Page 29 - Economic Damage Calculations

Another consideration pertains to the cost of future medical care, as an additional expense item, and the
uncertainty surrounding such expected future costs. Some experts have suggested that discount rates
should vary depending on the risk of individual line items. Given that costs affect loss calculations in the
opposite direction of revenues, applying a higher discount rate to costs to account for a higher degree of
risk actually runs counter to the true impact of such risk.

For example, if a plaintiff were able to lock in a cost of future medical care at $10,000 in one year, or
assume the risk of a possible future medical care cost of between $5,000 and $15,000, risk aversion sug-
gests that a certainty on a cost may be higher than the expected value (consistent with people's willing-
ness to buy insurance). As a result, applying a higher discount rate for risky costs in general, and costs of
future medical care in particular, is conceptually inappropriate.

Reasonable Royalty and Defendant’s Profits or Unjust Enrichment

A reasonable royalty is a measure of damages often awarded in intellectual property infringement suits.
It is based on the premise that a plaintiff has lost out on the payment of a royalty adequate to compensate
the plaintiff for the use by the defendant of the intellectual property in suit. Courts may also award de-
fendant’s profits resulting from the unauthorized use by the defendant of plaintiff’s intellectual property
or other act. This form of damages is similar to unjust enrichment.

Largely because reasonable royalties and awards of a defendant’s profits are assumed to end with the is-
suance of an injunction, it is normally unnecessary to discount these awards for time value.

Benefit of the Bargain Damages

Benefit of the bargain damages measure the difference between the value received and the value of the
defendant’s performance as per an agreement.

Other Measures of Damages or Losses

The previous sections describe the principal measures of damages that may involve the identification of
a discount rate. This practice aid does not attempt to summarize all possible measures of damages or
loss. Other common types of damages or loss exist, including, for example, rescission, restitution, and
out-of-pocket loss. Typically, these types of damages or loss do not involve discounting. Readers of this
practice aid may wish to consult Black’s Law Dictionary for additional definitions.

Factors Influencing a Damages Analysis

Regardless of the type of damages analysis conducted, a damages model and the applied discount rate
may be influenced by a variety of factors, including the following:

 Financial, economic, and accounting theories. The bodies of knowledge and academic theories
surrounding these disciplines may be used by the expert.

 Industry experience. Common practices to value certain business opportunities may be relevant
in damages analysis.

 Case facts. Documentary evidence, sworn statements, and other disclosures may reveal facts that
influence the expert’s analysis of damages. For example, the plaintiff’s statements about its exit
strategy from a developmental effort may influence the expert’s conclusions about how long the

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