Page 46 - Economic Damage Calculations

Purina Mills, L.L.C. v. Less, 295 F. Supp. 2d 1017 (N.D. Iowa 2003)

Purina sought lost profits related to the defendant’s repudiation of an agreement to purchase weanling
pigs. The lost profits models presented at trial failed to discount damages. The court found that lost prof-
its must be discounted to present value, and with no alternative evidence, applied the 1-year U.S. Treas-
ury bond rate to year 1, a 2-year U.S. Treasury bond rate to year 2, a 3-year U.S. Treasury bond rate to
year 3, and an extrapolation between the 3-year and 5-year U.S. Treasury bond rate for year 4.

Northern Helex Co. v. United States, 634 F.2d 557 (Ct. Cl. 1980)

In a case involving a natural gas producer that produced helium, the trial court recommended an undis-
counted damage award of $78 million. The appellate court remanded the case, ordering that the damages
be discounted. The plaintiff was ultimately awarded $33,457,400 in damages, using a 9 percent discount
rate. This rate was derived from available conservative investment instruments and was applied to a
damage period of less than 90 days.

Kairos Scientific v. Fish & Richardson, P.C., 2003 WL 21960687 (Cal. Super. Ct. Jul. 29, 2003)

This case is notable because the court not only distinguished a preference towards the use of a risk-free
rate over a risk-adjusted rate, but it stated its rationale for doing so based upon the fact that the relevant
damages model had already adjusted for risk. The particular case involved alleged legal malpractice.
The court found for the plaintiff and awarded lost profits of $30 million before discounting. Lost profits,
which consisted of $12.5 million in licensing fees and $17.5 million in royalty payments, were discount-
ed by the plaintiff’s expert using a risk-free rate of 2.3 percent for the 7-year damage period. The de-
fendant’s expert testified that the appropriate discount rate to use was a risk-adjusted rate of 35 percent,
which was rejected by the trial court judge, saying "The trial court expressly stated that it had already
considered the risk factors when it determined the amount of damages ... The court therefore did not
abuse its discretion in excluding this testimony ... it had already considered the risk factors when deter-
mining the amount of damages."

Case Law Consistent With the Use of a Risk-Adjusted Rate

The cases in this section provide examples of when courts have accepted damages models premised on a
risk-adjusted discount rate.

Olson v. Nieman’s, Ltd., 579 N.W.2d 299 (Iowa 1998)

In May 1992, Andrew H. Olson built a prototype for breakaway hazard lights that would activate flash-
ing lights on a trailer if the trailer disengaged from the transporting vehicle. Olson approached Nieman
with the idea, and Olson agreed in writing to disclose his schematic drawing to Nieman. Nieman agreed
to keep all technical design information confidential. Nieman and Olson failed to reach an agreement re-
garding Olson’s compensation for his device. A month later, at a trade show, Nieman demonstrated and
distributed literature describing an implementation of Olson’s idea. Olson filed suit against Nieman
claiming, among other things, misappropriation of trade secrets.

Olson’s damages expert based his opinions on the patentability of the device. The damages expert creat-
ed four damages models, applying a range of reasonable royalties to forecasted sales of Nieman. In all
four models, the damages expert reduced the royalty income to present value, using a 19.4 percent dis-
count rate. He testified that the normal rate of return for publicly held corporations was 14.4 percent, to
which he then added 5 percent to reflect the market risk for the device. The district court jury found in

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