Calculating damages in the litigation context is a specialty within business valuation, which is really to say it’s a niche within a niche. While there is much to be said about getting a solid business valuation practitioner to assist you in determining damages, it gets you nowhere if they do not adhere to the Federal Rules of Civil Procedure, or if their conclusions are thrown out due to a successful Daubert challenge.
Both the business appraiser and the legal counsel must keep a number of key factors in mind when engaging in damage calculations. Listed below are ten such factors to consider, among many.
1. Expert witness reports fall under the Federal Rules of Civil Procedure 26(a)2(b). Make certain your damages expert is familiar with the procedures therein. A strict interpretation of 26(a)2(b) limits evidence introduced in court to that which is actually written or displayed in the report. That means The report must be court-ready and contain all the content on which you and your expert plan to rely to establish (or refute) damages.
2. The financial expert will have an extensive information request. It is in your best interests to fulfill it completely. In a perfect world, all of the data requested can be a) found and b) delivered on a timely basis. Practically speaking, any lists you receive should be prioritized according to importance. Establishing damages will be difficult, if not impossible, if that essential information is unavailable.
3. Make depositions and interrogatories available to the expert. They provide invaluable information about the case. The more your financial expert knows and understands about the situation, the more likely he or she will develop a refined understanding of damages. The result will be a more robust opinion and a more thorough and defensible report.
4. The expert will know that a choice must be made between using an ex ante and ex post approach to lost profits. While some notable professionals choose between these two separate camps, the best approach depends on the facts and circumstances of the particular case. Make sure you discuss the reasonableness of each approach, and allow the appraiser to make an informed decision.
5. The financial expert will know that damage calculations must be valued on a pre-tax basis. Your expert will also understand the role of pre-judgment interest, and how to apply discounts properly when using ex post and ex ante approaches. If you – as counsel, plaintiff or defendant – are concerned about statutory interest rates, discount rates, or taxation issues, discuss them with your appraiser.
6. Daubert challenges are real, and really unpredictable. Expert testimony must be based on methods that 1) are peer reviewed, 2) can be tested, 3) have known error rates, and 4) are generally accepted by practitioners in the realm. McClain vs. Metabolife offers a good discussion of Daubert. A note for our friends in California: you are in a Frye state, which simplifies the challenge, but only slightly, to a single “generally accepted” test. A note for appraisers in general: even the most respected experts in the field of business appraisal have lost Daubert challenges. Don’t underestimate the possibility of your report being thrown out.
7. When selecting a financial expert, competence is critical; however, you also want the ability to communicate confidently. How will the expert appear to the judge or jury? How will he or she contribute to (or detract from) his or her position in deposition, or in direct- or cross-examination? Will the bench or jury enjoy and learn from his or her presence and testimony?
8. Said differently, avoid the jackass. Pardon the expression. First off, life’s too short to work with a professional of such description. More to the point, the judge and jury expect to see expertise confidently displayed and effectively communicated. Just like you, they want nothing to do with the jackass. Because, after all, life’s too short.
9. Do not attempt to direct the appraiser, appraisal or result. Establish and maintain integrity in the process, while the expert arrives at his or her own conclusions. To do otherwise only weakens your case, and possibly harms your relationship with the appraiser. While you may be the advocate for your client, do your best to protect your appraiser from subjectivity or bias. An appraiser is an advocate for the truth, as he or she sees it, and is retained to assist the court in calculating (or refuting) alleged damages. It is dangerous, and possibly self-defeating, to confuse the role of the appraiser with advocacy.
10. One for the BV pro: your purpose is to help the judge and jury. Jury trials are often complex, confusing and daunting for the jury. Help them. The jury understands that this is an adversarial “truth contest,” and they desperately want to find someone they trust. They crave the scientific method; they want a witness for the truth. However, your work does not speak for itself. The truth will not simply appear on its own: You must “reveal” it to the court. You must persuade the judge and/or jury of your position. Do great work. Follow the rules flawlessly. Then stand by your work, speak clearly and confidently, and you will do well by the jury and the judge.