Page 47 - Acertaining Economic Damages Calculation

tiff needs to expend over and above what Plaintiff was already expending in order to service de-
fendants account. fn 46

On appeal, one of the issues addressed by the Court of Appeals of Florida was RKR Motors’ challenge
to the amount of lost profits awarded to Associated Uniform. It argued that the methodology used by the
trial court to calculate lost profits was legally incorrect. In analyzing this issue, the court of appeals
looked at fixed costs that "were... involved in the performance of the contract in question." The court
explained its rationale that

[r]equiring a deduction of a share of fixed costs related to the performance of a contract allows
for a true measurement of the amount of the non-breaching party would have earned on the con-
tract had there been no breach, which is the proper measure of damages. fn 47

The court of appeals pointed to evidence from Associated Uniform’s income statements showing that its
"average net profit ha[d] been 8% of its average total revenue," as well as that RKR was a "typical" cus-
tomer. Thus, the court of appeals reasoned that this accounted for all the costs needed to perform the
breached contract when calculating Associated Uniform’s lost profits:

[T]he correct method in determining lost profits is not to subtract only those expenses that would
not be "saved" or reduced by not performing the breached contract. Instead[,] the correct method
in determining lost profits is to subtract all costs related to performing the contract. fn 48

The court of appeals was not convinced by the nature of fixed costs and overhead as deciding factors
when determining the appropriate costs to include in a lost profits calculation. Therefore, the court con-
cluded that these costs should be included in any lost profits calculation, reasoning that failure to do so
would conceptually result in an outcome it was not prepared to accept:

[I]n applying the methodology relied upon by Associated Uniform’s expert [(only considering
incremental costs)], Associated Uniform would realize 64% net profit margin on services not
rendered and an 8% net profit margin for services it actually performs. fn 49

Accordingly, the court reversed the trial court’s award of damages, finding that defendant’s expert’s
methodology that included "all costs related to performing the contract" was appropriate.

This case demonstrates to the practitioner that it is important to understand the legal framework and ju-
risdiction in which one is operating when performing a lost profits calculation. Although significant lit-
erature has been written (and approved by many courts) regarding avoided expenses being the appropri-
ate expenses to deduct in a lost profits calculation, certain jurisdictions and courts may treat certain ex-
penses differently.

fn 46 RKR Motors, 995 So.2d at 591 n.2.

fn 47 Id. at 593.

fn 48 Id. at 594 n.5.

fn 49 Id. at 594.

© 2020 Association of International Certified Professional Accountants 45