Page 38 - Calculating Lost Profits

cussion of the issues specific to such businesses is also included in chapter 4, "Newly Established Busi-
nesses," in Attaining Reasonable Certainty in Economic Damages Calculations.

The "Before-and-After" Method

This method compares the but-for revenue, estimated using the plaintiff's performance before the event
or action alleged to have caused lost profits, with the plaintiff's actual (impaired) performance after that
event or action. The underlying theory is that the same entity’s performance from a prior time period ei-
ther is a good proxy or otherwise provides a basis to project the but-for revenue to be estimated. In other
words, but for the defendant's wrongful conduct, the plaintiff would have experienced the same or simi-
lar revenues and profits after the event or action as the plaintiff did before that event or action. In im-
plementation, it may be appropriate to use parts of the plaintiff’s operations, or extrapolate the historical
results, in the but-for revenue estimation. For example, historical prices may be kept constant or adjust-
ed. Alternatively, sales may be adjusted to account for population growth, demonstrated trends, or indus-
try events. The before-and-after method, like all the methods discussed, does not necessarily call for
strict implementation with duplication of historical results.

But-for revenues under this method typically rely on the plaintiff’s historical accounting records. As
such, the practitioner should consider the plaintiff’s sales history and what factors affected its revenues
and growth (or lack thereof) in the "before" period that is used to project lost revenues during the "after"
period. The practitioner should consider whether and to what extent the historical revenues form an ap-
propriate basis for determination of but-for revenues, including the following:

 Are the plaintiff’s revenues affected by seasonality?

 Were there any one-time events or projects that affected revenues?

 How consistent has revenue growth been for the company over periods comparable to the dam-
age period? What factors affected growth? Are these growth rates sustainable?

 Are there any non-violative economic factors that occurred in the "after" period that would have
affected revenues?

 Is there available industry data that corroborate or support the growth rate?

 Are the types of activities used to generate revenues in the "before" period the same activities
used to generate revenues in the "after" period?

 Are there any capacity issues that could limit or have limited growth or revenues?

 Has the business experienced a significant change in management, growth rates, or business ac-
tivities?

 Does the "before" period include the same market and economic conditions, including the same
competitors, as the after period?

 Can the differences between the "before" and "after" period be adequately and reliably accounted
for in the analysis?

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