COVID 19 Lost Profit Calculations

Understanding the key to lost profits. There seems to be a great deal of misunderstanding when we discuss lost profits with clients. Most of the time they think they are entitled to their sales that they would have made or projected to be made. However, this is unrealistic. When you do not have sales that also means that you probably do not have expenses that typically go with those sales. This is sometimes known as avoidable costs, because costs that would have been incurred in connection with sales, were not incurred because revenues were lost. For example, if you have to pay commissions you would expect your payroll to decrease. Also, you have  to attempts to mitigate or lessen your losses, you cannot take advantage of a bad situation. You have to have a good understanding of cost behaviors when calculating damages. There are basically three types of costs; variable, fixed and semi-variable costs. The formula for lost profits is:  Lost Profits = Lost Revenue – Avoided Costs We have many methodologies and techniques for calculating lost sales and damages. We had a national furniture retailer that contacted us a few years back. They had a location next to a major highway and the furniture store received a lot of traffic from this highway based on a large billboard located on the highway that advertised their stores offerings,  Apparently, people passing would see the large billboard and then pull off at the next exit and make a right turn into the furniture store. At some point however the State of New Jersey undertook a major project to upgrade the highway that resulted in their sign being obstructed and the turn that allowed cars to easily get to their store was closed for over a year. This all occurred during a downturn in the economy and as a result of the lost business the furniture store had to close one of their top locations in the country. This is a tricky case, because we had two factors to deal with; a recession and also the loss of traffic due to the state’s construction on the highway. The furniture retailer needed our firm to calculate not only the lost sales for the prior year but also project the lost sales and profits into the foreseeable future. Essentially, we were stating that not only did they have lost profits, but the construction actually destroyed the business, which meant lost business value. This is a very complex undertaking, because first we had to determine the stores approximate growth rate, then determine lost sales from the recession and lost sales from the construction. Once we had that we then had projected sales into the future. Once we had those numbers, we then had to figure out what type of profits they could expect. We did all the work and went through several rounds of depositions before the case settled out of court. From Robert L. Dunn’s book Recovery of Lost Damages for Profits: The Proximate Cause Rule: “Recovery of damages for lost of profits is subject to the general principle that damages must be proximately caused by the wrongful conduct of the defendant. The principal governs the recovery of all compensatory damages. The requirement that lost profits damages must be proximately caused to be recoverable is expressed in innumerable cases.” Cases Analyzing the Reasonable Certainty Rule: Courts have modified the “certainty” rule into a more flexible one of “reasonable certainty.” In such instances, recovery may often be based on opinion evidence, in the legal sense of that term, from which liberal inferences may be drawn. Generally, proof of actual or even estimated costs is all that is required with certainty. Some of the modifications which have been aimed at avoiding the harsh requirements of the “certainty” rule include: (a) if the fact of damage is proven with certainty, the extent or amount thereof may be left to reasonable inference; (b) where a defendant’s wrong has caused the difficulty of proving damage, he cannot complain of the resulting uncertainty; (c) mere difficulty in ascertaining the amount of damage is not factual; (d) mathematical precision in fixing the exact amount is not required; (e) it is sufficient if the best evidence of the damage which is available is produced; and (f) the plaintiff is entitled to recover the value of his contract as measured by the value of his profits. Key elements of a lost profit claim Plaintiffs loss is proved with a reasonable degree of certainty Trier of fact is satisfied that the wrongful act of the defendant caused the loss of profit There is a basis for the claim, example; breach of contract Three things that must be proved by the plaintiff The defendant breached a legal duty to the plaintiff Defendant’s actions or failure to act damage the plaintiff The plaintiffs damages are proximately related to the defendant’s actions or failure to act   The first step in computing lost profits is to determine the lost revenue.   Typically, we call this the revenue the plaintiff could have earned but for the defendant’s actions.   The three generally accepted ways to estimate lost revenues are: