Page 42 - Calculating Lost Profits

 a predetermined damages formula (sometimes referred to as liquidated damages).

When using this method to measure lost revenues, the practitioner may develop a model to determine
the revenues anticipated by the parties.

Other Methods

Other approaches may also be appropriate depending on the facts and circumstances involved in the
matter for which lost profits are calculated. When applying other methods, the general principles under-
lying comparability, reasonable certainty, and the methods discussed previously should be considered in
the development of a model.

One example of an alternative method is to estimate lost revenues based on market share data. Under
this approach, the practitioner may analyze the market share data to estimate the percentage of its market
share before and after the wrongful act. The ability to estimate lost revenues using a market share ap-
proach is dependent on the availability of relevant data on which to base the analysis, among other con-
siderations.

Another method is to use a multiple regression, which is a statistical tool to estimate the impact of inde-
pendent variables on a dependent variable (also discussed in chapter 7). A multiple regression can be
used in the development of a revenue projection by evaluating the historical relationship between sales
and independent or explanatory variables such as population, prices, competitors in the market, competi-
tor prices, legislation, and supply costs. Once the relationship has been estimated, based on past data, it
can be applied to future periods to estimate but-for sales, taking into account a wide range of potentially
impactful variables to estimate sales in a world in which only one factor changed: the alleged wrongful
act.

Past and Future Lost Revenues

In many cases, the plaintiff's lost revenues may span a time period before and after the preparation of a
damages calculation or before and after trial. If there are future losses (that is, the loss period extends
beyond the date of trial or the preparation of the lost profits estimate), the practitioner will need to esti-
mate both those future revenues that will be realized by the plaintiff and those revenues that the plaintiff
would have realized but for the wrongful act of the defendant.

The following example highlights this issue, with the solid line representing actual amounts and the dot-
ted lines representing projected amounts. Note that the top line is dotted for the entire loss period, given
that this is the but-for revenue estimate and is projected for both past and future periods. Year 4 is when
the damaging event occurred, and year 6 is when the calculation is made. The bottom dotted line repre-
sents the future projected actual revenues. The space between the top line and bottom line represents the
lost revenues.

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