Page 68 - Economic Damages Calculation

evidence versus a rule of law. fn 14 The Restatement (Second) of Contracts also implicitly recognizes the
role of the alternative analytical techniques in calculating damages. fn 15

When estimating "but for" revenues or profits, experts have several tools available. Case law notably in-
cludes reference to the before-and-after method and the yardstick method, as well as statistical tools like
regressions (which use elements of the before-and-after and yardstick methods). While the new business
rule relies exclusively on past data as would be used in the before-and-after method, the yardstick meth-
od does not necessarily require past data for its implementation.

For example, if a business has in the past had annual profits of $100,000, growing at 5% per year, the
before-and-after method would use the past levels and trends as at least a starting point in estimating
"but for" profits. The yardstick method would likely look to similar businesses and use their experience
and performance in estimating "but for" profits. The yardstick method is not necessarily blind to past da-
ta, as it might look at the historical relationship between the yardstick entity and the entity being esti-
mated for the "but for" profits. However, in some situations, a historical relationship between the yard-
stick and the estimated entity may not exist, but that does not necessarily foreclose the use of the yard-
stick method.

When used to estimate "but for" revenues or profits, a regression typically looks at the statistical rela-
tionship between independent or explanatory variables and the dependent or estimated variable (reve-
nues or profits). This normally is done in a time series, but can also be done in a cross-sectional analysis,
looking at yardstick or comparable entities or other metrics that demonstrate a statistically significant re-
lationship to the dependent variable. For example, the revenue of a gas station or service station would
likely be influenced by gas prices. The price of repairs at the station would likely be influenced by the
cost of labor. Or, the sales of other stations in the area may show a high degree of correlation. Independ-
ent variables like these are often used in performing regressions, such that panel data (time series and
cross-sectional data) are helpful in estimating "but for" revenues and profits.

The availability and acceptance of methods such as these have impacted the new business rule and the
manner in which it has been modified and implemented in courts. Today, the stricter form of the new
business rule appears to be followed in only a handful of states, and even those states have seen the
courts carve out exceptions that allow for recovery. In the vast majority of remaining jurisdictions,
courts emphasize the sufficiency of the evidence of lost profits suffered by an unestablished business, ra-
ther than focusing on a categorization of plaintiff as a new or unestablished business. However, whilst
these courts permit recovery for new or unestablished businesses, the case law indicates that any analy-
sis is likely to receive heightened scrutiny by courts.

Notably, the relevant question of what qualifies as a sufficiently reliable projection used in a damages
calculation is not always whether a business entity is "new," but rather whether a product or line of busi-
ness is or is not sufficiently established. While the term "new business rule" generalizes to a question of
whether a business (for example, a corporation) has a history, often courts are interested in whether the
"but for" projections are well supported, which projections may relate to, for example, a new product,
new geographical area, or a new store.

fn 14 Bollas, supra note 11, at 870.

fn 15 Restatement (Second) of Contracts (1981), Section 352 4(b).

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