Page 32 - Acertaining Economic Damages Calculation

Chapter 2

Costs

Introduction

As described in the AICPA Forensic and Valuation Services practice aid, Calculating Lost Profits, a lost
profits calculation is calculated as lost revenues less avoided or saved costs, sometimes referred to by
courts as incremental costs. fn 1 This chapter addresses considerations for the practitioner when identify-
ing the appropriate costs to include in a lost profits calculation and the bases for such conclusions. As
noted in Del Monte Fresh Produce Co. v. Net Results, Inc., 77 So. 667 (Fla. Dist. Ct. App. 2011), the
proper identification and inclusion of costs is essential to a damages methodology for a court to accept a
practitioner’s calculation because failure to do so appropriately only proves "half of the ledger involved
in a lost profits case."

As with any lost profits calculation, the cases dealing with costs presented in this chapter often turn on
specific facts and analyses, as well as the particular action and law under which the case was brought.
Finding a practitioner’s identification of avoided costs appropriate or that a lost profits calculation meets
the reasonable certainty standard may involve whether, as Judge Posner stated, the court deems award-
ing damages to be "fair." fn 2 Fairness and other factors drawn from cases and highlighted in the AICPA
Forensic and Valuation Services practice aid, Attaining Reasonable Certainty in Economic Damages
Calculations fn 3 also exist in the cases presented in this chapter. For example, in Honeywell Int’l, Inc. v.
Air Prods & Chems., Inc., the court analyzed both experts’ competing lost profits methodologies, ulti-
mately approving plaintiff’s methodology for calculating costs, albeit noting that "the incremental profit
rate appeared overly optimistic." fn 4 After making a number of adjustments to different components of
the lost profits calculation, the court used an incremental profit rate that was 75% of that calculated by
plaintiff’s expert. fn 5 The court described its adjustments, including those related to costs as follows:

This, of course, is not a "scientific" remedy that has the pretense of precision. It is instead an ef-
fort to fairly quantify the losses Honeywell will proximately suffer as a result of Air Products’
breach. fn 6

fn 1 For additional information, see the AICPA Forensic and Valuation Services practice aid, Calculating Lost Profits.

fn 2 For additional information, see chapters 1–2 of the AICPA Forensic and Valuation Services practice aid, Attaining Reasonable
Certainty in Economic Damages Calculations.

fn 3 For additional information, see chapter 2, “Client-Supplied Information,” of the AICPA Forensic and Valuation Services practice
aid, Attaining Reasonable Certainty in Economic Damages Calculations.

fn 4 Honeywell Int’l, Inc. v. Air Prods & Chems., Inc., 858 A.2d 392, 431-32 (Del. Ch. 2004).

fn 5 Id. at 432.

fn 6 Id. at 433.

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