Page 61 - Calculating Lost Profits

Defendant’s Cost of Unsecured Borrowing

In some situations, courts have awarded prejudgment interest at the defendant's cost of unsecured bor-
rowing based on the idea that the defendant has effectively borrowed the money from the plaintiff for
the time between when the damages were lost and the time of the judgment. fn 18 Use of this rate ac-
counts for risks inherent in the defendant's business, including default and bankruptcy risk. It is helpful
to seek out and analyze the defendant's borrowing history when analyzing this rate for use in a prejudg-
ment interest award.

Plaintiff’s Cost of Borrowing or Return on Investment

When a plaintiff has borrowed money (particularly if it exceeds the amount of the damages award),
courts have awarded prejudgment interest using the plaintiff's cost of borrowing, and particularly unse-
cured borrowing, if there is evidence of such borrowings. This is because, as described previously, the
defendant has effectively benefited from an unsecured loan during the period in question. In addition, it
is likely that, in some instances, a plaintiff would have paid off its borrowing at its highest rate of inter-
est if the monies in question were available earlier. fn 19

As the court wrote in Mars, Inc. v. Coin Acceptors, Inc., 513 F.Supp. 2d 128, 133 (D.N.J. 2007), "... in
order to make [the plaintiff] whole, the Court must determine whether it would have used the money to
invest, or to avoid borrowing, determine the percentage yield that [the plaintiff] either would have
earned, or avoided paying, and then charge that rate to the [defendant] as prejudgment interest."

Plaintiff’s Cost of Capital or Cost of Equity

The plaintiff's cost of capital (or cost of equity) has been argued as appropriate for the award of pre-
judgment interest on the theory that a plaintiff has been deprived of monies it would have had available
to invest in the company, and the best evidence of the expected return on investment in a company is its
cost of capital. This can be compelling when a plaintiff has raised debt and equity financing, providing
evidence of capital markets' views of the returns required on an investment in the plaintiff company. The
cost of capital and cost of equity in the context of discount rates are addressed in greater detail in the
AICPA practice aid Discount Rates, Risk, and Uncertainty in Economic Damages Calculations.

The Prime Rate and Other Rates

The prime rate (an index rate at which commercial banks make loans) has frequently been used in
awards of prejudgment interest, frequently as a representation of a lending rate for companies (for ex-
ample, the plaintiff or defendant). In addition, on occasion, federal courts have used rates such as the
composite bond rate, commercial paper rates, and state law prejudgment interest rates.

The Role of the Practitioner

fn 18 ABT Sys., LLC v. Emerson Elec. Co., No. 4:11CV00374 AGF, 2014 U.S. Dist. LEXIS 77136 (E.D. Mo. June 6, 2014); In re Ma-
hurkar Double Lumen Hemodialysis Catheter Patent Litig., 831 F. Supp. 1354, 1394–95 (N.D. Ill. 1993).

fn 19 K-TEC v. Vita-Mix, 765 F. Supp. 2d 1304, 1316 (D. Utah 2011). Stryker Corp. v. Zimmer Inc., No. 1:10-CV-1223, 2013 U.S.
Dist. LEXIS 171817 (W.D. Mich. Aug. 7, 2013).

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