Page 14 - Acertaining Economic Damages Calculation

Chapter 1

Revenue and Growth Rates

Introduction

In dispute matters involving claims for lost profits, one of the key elements in the damages calculation is
the estimate of revenues that would have been earned but for the alleged bad act. In calculating lost rev-
enues, experts are called upon to apply techniques not only to estimate the lost revenues, but to also con-
sider how the lost revenues (and profits) would have grown, if at all, over the applicable damage period.
Given the centrality of revenue estimation and growth to the analysis of lost profits, there is a robust
body of case law that examines the expert’s role in revenue and growth estimation. As these cases
demonstrate, the courts have considered two primary issues:

1. The admissibility and reliability of expert opinions that use approaches to estimate revenue and
growth rates that do not follow accepted methodologies and are generally considered to reflect a
lack of analysis or understanding of the underlying data

2. The admissibility and reliability of expert opinions that use accepted methodologies to estimate
revenues and growth rates, such as the before-and-after method or the yardstick method.

With respect to the former, the courts have been consistent in their consideration and treatment of pro-
posed expert testimony regarding damages that are premised on revenue estimates and growth rates that
have no grounding in any analytical process — that testimony is regularly excluded. For example, in the
matter Chemipal Ltd. v. Slim-Fast Nutritional Foods Int’l, Inc., fn 1 the expert for the plaintiff put forward
a lost profits claim that was based, in part, on growth rate estimates purportedly derived from the ex-
pert’s recollection of growth rates of other products with which he had experience. The expert did not
check the accuracy of his recollection or do any analysis around the specific growth rates of the other
products. As such, the court excluded the expert’s opinion on the basis that there was not a valid scien-
tific connection between the specific product at issue and the growth rates of the other products from his
"recollection."

In contrast, the courts have reached different conclusions surrounding the treatment of proffered expert
testimony in matters in which the expert has used one of the common methods for estimating revenues
and growth. In some instances, the courts have concluded that the role of the court under Daubert and
the federal rules is to assess whether the expert has applied reliable principles and methods, with chal-
lenges to the integrity and reliability of the underlying data and analyses left to the adversarial process.
In other instances, the courts have gone beyond an evaluation of the methodology and have excluded
expert testimony when the court determined that the expert did not do enough to establish the integrity
and reliability of the underlying data used to estimate lost revenues and growth rates.

Through a discussion of specific cases, this chapter attempts to provide some perspective to damages
experts of what the courts have considered when challenges to the admissibility of expert testimony
have been raised concerning the methods employed to estimate revenues and growth rates.

fn 1 350 F. Supp. 2d 582 (D. Del. 2004).

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