Page 40 - Acertaining Economic Damages Calculation

In rejecting National Union’s arguments regarding Bettius’s principal’s compensation being an appro-
priate expense to deduct to calculate lost net profits, the Fourth Circuit pointed to the fact that profes-
sional corporations and business corporations are different entities under Virginia law, existing for sepa-
rate purposes. The court noted that the professional corporation "calculate[s] [its] net incomes with dif-
ferent goals in mind." fn 25

The aim of a professional corporation is different. In a professional corporation, the shareholders
and the principals are, in fact, one and the same [(as compared to a business corporation)].
Therefore, the professional corporation desires to disburse its earnings in order to avoid having
income taxes imposed twice on what is in reality the same group of people — the principals who
are required by law to be both shareholders and professional employees. This is accomplished by
distributing all or most of its earnings to the principals as compensation before calculating the
professional corporation's net income. The result, of course, is that the corporation's net income
for tax purposes is almost always at or near zero, but it is unrealistic to suggest that the corpora-
tion is not earning a profit. fn 26

The Fourth Circuit further noted that to follow the trial court’s post-judgment ruling would lead to the
harsh result that professional corporations in Virginia would almost certainly "end up in almost every
case with little or no recovery." fn 27 Thus, the court ruled that in calculating lost net profits, "the com-
pensation paid to principals in a professional corporation tends to prove the corporation’s net profit." fn 28
The case was remanded to the trial court for further proceedings outlined in the court of appeals ruling.

This decision does not turn on the question regarding whether the plaintiff provided sufficient revenue
and cost evidence to calculate its lost net profits. Rather, the Fourth Circuit’s opinion suggests that a
practitioner calculating net profits may need to consider the nature of the entity structure in terms of
what the structure may mean for what are, in fact, the lost net profits.

Lost Gross Profits as Measure of Lost Net Profits

Finally, the practitioner should also be aware that gross profits as the measure of lost net profits have
been accepted by courts under certain conditions. In such instances, it appears that the courts have
looked at the nature of the business activity and found that costs were not, in fact, avoided. For example,
in Springs Window Fashions Div., Inc. v. Blind Maker, Inc., 184 S.W.3d 840 (Tex. App. 2006), the
Court of Appeals of Texas stated the following:

Here, the jury found that Springs committed fraud, and that fraud left Blind Maker with no way
to reduce its expenses – Blind Maker's operating costs remained basically the same but Springs
refused to sell Blind Maker more material, to buy back Blind Maker's unsold inventory, or to

fn 25 Id. at 1013.

fn 26 Id.

fn 27 Id. at 1013-14.

fn 28 Id. at 1014.

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