Page 41 - Acertaining Economic Damages Calculation

provide Blind Maker with service. Under these circumstances, gross profits are an appropriate
measure of lost-profit damages. fn 29

Similarly, in Northwoods Mfg., Inc. v. Linsmeyer, 2016 WL 3004419 (Mich. Ct. App. May 24, 2016)
(unpublished), the Court of Appeals of Michigan found the trial court had not erred in relying on the ex-
pert’s gross profits calculations under the facts of the case. The court of appeals wrote:

Here, the expert testified that Northwoods' historical net profits were akin to its gross profits be-
cause the company did not have a lot of "below the line" expenses. Defendants have failed to
demonstrate that the trial court clearly erred by relying on the expert's historical profit percent-
ages in calculating net lost profits. fn 30

Nature of Costs to Include in Calculation — Variable, Incremental, Fixed?

In a lost profits calculation, the practitioner is tasked with estimating the avoided and incremental costs
not incurred as a result of the actions in dispute. Because these costs are fact- and company-specific, the
practitioner often will analyze a combination of specific cost line items using accounting records, statis-
tical analysis of the relationship between costs and revenue, or company-specific facts. In other words,
the question of which costs are avoided and incremental versus fixed depends on the nature of the dis-
pute and the facts in the case. For example, under one fact pattern, such as when a restaurant was not
built as a result of the alleged wrongful acts, construction costs could be deemed incremental and saved.
However, in a dispute about false advertising, which caused the restaurant to have fewer customers and
sales, the same construction costs may be characterized as fixed. Although case law is not formulaic in
discussing the nature of costs to include in a lost profits calculation, there are some cases that address
the importance of properly characterizing costs.

Waggoner Motors, Inc. v. Waverly Church of Christ, 159 S.W.3d 42 (Tenn. Ct. App. 2004)

Waggoner Motors, Inc. (Waggoner) was an automobile dealer that sold Chrysler and Chevrolet vehicles
and was located adjacent to the Waverly Church of Christ (Waverly Church). During renovations to the
Waverly Church building in June 1997, wind caused paint used by Waverly Church’s painter to blow in-
to Waggoner’s dealership, damaging 52 new vehicles, 37 used vehicles, and 3 vehicles owned by Wag-
goner’s customers. Waggoner eventually sold all the vehicles that had been damaged. During this time,
Waggoner decided to continue to pay its sales staff even though there were fewer cars to sell. Waggoner
filed a negligence action against Waverly Church seeking damages for the cost of cleaning the vehicles
and its lost profits related to Chrysler’s decision to cut back its financing for Waggoner’s vehicles.
Waggoner asserted that Chrysler’s financing cutback was caused by the overspray incident and that the
financing reduction impaired Waggoner’s ability to acquire and sell new and used vehicles.

Among other analyses, Waggoner’s expert presented a lost profits calculation that compared the dealer-
ship’s post-incident profits with its profits earned in 1994–1996, the three calendar years before the inci-
dent. Waggoner’s expert estimated lost profits in the amount of $405,457 or $508,663 after adjusting the
loss to its present value. The total damages claimed amounted to $718,000.

fn 29 Springs Window Fashions, 184 S.W.3d at 888.

fn 30 Northwoods Mfg., 2016 WL 3004419, at *6.

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