Page 22 - Calculating Lost Profits

Figure 3.1. Summary of Lost Profits

Typically, the first step in this calculation is to estimate the profits that would have been obtained by the
harmed party (simplified to "plaintiff" fn 3 ) but for the unlawful act during the damage period. This is of-
ten referred to as the but-for scenario or the but-for world. The but-for profits are measured as but-for
revenues less but-for expenses (also referred to as avoidable expenses). Generally speaking, the but-for
world is different from the "actual world" (which is often more accurately described as the "actual or
mitigating world") in several ways. For example, in the but-for world, the plaintiff might have launched
a new product (or done so earlier than when it was actually launched), sold more of a certain product,
expanded to a new location, charged a different price, sold to different customers, saved certain costs, or
earned and been paid more royalties.

Typically, the next step is to subtract the actual profits earned (or anticipated to be earned, in the event
that the effects of the wrongdoing are ongoing as of the time of the damages analysis) from the but-for
profits during the damage period. However, this can be complicated by the issue of mitigation (dis-
cussed in detail in chapter 11), which is an obligation that a plaintiff often has to maximize profits in the
actual or impaired world, even if the defendant’s wrongful acts have hindered the plaintiff’s ability to do
so. fn 4 For example, if as a result of the wrongful acts the American Kitchen Franchisee was unable to
open a restaurant in a specific location but could have opened a restaurant in another location (potential-
ly after a delay or with lower profits), the actual or mitigating world may call for the assumption of
Franchisee mitigating in a reasonable way (for example, opening an alternative restaurant). Often, the

fn 3 Although it may be possible that the injured party may also be a defendant or counterclaim plaintiff, or a claimant (as in an arbi-
tration), the term plaintiff is used throughout this practice aid to refer to the injured party, and the defendant generally refers to the
party accused of the alleged wrongful act.

fn 4 Mitigation may or may not be required, depending on the applicable law. See chapter 11 of this practice aid.

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