Page 82 - Acertaining Economic Damages Calculation

Eateries, Inc. v. J.R. Simplot Co., 346 F.3d 1225 (10th Cir.2003)

Plaintiff Eateries, Inc. was a publicly-traded company that owned and operated many Garcia’s Mexican
Restaurants. Plaintiff sued defendant J.R. Simplot Co. for breach of contract after chile rellenos supplied
by defendant were found to be tainted with salmonella, sickening restaurant customers and stimulating
adverse television and newspaper coverage.

Plaintiff computed damages as the difference between the $9.00 per share value of the publicly-traded
company before the contamination (based on an outside offer to purchase its assets, which was with-
drawn after the contamination) less the $6.92 per share value after the contamination (based upon a price
of $5.125 per share to repurchase shares from an investor plus a court-determined 35% control premi-
um). Based upon this analysis, the District Court awarded Eateries damages of $8.2 million. Both sides
of the case appealed the court’s judgment.

On appeal, the court accepted the pre-acquisition offer price of $9.00 per share as the best evidence of
value, rather than the stock’s actual trading price. Because both Eateries and the potential acquirer testi-
fied that the transaction would have been completed but for the contamination, the court accepted this
value even though the offer was not final and, arguably, subject to change, as argued by Simplot. With
respect to the post-acquisition price, Eateries objected to the court-determined 35% control premium,
arguing that the $5.125 repurchase price already included a premium and was above the stock’s trading
price. The court, however, ruled that the inclusion of this 35% control premium did not constitute re-
versible error.

Fluorine on Call, Ltd. v. Fluorogas Ltd., 380 F.3d 849 (5th Cir. 2004)

This case arose from a Memorandum of Understanding (MOU) between plaintiff, Fluorine on Call, Ltd.
(FOC), a start-up company with the intention to enter the potential market for on-site fluorine generators
for use in the semiconductor industry, and defendant, Fluorogas Limited (Fluorogas), a small company
that developed and manufactured the generators. The MOU granted FOC "the exclusive worldwide right
to manufacture and supply Fluorine generators based on FG Background Technology" and "the non-
exclusive worldwide right to manufacture and supply Fluorine generators based on FG Background
Technology." These rights were granted in exchange for royalties FOC was to pay based on its revenues.
Subsequent to the MOU, Fluorogas sent a letter to FOC terminating their relationship.

Although a case brought by FOC against Fluorogas was pending, The BOC Group PLC (BOC) pur-
chased all of Fluorogas’s stock. As a result of the acquisition, FOC amended its complaint to add claims
against BOC. At trial, the jury found for FOC, also finding BOC derivatively liable, and awarded FOC
"loss of income producing asset" damages totaling $120 million.

FOC claimed to have based its lost asset theory on Schonfeld v. Hillard, which held that a plaintiff could
recover consequential damages in the event of a defendant’s breach equal to the value of the asset lost
due to the breach. Fluorogas challenged the calculation of lost asset damages arguing that FOC did not
prove the damages with reasonable certainty.

FOC’s damages expert calculated the value of the exclusive license, its lost asset, by discounting the
stream of future profits over the 11-year contract period to present value. The expert, however, acknowl-
edged at trial that his lost profits analysis was different than an analysis of what a willing buyer and will-
ing seller would have paid for the MOU on the date it was canceled. The court ruled as follows:

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