April 18, 2016 Articles

Calculation of Prejudgment Interest on Past Losses in Business Litigation

A look at the variables: applicable interest rates, the prejudgment period, the compounding period, and discounting.

By Boris J. Steffen

Damages claims commonly entail the calculation of lost profits, measured as the difference between profits actually earned by the plaintiff and profits that it would have earned but for the defendant's wrongful conduct. Variables that are typically considered and modeled in such an analysis include, in addition to pre- and post-trial losses, the dates of the wrongful act and of the trial, the damages period, and an interest rate to discount future lost profits to present value as of the appropriate date. To account for the passage of time between the date of the wrongful act and the date of restitution—and thereby make the plaintiff whole for past damages—it is also often necessary to determine a rate of return to accumulate prejudgment interest.

If specified by state statute, the selection of the rate to be used to calculate prejudgment interest may be a relatively uncontested and straightforward exercise. For instance, certain states apply a fixed prejudgment interest rate defined by statute, while others tie the rate to an established index. This is not true of all jurisdictions or for all causes of action, however. Further, in federal courts, there is no mandated prejudgment interest rate or index. Rather, prejudgment interest is awarded in an amount intended to compensate the plaintiff for the defendant's use of its funds from the date of the wrongful act through the date of the judgment. What the applicable rate should be is open to debate, however, as is the choice of the period over which prejudgment interest is to be calculated and the period (or periods) over which the rate selected to calculate prejudgment interest is compounded. Moreover, the amount on which prejudgment interest is calculated can vary significantly based on the underlying approach to discounting damages, whether ex ante or ex post.

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