Page 65 - Economic Damages Calculation

Chapter 4

Newly Established Businesses

New Businesses and Reasonable Certainty in Damages

As discussed in earlier chapters, courts frequently are concerned with the proof required to raise a lost
profits calculation beyond mere speculation. This chapter addresses considerations for the expert when a
new business is involved. In looking at questions of recovery, courts have characterized these businesses
as "new," "unestablished," "unproved," "unproven," or even as a "start-up." But what does this mean for
the expert?

Many experts may have been engaged to quantify the harm suffered by a new business and recognize
the unique challenges that such engagements involve. By their very nature, new businesses typically
lack operational history or have only a limited period of sales or profits, which creates skepticism re-
garding the accuracy of damages models for new businesses. For example, experts who perform calcula-
tions of lost profits of newly established businesses confront questions such as the following:

• Will or would the business ever generate a profit?

• Is the management team capable of growing the business?

• Will or would consumers buy the product under development?

• Will or would the technology work?

• Does or would the company have appropriate access to capital and funding?

• Will or would the federal government approve the product for consumer use?

Thus, courts have grappled with the extent to which new businesses should be entitled to recover any al-
leged lost profits. The discussion and cases identified in this chapter reflect concepts that the expert may
wish to consider when calculating lost profits for a new business — from the new business rule and its
practical application today fn 1 to facts to which courts have pointed in either accepting or rejecting a lost
profits analysis. The analysis presented here is for illustrative purposes, with the hope that the infor-
mation will provide some guidance regarding analyses that are often considered by courts when faced
with a new business’ lost profits claim.

fn 1 See explanation and discussion of the new business rule in the immediately following section.

© 2020, Association of International Certified Professional Accountants 63