A Primer on Economic Damages for Litigators

While the calculation of economic damages is a task for the economic expert, an understanding of the basic framework can be helpful for attorneys. At the outset, it can inform the discovery and information request process. Moreover, an understanding of how the theory of harm relates to the damages model and resulting economic damages is especially helpful in cases with more than one theory of harm. In the famous case of Comcast v. Behrend, 569 U.S. 27 (2013), the Supreme Court did not allow certification of the class because of an inadequate damages model. There were four theories of harm proposed, of which all but one were dismissed by the Court. However, the regression model set forth to measure damages was incapable of isolating damages resulting from any single theory and was thus rejected by the Court. An understanding of the damages framework can also help in identifying weaknesses in opposing experts’ work and can be leveraged in drafting deposition questions or in relevant briefs and motions. Finally, if the litigation progresses to trial, an understanding of the damages framework can help inform what may be critical elements to draw out in opening and closing statements and in designing effective direct and cross-examination strategies.

At a basic level, the standard format for economic damages is the difference between earnings had the harmful event not occurred and actual earnings. Plaintiffs may also be entitled to interest on past losses and discounted present value of future losses. A damages analysis thus involves a comparison between the actual and the “but-for” world.

The but-for world is a characterization of the world had the harmful act not taken place. A proper characterization of a but-for scenario is a necessary component in a reliable measurement of damages. The but-for world must be characterized carefully such that it differs from the actual world only in that the alleged wrongful conduct did not occur. In doing so, the expert must make assumptions because no one can know with certainty what would have transpired in a world where the harmful act did not occur. However, care must be taken because a poorly chosen set of assumptions can render a damages analysis speculative and unreliable. For example, if an assumption underlying the damages model is that a plaintiff firm would have doubled its output but for the alleged bad act (e.g., a contract breach or tortious interference), but in reality the firm does not have the production capacity to double output, then clearly this is not a plausible assumption. The various assumptions underlying damages analyses often are a point of contention between opposing experts.

Moving from the formulation of the but-for world to the actual calculation, there are several methods that can be used to measure economic damages. Examples include a before and after comparison or a yardstick or a benchmark approach. In the before and after method, the plaintiff’s earnings before the harmful act are compared with the earnings after the harmful act. In the yardstick or benchmark approach, actual earnings of the plaintiff are compared with a thoughtfully chosen yardstick or benchmark. The choice of methodology often ends up being dictated by the facts of the case and, as a practical matter, the availability of data and information. For example, a before and after method is not practical in the case of a startup firm where there is no evidence of historical earnings. Similarly, a benchmark approach may not work if there is no firm or entity that is reasonably comparable to the plaintiff.

Regardless of the specific methodology chosen, a key element of a proper damages analysis involves the isolation of the harmful act. If the damages analysis puts forward a measure of harm but does not attempt to isolate the effect of the harmful act, then that analysis may not be reliable. A reliable calculation of damages should take into account other factors that changed at the same time that the harm occurred. This involves a careful examination of, and controls for, the extrinsic factors unrelated to the alleged conduct that could affect earnings before or after the harmful act, or both before and after. This consideration of factors unrelated to the alleged conduct is important in any type of litigation or dispute that calls for a damages analysis.

To summarize, while the choice of methodology and assumptions in damages analysis is the expert’s job, as outlined in this practice point, a basic understanding of the framework can be helpful for litigators.