3 Methods for Calculating Lost Profits by Scott Bouchner, CMA, CVA, CFE, CIRA
The $787.5 million settlement recently reached between Dominion Voting Systems and Fox News is historic for many reasons, including both parties’ ability to agree upon a payout amount just minutes before the trial was set to begin.
In its initial suit, Dominion sought damages totaling $1.6 billion for Fox News’s false and defamatory statements that their voting machines were used to rig the 2020 presidential election. The amount, which Dominion’s financial experts estimated based on industry-standard valuation metrics, was broken down to include $6 million in lost profits and $1 billion in lost enterprise value. A pleading later filed by Dominion stated the following:
“All of this evidence (and more) supports the conclusion that Fox’s defamation has irreparably poisoned Dominion’s name and damaged Dominion’s business. As such, Dominion has presented an expert report and testimony from a well-respected financial expert, Mr. Mark Hosfield, that estimates a $920 million diminution of Dominion’s enterprise value. He also calculates potential additional damages for lost growth opportunities. Ex.738, Hosfield Rep.p.5. Mr. Hosfield’s estimate of $920 million appropriately considers the financial impact of lost customers and opportunities discussed in his report. See id. pp.24-51.”
Commercial litigation cases such as this involve claims of lost profits one business suffered due to the actions of another party. To recover damages, plaintiffs must prove causation with reasonable certainty (that their loss is related to the defendant’s breach or wrongful act) and that the loss is quantifiable based on reliable factors. Generally, this requires an estimation of lost revenue, which damages experts can compute using one of several methods.
Before and After Method
Comparing a plaintiff’s financial performance before a damage event to its performance after that event helps to demonstrate that its pre-event profits and income would have continued if not for the defendant’s action. This method of estimating damages is appropriate when the plaintiff has reliable data showing a historical track record of profitability. It also works well in an environment where competition is unchanged, and growth trends are steady and predictable. With this in mind, damages experts must conduct due diligence to determine if factors other than the defendant’s action could have harmed profits.
Yardstick or Benchmark Method
This method for estimating lost profits benchmarks and compares the plaintiff’s business performance with the revenue and profits reported by comparable businesses in similar industries. When this data exists, it can account for changes in specific sectors and markets and provide experts with objective facts to establish that the plaintiff could have realized comparable profits if not for the defendant’s action.
Market Share Method
Estimating lost profits based on the difference between a plaintiff’s market share before a damaging event and after can help experts differentiate a loss caused by a defendant’s action from those resulting from industrywide changes. While this method is reliable when a business fits within a particular sector for which historical data exists, it may be more challenging for experts to make a damage assessment due to dynamic markets.
The advisors and accountants with Berkowitz Pollack Brant’s Forensic and Advisory Services practice have extensive experience working with law firms, attorneys and their clients to conduct economic damages analysis, business valuations and accounting investigations and to provide expert testimony in commercial disputes and matters involving corporate fraud.
About the Author: Scott Bouchner, CMA, CVA, CFE, CIRA, is director-in-charge of Forensic and Advisory Services with Berkowitz Pollack Brant CPAs + Advisors, where he serves as a litigation consultant, expert witness, court-appointed expert and forensic investigator on several high-profile cases. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or info@bpbcpa.com.
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