIED EXPERT (cont’d)
• Must use proper methodology
• Must be objective
• Must have sufficient evidentiary support
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DEFENDING AGAINST AN ACTION
• What defenses exist to a lost profit action?
• What can a party do to challenge the lost profits findings of an
expert?
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CONCLUDING THOUGHTS
• Applicable standards
• Burden of proof
• Evidentiary challenges
• Remedies
• Methodologies
• Qualified expert
• Other remedies
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ABOUT THE FACULTY
LELAND CHAIT – LelandChait@gmail.com
Lee is an experienced litigator and counselor who represents individuals, investors, families, and businesses
ranging from partnerships and LLCs to medium-sized enterprises to the world’s largest financial services
institutions. He has successfully handled disputes in state and federal courts and arbitrations throughout
the United States alleging fraud and violations of duties owed to partners, shareholders, employees,
customers, and the public; violation of employment and anti-discrimination laws; antitrust laws; industry
regulations; and cyber insurance contracts.
Lee is Vice-Chair of the Excess, Surplus Lines & Reinsurance Committee and the Corporate Counsel
Committee of the American Bar Association’s Tort Trial and Insurance Practice Section.
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ABOUT THE FACULTY
JOHN LEVITSKE – John.Levitske@ankura.com
John Levitske is a Senior Managing Director at Ankura, focused on business valuation and complex financial disputes. He has served as a senior advisor to
companies, owners, executives, and legal counsel in business disputes, shareholder disputes, and M&A transactions regarding issues of valuation, finance,
damages, and accounting. John is based in Chicago. With over 30 years of experience, including two decades of Big Four public accounting and international
consulting experience, John is seasoned in business valuation, financial analysis, economic damage quantification, forensic accounting, retrospective solvency
analysis, and post-merger and acquisition accounting calculations. He is experienced in the appraisal of healthy and distressed companies for buyouts of
shareholders and creditors, transaction planning, estate and gift taxation, financial accounting, bankruptcy proceedings, and litigation disputes. His experience
includes numerous valuation dispute cases in US litigation, arbitration, and medication, plus international arbitration.
John has provided consulting and expert witness testimony services and has served as a neutral party in arbitration and mediation. He has testified as an expert
witness in the US and Europe in depositions, hearings, bench and jury court trials, and domestic and international arbitration (ICC, SCC, AAA, JAMS, FINRA, and
ad hoc arbitrations) and has served as a neutral arbitrator. In addition, he has rendered binding decisions on disputed matters.
He is co-author of the “Managing Post-Merger & Acquisition Purchase Price Disputes” chapter in the American Bar Association’s 2016 Alternative Dispute
Resolution Handbook for Business Lawyers. John has lectured on valuation, financial analysis, and forensic accounting topics to various professional groups,
including the American Bar Association, the Chicago Bar Association, the Association of Insolvency & Reorganization Advisors, and DailyDAC-Financial Poise.
In addition, he served as an accounting, finance, and auditing adjunct professor at both the University of Pittsburgh and Point Park University, and as a national
exam question writer for both the Uniform CPA Exam and the American Institute of Certified Public Accountants’ Accredited in Business Valuation Exam.
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ABOUT THE FACULTY
SHAWN FOX– Shawn.Fox@Sikich.com
Effective as of January 1, 2019, Shawn Fox was promoted to the national managing director of Sikich’s forensic and valuation services
practice. He is based in the Chicago office. He has 22 years of experience providing fraud and forensic accounting, dispute advisory, and
valuation services to the business and legal community involved in high profile disputes and investigations.
With significant experience in the preparation of expert reports, Shawn assists clients in all phases of complex litigation, including case
assessments, discovery, document review, damages analysis, complex modeling, and demonstrative exhibits. He has testified in almost 50
different cases at deposition, trial, and arbitration as an expert witness and has served as a court-appointed receiver. Shawn has been
qualified as an expert witness in federal district and bankruptcy courts and state courts across the U.S. Shawn is also retained as a
consultant to quantify the potential damages or exposures in disputed matters.
Shawn directs forensic investigations and analysis across a wide range of areas, including high-stakes litigation, complex damages, lost
profits, unjust enrichment, economic damages, diminution of value, reasonable royalty, intellectual property infringement, bad faith,
breach of contract, breach of fiduciary duty, misappropriation of trade secrets, tortious interference, securities, fraud, purchase price
disputes/post-acquisition disputes, class action, and bankruptcy litigation, as well as valuation and insurance claims recoveries.
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ABOUT THE FACULTY
MICHAEL D. PAKTER – mpakter@litcpa.com
Michael D. Pakter has more than 40 years of experience in accounting and forensic accounting, business economics and investigations in
numerous industries and diverse engagements, including more than 20 years of experience in economic damages and business
valuations. He has submitted expert reports in several jurisdictions and testified in arbitrations, regulatory proceedings and litigated
disputes. State, Federal and Bankruptcy Courts, as well as arbitral bodies, have recognized him as an expert in accounting, financial
analysis, forensic accounting, economic damages, business valuation and business economics.
Mr. Pakter is a Certified Public Accountant, registered in the State of Illinois. The AICPA has recognized him as additionally Certified in
Financial Forensics and Management Accounting. He earned the NACVA Certified Valuation Analyst designation having completed its
business valuation specialty program and its Master Analyst in Financial Forensics designation having completed its business and
intellectual property damages specialty program.
The Association of Insolvency and Restructuring Advisors has awarded him its Certified Insolvency and Restructuring Advisor and its
Certification in Distressed Business Valuation. He is a Certified Fraud Examiner and a Chartered Accountant with undergraduate
academic education in accounting, auditing, commerce and business economics.
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for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education.
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