Page 45 - Economic Damage Calculations

profits to the date of judgment rather than the date of the breach. However, the appeals court rejected the
trial court’s use of a risk-free rate as well as the discount rate proposed by the government’s expert be-
cause that rate was "far from credible." Ultimately, the discount rate was determined to be 10.5 percent,
consistent with the discount rate proposed by Energy Capital’s expert.

Case Law Consistent With the Use of a Risk-Free or Otherwise Low Discount Rate

The following cases provide examples of when courts have accepted damages models premised upon ei-
ther risk-free or relatively lower discount rates.

American List Corp. v. U.S. News & World Report, Inc., 75 N.Y.2d 38, 550 N.Y.2d 590 (1989)

This case is notable because the appeals court rejected the apparently risk-adjusted discount rate adopted
by the trial court to determine the present value of the lost profits award. The particular circumstances of
the case involved U.S. News and World Report as the defendant, which had repudiated its contract with
plaintiff American List. Pursuant to the contract, the defendant had agreed to 10-year rental period for
the mailing lists compiled by the plaintiff of college students.

In calculating the damages due to the plaintiff, the Supreme Court of New York computed the total
amount due to the plaintiff under the contract. The court took into account the costs reasonably saved by
the plaintiff as a result of the breach and subtracted the amount already paid by defendant for the mailing
lists it received in 1984 and 1985. The court found the defendant liable and awarded damages of
$1,449,344, which constituted the balance due to the plaintiff on the contract for the years 1985–94. The
award was reduced to present value using a discount rate of 18 percent, which included a consideration
of the risk that the plaintiff would be unable to perform the contract in the future.

On appeal, the 18 percent rate was rejected and remanded, with the appeals court finding that it "does
violence to the settled principles of the doctrine of anticipatory breach because it would require the non-
repudiating party to prove ability to perform in the future, despite the fact that the doctrine is intended to
operate to relieve the nonrepudiating party from that very performance."

Schonfeld v. Hilliard, 62 F. Supp. 2d 1062 (S.D.N.Y. 1999)

This case involved a dispute over the funding of a closely held cable television station. Included in a lost
asset value claim was an agreement to pay programming rights equal to $100,000 per year for 10 years.
The court accepted a discount rate of approximately 7.5 percent, approximately consistent with the 10-
year U.S. Treasury bond rate at that time.

BGB Pet Supply, Inc. v. Nutro Products, 1997, U.S. App. LEXIS 22451

This case involved a breach of an exclusive distribution agreement to supply pet products. BGB Pet
Supply sued Nutro Products for $26 million of lost profits, which covered a damage period extending
more than 20 years. The jury awarded $8.6 million in lost profits over a 9-year period, calculated using a
5 percent risk-free discount rate. The defendant appealed the award’s use of a 5 percent risk-free dis-
count rate, offering a 20 percent discount rate as an alternative. The appeals court affirmed the jury's rul-
ing and its use of the 5 percent risk-free rate.

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