Page 73 - Acertaining Economic Damages Calculation

• The growth rate was substantially less than the sales actually sold to Lowe’s by Imperial.

Unlike CSL’s relationship with Lowe’s, in which it was the exclusive provider of fire logs from 2003–
2005, CSL was only one of several providers of fire logs to Ace Hardware and other customers. Conse-
quently, for Ace Hardware and other customers, CSL’s expert calculated the total sales made by Imperi-
al to each customer, which he adjusted by a "capture rate," which attempted to allocate the number of in-
fringing sales that would have been made by CSL and the other distributors.

In awarding lost profits to CSL, the court found that the evidence presented as the basis of CSL’s calcu-
lation of lost profits in sales to Lowes was accurate, reasonable, and sufficient, accepting CSL’s expert’s
lost profits calculation of $1.137 million. The court, however, concluded that the "capture rate" calcula-
tion used for Ace Hardware and other customers (a calculation not explained in the opinion) was too ar-
bitrary and speculative to support an award of damages, reasoning that it failed to address the impact
that a competitive product would have had on CSL’s sales.

Given CSL’s exclusivity with Lowe’s, a comparison of historical and subsequent sales to Lowe’s was
found, in this case, to provide a sufficient basis to project lost sales volume. Without the exclusivity,
however, an analysis of pre- and post-breach sales to Ace Hardware and other customers was not
deemed sufficient, a deficiency that could not be rectified by CSL’s expert’s "capture rate."

Best Evidence and Reliance Upon Contemporaneous Pre-Litigation Projections

The calculation of lost profits requires the damages expert to project what profits would have been
earned by the plaintiff but for the defendant’s alleged bad acts. Although not always available, courts
have, in some instances, found contemporaneous projections prepared by the parties prior to any litiga-
tion to be more persuasive than projections prepared solely for the purposes of litigation. At a minimum,
such contemporaneous pre-litigation projections could be used as the basis of cross-examination. The
mere existence of pre-litigation projections does not render them, per se reliable. Nonetheless, the fol-
lowing cases illustrate the benefits of inquiring about the existence of pre-litigation projections and con-
sidering whether they may be the best evidence available to establish damages with reasonable certainty.

Lambert v. Weyerhaeuser Co. (In re Paragon Trade Brands, Inc.), 324 B.R. 829 (Bankr. N.D. Ga. 2005)

Weyerhaeuser, the defendant, spun off its private label diaper business to Paragon Trade Brands (Para-
gon), a new entity created as part of an initial public offering (IPO). At the time of the IPO, demands for
royalties were being made by Procter & Gamble and Kimberly-Clark, which claimed to own patents on
technology used to manufacture the diapers. After Paragon completed its IPO, a court found that a key
feature of the diapers ("inner leg gather") infringed on various patents owned by Procter & Gamble,
which forced the new company into bankruptcy. The litigation trustee for Paragon brought suit against
Weyerhaeuser and was awarded a judgment of $457.9 million for Weyerhauser’s breach of warranties
included in an Asset Transfer Agreement and an Intellectual Property Agreement entered into by the
parties at the time of the spin-off. This award was challenged by Weyerhaeuser on appeal.

Paragon's damages expert calculated lost sales in 1998 and 1999 by taking the difference between Para-
gon’s actual infant care net sales in those years and the base case projections for those years included in
Paragon's August 1997 mid-term plan. This mid-term plan was prepared by Paragon’s CFO and present-
ed to Paragon’s board of directors to provide them with "what management felt were the best set of as-
sumptions available at that time." To compute Paragon's lost profits, Paragon’s damages expert multi-
plied the calculated lost sales by Paragon's 22.3% gross profit margin for 1997, the year preceding the
lost profit period. The court found the following:

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