Page 87 - Economic Damages Calculation

The plaintiff’s damages expert was the president of Matrix Energy Corporation, the company the plain-
tiff had hired to build the fuel alcohol plant. At trial, the jury returned a verdict in favor of Farm Crop
Energy, awarding $295,000. The trial court denied the defendant’s motion for a new trial, a ruling that
the Court of Appeals affirmed. The Supreme Court of Washington then took up the defendant’s petition
to consider whether "the trial court err[ed] in allowing the jury to consider lost profits." In its analysis on
appeal, the Supreme Court of Washington referenced that Farm Crop Energy’s claim for lost profits was
supported solely by the testimony of its expert.

We note that the proposed fuel alcohol plant from which the anticipated profits were to flow was
not built. None of the officers or investors in Farm Crop had built or operated a similar plant.
Farm Crop relied solely on expert testimony at trial to substantiate its claim for lost profits. fn 87

The plaintiff’s expert had been a bank loan officer and venture capitalist, but did not have experience in
the industry at issue. In describing the substance of the opinion as to lost profits, the Supreme Court not-
ed the following:

The expert testified in generalities, without dollar amounts or percentages, as to construction and
operation costs. Additionally, he made certain assumptions about time and costs of construction,
expenses of production, and sales. He assumed an annual output of 1 million gallons. No North-
west plant of which he was aware had ever produced such amount in a year. fn 88

The Supreme Court summarized the expert’s analysis as being from "a former bank employee who had
no technical knowledge of ethanol plants" and whose analysis was premised on a plant producing 1 mil-
lion gallons of fuel alcohol in the first year, despite the expert being unaware of any plant in the 3
northwestern states that had such a production record. fn 89 The Supreme Court noted that the plaintiff’s
expert "candidly admitted that his pro forma estimate of future profits was ‘an uneducated judgment.’" fn
90

In considering the issues, the Supreme Court of Washington stated the following:

In Larsen, . . . the new business rule should not bar recovery of lost profits when a reasonable es-
timation of damages can be made through analysis of market conditions and a profit showing of
identical or similar businesses in the vicinity, operating under substantially the same conditions.
The court concluded that expert testimony could alone form a sufficient basis for an award of
lost profits.

...

[T]here was no substantial and sufficient basis upon which [the expert] based his "expert" testi-
mony regarding Farm Crop’s lost profits. Here, the jury was not presented with evidence based

fn 87 Id. at 234.

fn 88 Id.

fn 89 Id. at 235.

fn 90 Id. at 902-03.

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