Page 68 - Acertaining Economic Damages Calculation

the pre-damage period, historical business records of the subject company may not be appropriate as a
basis for estimating future profitability. Under these circumstances, some courts, as discussed in the fol-
lowing cases, have accepted other businesses owned or controlled by the plaintiff as a benchmark or
yardstick to establish economic damages with reasonable certainty, provided that the plaintiff can
demonstrate sufficient comparability between the subject business and the other businesses.

Adell v. John Richards Homes Bldg. Co., L.L.C. (In re John Richards Homes Bldg. Co., L.L.C., 439 F.3d
248 (6th Cir. 2006)

Preceding this case, Kevin Adell filed an involuntary bankruptcy petition against John Richards Homes
Building Co., L.L.C (JRH), which was dismissed by the bankruptcy court. Because the petition was
found to have been filed in bad faith, the bankruptcy court awarded $4.1 million in lost profits to JRH.
Adell challenged this award, contending, among other things, that the court accepted plaintiff’s expert’s
approach for estimating JRH’s expected future profits on the basis of past profits of other affiliated enti-
ties (the Affiliates), rather than on JRH’s own performance.

Plaintiff contended that JRH was created in an effort to consolidate the business that had been previous-
ly handled by the Affiliates, causing a number of the Affiliates to be phased out. Therefore, plaintiff
maintained that because JRH was newly formed and the business of the affiliate entities was "being fun-
neled into [JRH] going forward," the expert’s use of the Affiliates’ historical sales data was not only
reasonable, but the best evidence of JRH’s future profits. The court found this evidence sufficient to
support the bankruptcy court’s decision to accept the expert’s approach in calculating JRH’s future lost
profits and affirmed the damage award.

Doctor John’s, Inc. v City of Sioux City, 438 F. Supp. 2d 1005 (N.D. Iowa, 2006)

Dr. John’s Inc., an operator of an adult entertainment business, was barred from opening a new location
as a result of ordinances passed by the city of Sioux City just prior to the store’s anticipated opening. Af-
ter a delay, the court allowed the store to operate, at least until the legality of the city’s actions were ad-
judicated. Both sides filed various motions. Among other things, Sioux City argued that, as a new busi-
ness, Dr. John’s was not entitled to assert a claim for lost profits.

Doctor John’s argument pointed to sales made and profits earned by the Sioux City store in the year fol-
lowing the delayed opening. The court ruled that the Doctor John's store in Sioux City was not an "un-
tried business" or a business without a "track record," but one that had been operating pursuant to the
court's preliminary injunction.

In addition, the court further ruled that the plaintiff could provide evidence of the performance of its
other comparable stores as a basis to prove its lost profits.

For a more comprehensive discussion of the unique challenges presented when calculating economic
damages for new or unestablished businesses, see chapter 4, “Newly Established Businesses,” of the
AICPA Forensic and Valuation Services practice aid, Attaining Reasonable Certainty in Economic
Damages Calculations, which contains additional examples of cases in which the use of a benchmark or
yardstick was successful or unsuccessful.

Best Evidence and Reliance on Specific Customer Sales Data

In an ideal world, when attempting to establish lost profits with reasonable certainty, the expert would
be able to identify each specific sale that was lost as a result of the defendant’s actions, along with such

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