Page 49 - Economic Damage Calculations

Fairmont Supply Co. v. Hooks Industrial, Inc., 177 S.W.3d 529 (Tex. App. 1 Dist. [Houston] 2005)

In a breach of contract case, the trial court awarded lost profits damages to the plaintiff. The defendant’s
expert testified that a discount rate of 33 percent was appropriate, and the plaintiff’s expert testified that
a discount rate of 26 percent was appropriate. The court awarded damages in the amount of $1.2 million,
which, although not specifically stated, implied a discount rate within the 26 percent to 33 percent range.

Other Notable Case Law

Diesel Machinery, Inc. v. B.R. Lee Industries, Inc., 418 F.3d 820 (8th Cir. 2005)

This case illustrates why it is advisable for a damages expert to consult with his or her retaining attorney
to ensure that the elements of the damages model, including the discount rate, are suitable for the venue
in which the matter has arisen. In this dispute, the defendant’s expert argued for a 17.5 percent discount
rate to account for the risks inherent in the plaintiff’s projected cash flow. The district court, however,
struck the portion of the expert’s testimony addressing the discount rate because South Dakota law re-
quired the use of a risk-free rate. Although the appeals court acknowledged that the proposed discount
rate employed sound methodology, it ruled that the district court had not abused its discretion.

Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523 (1983)

This case was cited in the section titled "Personal Injury, Wrongful Death, and Wrongful Termination
Cases" in chapter 4, "Present Value and Discount Rates Within a Litigation Context," and relates to per-
sonal injury and lost individual earnings. This case is notable for its analysis of the "total offset method,"
in which the discount rate and future growth rate are the same.

The employer, Jones & Laughlin Steel Corp., owned a fleet of barges that it regularly operated in the vi-
cinity of Pittsburgh. The employee, Pfeifer, was employed for 19 years to aid in loading and unloading
those barges. On January 13, 1978, the employee was injured while working, making him permanently
unable to return to his job or to perform anything other than light work.

In November 1979, the employee brought action against the employer, alleging that his injury had been
caused by the negligence of the company’s employees operating the vessel. The district court found in
favor of the employee and awarded damages of $275,881. The court did not increase the award to take
inflation into account, and it did not discount the award to reflect the present value. The court adopted
Pennsylvania’s "total offset method" of computing damages, presuming that the future inflation rate will
be equal to future interest rates. The appeals court affirmed the decision.

The U.S. Supreme Court vacated the decision and remanded the amount of damages awarded, stating
that the district court erred in applying the state’s "total offset" theory for the calculation of damages.
The Supreme Court further stated that the discount rate should be based on the rate of interest that would
be earned on the best and safest investments. Per the ruling, an injured worker is entitled to a risk-free
stream of income, and the discount rate should not reflect the market’s premium for investors who are
willing to accept some risk of default.

© 2020 Association of International Certified Professional Accountants 47