The purpose of this article - the third of three (Part I and Part II) on this topic - is to provide the reader with an understanding Chapter 3 (What Constitutes Best Evidence) of the 2018 Practice Aid as well as certain other publications containing a body of knowledge on the best evidence to support economic damages in a court of law.[1] Prior articles dealt with Chapter 1 (Revenue and Growth Rates) and Chapter 2 (Costs) of the 2018 Practice Aid and related topics.
In 2015, the American Institute of CPAs (AICPA) Forensic and Valuation Services (FVS) issued a practice aid entitled, "Attaining Reasonable Certainty in Economic Damages Calculations." That publication added to the body of knowledge available to experts calculating lost profits and other forms of economic damages.
In November 2018, the AICPA FVS updated the practice aid, also entitled, Attaining Reasonable Certainty in Economic Damages Calculations (hereafter, the 2018 Practice Aid) further adding to the body of knowledge. The 2018 Practice Aid was updated after the AICPA decided that case law research may yield additional topics worth presenting.
AICPA FVS practice aids are prepared by AICPA staff and volunteers and do not reflect AICPA positions, nor establish standards or preferred practices. The AICPA’s position is the practice aids provide illustrative information on the subject matter. The author is both an AICPA and NACVA member and notes in certain of his expert reports, where applicable, that the work performed was guided by the AICPA Standards and Practice Aids; the Litigation Services Handbook, The Role of the Financial Expert, Sixth Edition, Roman L. Weil, Daniel G. Lentz, and Elizabeth A. Evans (the Weil Text); and the Comprehensive Guide to Lost Profits and Other Commercial Damages, Fifth Edition, Nancy J. Fannon and Jonathan M. Dunitz (the Fannon Text).
The concepts of reasonable certainty and best evidence are inextricably interconnected.[2] Evidence is a critical factor to consider when Courts determine whether an expert’s opinion is reasonably certain.[3] There are no universally accepted criteria or requirements about what constitutes best evidence.[4] Like reasonable certainty, best evidence is predicated entirely on the specific facts and circumstances of each case.[5]
Best evidence, as it concerns reasonable certainty and economic damages, was discussed in the Sunward case[6] as follows:
A reasonable basis for computation and the best evidence which is obtainable under the circumstances of the case, and which will enable the jury to arrive at an approximate estimate of the loss, is sufficient.
While the damages may not be determined by mere speculation or guess, it is enough if the evidence shows the extent of the damages as a matter of just and reasonable inference, although the result be only approximate.
However, the plaintiff must establish his damage by the most accurate basis possible under the circumstances. He must produce the best evidence reasonably obtainable.
Chapter 2 of the 2018 Practice Aid analyzed more than twenty instances where Courts addressed the issue of reasonable certainty and/or best evidence in economic damages cases. These cases study plaintiffs’ claims that used the best evidence to support their economic damages claims and the Court’s decisions whether they have or have not done that. The balance of this article attempts to extract the most salient “takeaways” from a few of these cases.[7]
In Eastern Fireproofing,[8] the Court stated:
“[A] plaintiff may not conjure up favorable estimations and hold back more solid but less favorable evidence otherwise available. And the admissibility of a particular class of evidence will depend, to a degree, upon the availability of less speculative evidence. On the other hand, there is no rule of law that only the best available evidence may be used. This would necessarily imply a determination of what class of evidence is best and it seems that such a determination cannot be made without infringing on the proper function of the jury as the finder of fact.”
In Bigelow,[9] the Court concluded there was evidence to support a verdict for damages on at least one theory on which the case was submitted to the jury and, in so doing, did not imply the verdict could not be supported on some other theory. The question for the Court was not whether one class of evidence was better than another but whether each is adequate itself to support a finding based upon it.
The 2018 Practice Aid explains[10] the relevant historical financial data preceding defendant’s alleged bad act may often be the starting point for analysis—for example, the use of a before-and-after approach to calculate lost profits requires the expert to compare plaintiff’s revenues, costs, and profits in the period leading up to the alleged breach to the damage period. “The before-and-after method is probably the most reliable method for proving lost profits as damages. Courts in nearly every jurisdiction have endorsed its use.”[11]
Generally, lost profits experts should consider whether factors other than the defendant’s alleged bad act caused changes between the pre-damage and post-damage period. Such an analysis could not typically be done without some consideration of the underlying historical financial data.[12]
In Travellers,[13] plaintiff entered into a joint venture agreement for the mass marketing of tours. The Court concluded[14] the statistical evidence presented at trial to establish damages was of the same type used and relied upon by the parties in conducting their own businesses, the ratio analysis relied on figures derived from the litigants’ historical relationship, the ratio analysis was a technique recognized and used in the industry, and was of the same type of data relied on by the litigants in their businesses. The Court found Travellers use of the same type of data used historically by management to make operating decisions to be persuasive.
The 2018 Practice Aid discusses how...
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Michael D. Pakter CPA, CFF, CGMA, CFE, CVA, MAFF, CA, CIRA, CDBV, has more than 40 years of experience in accounting and forensic accounting, business economics and investigations in numerous industries and diverse engagements, including more than 20 years of experience in economic damages and business valuations. He has submitted expert reports in several jurisdictions and testified in arbitrations, regulatory proceedings and litigated disputes. State, Federal and Bankruptcy Courts, as well as arbitral bodies, have recognized him as an expert in accounting, financial analysis, forensic accounting, economic damages, business valuation and business economics.
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