Measuring Business Interruption Losses and Other Commercial DamagesAn Economic Approach
<p><b>Measure business interruption losses with confidence</b></p> <p>You hope for the best and plan for the worst. It’s your job. But when the unimaginable happens, are you truly prepared for those business interruption losses?</p> <p><i>Measuring Business Interruption Losses and Other Commercial Damages </i>is the only book in the field that explains the complicated process of measuring business interruption damages after you’ve been hit by the unexpected, whether the losses are from natural or man-made disasters, or whether the performance of one company adversely affects the performance of another.</p> <ul> <li>Understand the methodology for how lost profits should be measured</li> <li>Deal with the many common types of cases in business interruption lawsuits in commercial litigation</li> <li>Take a look at exhibits, tables, and graphs</li> <li>Benefit from updated data, case studies, and case law references</li> </ul> <p>Don’t get caught off guard. Get ahead of planning for measuring your interruption losses before disaster strikes.</p>
<p><b>Chapter 1 Introduction 1</b></p> <p>Development of the Field of Litigation Economics 2</p> <p>Development of the Field of Forensic Accounting 3</p> <p>Qualifications of an Economic Expert 5</p> <p>Qualifications of an Accounting Expert on Damages 8</p> <p>Interdisciplinary Nature of Commercial Damages Analysis 8</p> <p>Difference Between Disciplines of Economics and Finance 10</p> <p>Finding a Damages Expert 11</p> <p>Critically Reviewing a Potential Expert’s Curriculum Vitae 12</p> <p>Getting the Damages Expert on Board Early Enough 18</p> <p>Courts’ Position on Experts on Economic Damages 19</p> <p>Standards for Admissibility of Expert Testimony 21</p> <p>Exclusion of Experts 25</p> <p>Trends in <i>Daubert </i>Challenges to Financial Experts 25</p> <p>Expert Reports 28</p> <p>Defense Expert as a Testifying Expert, Not Just a Consultant 33</p> <p>Quantitative Research Evidence on the Benefits of Calling a Defense Expert 35</p> <p>Treatment of the Relevant Case Law 36</p> <p>Legal Damage Principles 36</p> <p>Other Types of Damages Cases 42</p> <p>Summary 46</p> <p>References 46</p> <p><b>Chapter 2 Economic Framework for the Lost Profits Estimation Process 51</b></p> <p>Foundation for Damages Testimony 51</p> <p>Role of Assumptions in Damages Analysis 52</p> <p>Hearsay 53</p> <p>Approaches to Proving Damages 55</p> <p>Causality and Damages 59</p> <p>Using Demonstrative Evidence to Help the Client Understand Its Losses or Lack of Losses 67</p> <p>Causality and Loss of Customers 68</p> <p>Graphical Sales Analysis and Causality 69</p> <p>Causality and the Special Case of Damages Resulting from Adverse Publicity 71</p> <p>Length of Loss Period: Business Interruption Case 72</p> <p>Length of Loss Period: Plaintiff Goes Out of Business 77</p> <p>Length of Loss Period: Breach of Contract 78</p> <p>Methodological Framework 79</p> <p>Summary 82</p> <p>References 83</p> <p><b>Chapter 3 Economic Analysis in Business Interruption Loss Analysis 85</b></p> <p>Economic Fluctuations and the Volume of Litigation 85</p> <p>Macroeconomic Analysis 86</p> <p>Definition of a Recession 86</p> <p>Measuring Economic Growth and Performance 87</p> <p>Business Cycles and the Movement of GDP Components 90</p> <p>Business Cycles and Economic Damages 95</p> <p>Varying Responses to Business Cycles Across Industries 97</p> <p>Using More Narrowly Defined Economic Aggregates 99</p> <p>Quantifying the Strength of the Relationship Between Selected Economic Aggregates and Firm Performance 101</p> <p>Implementing Inflationary Adjustments 104</p> <p>Regional Economic Trends 108</p> <p>Quality and Timeliness of Regional Economic Data 109</p> <p>International Economic Analysis 111</p> <p>Globalization of Supply and Demand 113</p> <p>Summary 115</p> <p>References 116</p> <p><b>Chapter 4 Industry Analysis 119</b></p> <p>Sources of Industry Data 119</p> <p>North American Industry Classification System 125</p> <p>Retaining an Industry Expert 132</p> <p>Conducting an Industry Analysis 133</p> <p>Relating Industry Growth to the Plaintiff’s Growth 136</p> <p>Other Industry Factors 138</p> <p>Yardstick Approach and Industry Analysis 141</p> <p>Summary 144</p> <p>References 145</p> <p><b>Chapter 5 Projecting Lost Revenues 147</b></p> <p>Projections Versus Forecasts: Economic Versus Accounting Terminology 147</p> <p>Using Graphical Analysis as an Aid in the Forecasting Process 148</p> <p>Methods of Projecting Lost Revenues 153</p> <p>Curve‐Fitting Methods and Econometric Models 158</p> <p>Understanding Regression Output and Diagnostics 161</p> <p>Common Problems Affecting Regression Models 162</p> <p>Confidence in Forecasted Values 167</p> <p>Frequency of the Use of Econometric Techniques in Commercial Litigation 169</p> <p>Seasonality and the Forecasting Process 177</p> <p>Capacity Constraints and Forecasts 179</p> <p>Sensibility Check for the Forecasted Values 180</p> <p>Projecting Lost Sales for a New Business 181</p> <p>Projecting Losses for an Unestablished Business 186</p> <p>Summary 188</p> <p>Appendix 189</p> <p>References 197</p> <p><b>Chapter 6 Cost Analysis and Profitability 199</b></p> <p>Presentation of Costs on the Company’s Financial Statements 200</p> <p>Measures of Costs 201</p> <p>Profit Margins and Profitability 201</p> <p>Appropriate Measure of Profitability for a Lost Profits Analysis 202</p> <p>Burden of Proof for Demonstrating Costs 206</p> <p>Fixed Versus Variable Costs 207</p> <p>Using Regression Analysis to Estimate Costs as Opposed to More Basic Methods 212</p> <p>Pitfalls of Using Regression Analysis to Measure Incremental Costs 212</p> <p>Possible Nonlinear Nature of Total Costs 213</p> <p>Limitations of Using Unadjusted Accounting Data for Measuring Incremental Costs 217</p> <p>Treatment of Overhead Costs 220</p> <p>Must a Plaintiff Be a Profitable Business to Recover Damages? 224</p> <p>Mitigation of Damages 225</p> <p>Cash Flows Versus Net Income: Effects on the Discounting Process 230</p> <p>Recasted Profits 232</p> <p>Firm‐Specific Financial Analysis 238</p> <p>Cross‐Sectional Versus Time Series Analysis 240</p> <p>Summary 240</p> <p>References 241</p> <p><b>Chapter 7 Time Value of Money Considerations 245</b></p> <p>Determination of Interest Rates 246</p> <p>Types of Interest Rates 246</p> <p>Financial Markets: Money Market Versus Capital Market 247</p> <p>Money Market Securities and Interest Rates 247</p> <p>Capital Market 249</p> <p>Real Versus Nominal Interest Rates 250</p> <p>Determinants of Interest Rates 255</p> <p>Prejudgment Losses 261</p> <p>Components of the Cost of Capital 263</p> <p>Discounting Projected Future Profits 269</p> <p>Should the Risk‐Free Rate Be Normalized? 272</p> <p>Common Errors Made in Discounting by Damages “Experts” 276</p> <p>Summary 282</p> <p>References 283</p> <p><b>Chapter 8 Business Valuations 287</b></p> <p>Legal Standard for Business Valuations in Business Interruption and Business Failure Lawsuits 287</p> <p>Lost Profits Versus Lost Business Value 290</p> <p>Business Valuation Framework 292</p> <p>Public Versus Private Companies 293</p> <p>Business Valuation Parameters 294</p> <p>Revenue Ruling 59–60 and Factors to Consider in Valuation 294</p> <p>Valuation Concepts 298</p> <p>Capitalization of Earnings 304</p> <p>Adjustments and Discounts 308</p> <p>Summary 314</p> <p>References 316</p> <p><b>Chapter 9 Intellectual Property 319</b></p> <p>Patents 319</p> <p>Computation of Damages for Patent Infringement 325</p> <p>Legal Requirements Necessary to Prove Lost Profits 325</p> <p>Royalty Arrangements 333</p> <p>Copyrights 341</p> <p>Measurement of Damages for Copyright Infringement 344</p> <p>Trademarks 347</p> <p>Trade Secrets 352</p> <p>Summary 355</p> <p>References 357</p> <p><b>Chapter 10 Securities‐Related Damages 361</b></p> <p>Key Securities Laws 361</p> <p>Damages in Securities Litigation 366</p> <p>Fraud‐on‐the‐Market 367</p> <p>Comparable Index Approach 380</p> <p>Event Study Approach 383</p> <p>Examining the Variation in Abnormal Returns 386</p> <p>Limitations of the Event Study Model 391</p> <p>Broker Raiding Cases 394</p> <p>Merger‐Related Damages 400</p> <p>History of Mergers in the United States 400</p> <p>Client‐Broker Claims 405</p> <p>Churning 407</p> <p>References 415</p> <p><b>Chapter 11 Antitrust 419</b></p> <p>Antitrust Laws 421</p> <p>Antitrust Enforcement 423</p> <p>Economics of Monopoly 425</p> <p>Interpretation of Antitrust Violations: Structure Versus Conduct 429</p> <p>Changing Pattern of Antitrust Enforcement 429</p> <p>Antitrust and the New Economy 434</p> <p>Monopolization and Attempts at Monopolization 436</p> <p>Market Definition and Microeconomic Analysis 440</p> <p>Market Power 440</p> <p>Measures of Market Concentration 442</p> <p>Areeda and Turner’s Marginal Cost Rule of Predatory Pricing 452</p> <p>Summary 461</p> <p>References 462</p> <p><b>Chapter 12 Economics of Punitive Damages 467</b></p> <p>Evolving Position of the U.S. Supreme Court on Punitive Damages 467</p> <p>Frequency of Punitive Damages 470</p> <p>Frequency of Punitive Damages and the Shadow Effect of Punitive Damages 471</p> <p>Purposes of Punitive Damages 473</p> <p>Compensatory Versus Punitive Damages 474</p> <p>Criminal Penalties and Punitive Damages in Civil Lawsuits 475</p> <p>Punishment of Corporations and Corporate Governance 475</p> <p>Spillover Effects and Punishment of Corporations 476</p> <p>Deterrence Theory and the Changing Litigation Environment 487</p> <p>Deterrence and Regulatory Processes 490</p> <p>Typical Financial Measures Used in the Determination of Punitive Damages 493</p> <p>Net Worth 494</p> <p>Market Capitalization 497</p> <p>Uncertain Litigation Environment 503</p> <p>Summary 508</p> <p>References 508</p> <p>Index 513</p>
<p><b>DR. PATRICK A. GAUGHAN</b> is President of Economatrix Research Associates, an economic and financial consulting firm specializing in the application of economics and finance to litigated matters. Dr. Gaughan provides various consulting services in the field of litigation economics and finance as well as mergers and acquisitions. He is often called upon to serve as an expert witness in lawsuits and other litigated matters.
<p>Computing damages in business interruption cases requires thorough knowledge of the research and practices in diverse areas of expertise, such as general and forensic accounting, litigation economics, and business law. The <i>Third Edition</i> of <i>Measuring Business Interruption Losses and Other Commercial Damages</i> provides a detailed methodological framework for measuring lost profits for the purpose of determining damages in business interruption lawsuits and related types of commercial damages. Written by a leading expert in applying economics and finance to litigation, this authoritative volume examines every critical aspect of commercial damages analysis. <p>Designed for practical use, this book enables you to quickly find information on a specific topic without needing to read the entire volume—nor does it require that you complete preceding chapters to understand your selected reading. Divided into two parts, this reliable resource first provides deep coverage of business interruption damage analysis, including the lost-profits estimation process and time-value of money considerations. Part Two examines intellectual property, securities-related damages, antitrust damages, and various other types of common commercial damages. <p>Correctly measuring commercial damages involves a broad range of interdisciplinary knowledge. Accountants, for example, will find the book's economic topics highly useful. Acknowledging that few readers are experts in every discipline, the author provides accessible overviews of specialized topics throughout the text. This book emphasizes the important role that economics plays in damages calculations. Experts are given a thorough demonstration of the key roles that macroeconomics, microeconomics, and finance plays in commercial damages analysis. This knowledge is invaluable for experts who testify in commercial lawsuits. <p><i>Measuring Business Interruption Losses and Other Commercial Damages: An Economic Approach, Third Edition</i> is an indispensable resource for anyone working in the field of commercial damages, offering invaluable guidance on the vital economics issues that are relevant to so many different types of cases.
<p><b>The only book that explains the methodology for measuring lost profits in litigation, fully updated and revised</b> <p><i>Measuring Business Interruption Losses and Other Commercial Damages</i> has been the go-to resource for economists, accountants, and attorneys involved in lawsuits or serving as expert witnesses for nearly two decades. This new edition remains the definitive book in the field, demystifying the complex process of measuring lost profits and damages in litigation. Author Patrick A. Gaughan, a respected economic and financial consultant who specializes in litigated matters, offers authoritative guidance on measuring damages in business interruption and breach of contract cases as well as intellectual property, securities and antitrust lawsuits. <p>Providing a step-by-step framework for determining damages in a range of real-world scenarios, this comprehensive volume covers areas such as equity risk premium analysis, lost revenue projections, cost and profitability analysis, and the economics of punitive damages. A wealth of exhibits, tables, graphs, case studies, and references ensures that readers thoroughly understand each essential topic. Now in its <i>Third Edition</i>, this market-leading text features new and revised content in every chapter that reflects recent developments in the fields of economics and finance and changes in relevant case law.
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