Title Details

PATRICK A. GAUGHAN has published eight books, including the award-winning Mergers Acquisitions, and Corporate Restructurings, Fourth Edition, published by Wiley. He is President of Economatrix Research Associates, Inc., a firm that has conducted damages analysis for the past twenty years for corporate clients such as Airbus, GE, GM, Ford, Philip Morris, and Wyeth as well as insurance companies including Liberty Mutual, Zurich, State Farm, and many of the major law firms in the United States.

Preface xv

CHAPTER 1 Introduction 1

Development of the Field of Litigation Economics 1

Development of the Field of Forensic Accounting 2

Qualifications of an Economic Expert 4

Qualifications of an Accounting Expert on Damages 7

Interdisciplinary Nature of Commercial

Damages Analysis 7

Difference between Disciplines of Economics and Finance 10

Finding a Damages Expert 10

Critically Reviewing a Potential Expert’s Curriculum Vitae 12

Getting the Damages Expert on Board Early Enough 17

Courts’ Position on Experts on Economic Damages 18

Standards for Admissibility of Expert Testimony 21

Expert Reports 25

Defense Expert as a Testifying Expert, Not Just a Consultant 28

Quantitative Research Evidence on the Benefits of Calling a Defense Expert 30

Treatment of the Relevant Case Law 31

Legal Damage Principles 31

Other Types of Damages Cases 37

Summary 40

References 41

CHAPTER 2 Economic Framework for the Lost Profits Estimation Process 45

Foundation for Damages Testimony 45

Role of Assumptions in Damages Analysis 46

Hearsay 47

Approaches to Proving Damages 49

Causality and Damages 54

Using Demonstrative Evidence to Help the Client Understand Its Losses or Lack of Losses 61

Causality and Loss of Customers 62

Graphical Sales Analysis and Causality 63

Causality and the Special Case of Damages Resulting from Adverse Publicity 65

Length of Loss Period: Business Interruption Case 66

Length of Loss Period: Plaintiff Goes Out of Business 71

Length of Loss Period: Breach of Contract 72

Methodological Framework 73

Summary 75

References 77

CHAPTER 3 Economic Analysis in Business Interruption Loss Analysis 79

Economic Fluctuations and the Volume of Litigation 79

Macroeconomic Analysis 80

Definition of a Recession 80

Measuring Economic Growth and Performance 81

Business Cycles and Economic Damages 89

Using More Narrowly Defined Economic Aggregates 90

Overstatement of Inflation Statistics 98

Regional Economic Trends 100

International Economic Analysis 104

Macroeconomic and Regional Economic Analysis and the Before and After Method 106

Summary 107

References 108

P1: OTA/XYZ P2: ABC

CHAPTER 4 Industry Analysis 111

Sources of Industry Data 111

New North American Industry Classification System 118

Retaining an Industry Expert 125

Conducting an Industry Analysis 126

Relating Industry Growth to the Plaintiff’s Growth 130

Other Industry Factors 131

Yardstick Approach and Industry Analysis 134

Summary 138

References 138

CHAPTER 5 Projecting Lost Revenues 141

Projections versus Forecasts: Economic versus Accounting Terminology 141

Using Graphical Analysis as an Aid in the Forecasting Process 142

Methods of Projecting Lost Revenues 147

Curve-Fitting Methods and Econometric Models 152

Understanding Regression Output and Diagnostics 155

Common Problems Affecting Regression Models 156

Confidence in Forecasted Values 164

Frequency of the Use of Econometric Techniques in Commercial Litigation 167

Seasonality and the Forecasting Process 175

Capacity Constraints and Forecasts 177

Sensibility Check for the Forecasted Values 178

Projecting Lost Sales for a New Business 179

Projecting Losses for an Unestablished Business 184

Summary 187

Appendix 188

References 196

CHAPTER 6 Cost Analysis and Profitability 199

Presentation of Costs on the Company’s Financial Statements 199

Measures of Costs 201

Profit Margins and Profitability 201

Appropriate Measure of Profitability for a Lost Profits Analysis 201

Burden of Proof for Demonstrating Costs 207

Fixed versus Variable Costs 207

Using Regression Analysis to Estimate Costs as Opposed to More Basic Methods 210

Pitfalls of Using Regression Analysis to Measure Incremental Costs 211

Possible Nonlinear Nature of Total Costs 211

Limitations of Using Unadjusted Accounting Data for Measuring Incremental Costs 215

Treatment of Overhead Costs 218

Must a Plaintiff Be a Profitable Business to Recover Damages? 223

Mitigation of Damages 224

Cash Flows versus Net Income: Effects on the Discounting Process 230

Recasted Profits 231

Firm-Specific Financial Analysis 237

Cross-Sectional versus Time Series Analysis 239

Summary 239

References 240

CHAPTER 7 Time Value of Money Considerations 243

Determination of Interest Rates 244

Types of Interest Rates 244

Financial Markets: Money Market versus Capital Market 245

Money Market Securities and Interest Rates 245

Capital Market 247

Real versus Nominal Interest Rates 248

Determinants of Interest Rates 252

Prejudgment Losses 258

Components of the Cost of Capital 260

Discounting Projected Future Profits 267

Common Errors Made in Discounting by Damages “Experts” 273

Summary 279

References 280

CHAPTER 8 Business Valuations 285

Legal Standard for Business Valuations in Business Interruption and Business Failure Lawsuits 285

Lost Profits versus Lost Business Value 287

Business Valuation Framework 289

Theoretical Value of a Business 290

Public versus Private Companies 291

Business Valuation Parameters 292

Revenue Ruling 59-60 and Factors to Consider in Valuation 292

Valuation Concepts 295

Most Commonly Used Valuation Methods 298

Capitalization of Earnings 302

Comparable Multiples 303

Adjustments and Discounts 307

Summary 312

References 313

CHAPTER 9 Intellectual Property 315

Patents 315

Computation of Damages for Patent Infringement 318

Legal Requirements Necessary to Prove Lost Profits 318

Lost Profits Due to Price Erosion 322

Lost Profits Due to Changing Cost Conditions 325

Royalty Arrangements 326

Copyrights 333

Measurement of Damages for Copyright Infringement 336

Trademarks 339

Trade Secrets 345

Summary 347

References 349

CHAPTER 10 Securities-Related Damages 353

Key Securities Laws 353

Damages in Securities Litigation 358

Fraud-on-the-Market 359

Comparable Index Approach 364

Event Study Approach 367

Broker Raiding Cases 378

Merger-Related Damages 383

History of Mergers in the United States 384

Client-Broker Claims 388

Churning 390

Appendix 10A: Case Study: In Re Computer Associates International, Inc. 397

References 404

CHAPTER 11 Antitrust 407

Antitrust Laws 408

Antitrust Enforcement 411

Economics of Monopoly 411

Changing Pattern of Antitrust Enforcement 416

Antitrust and the New Economy 421

Monopolization and Attempts at Monopolization 421

Market Definition and Microeconomic Analysis 426

Market Power 426

Measures of Market Concentration 428

Common Types of Antitrust Cases 430

Summary 442

References 443

CHAPTER 12 Economics of Punitive Damages 447

Evolving Position of the U.S. Supreme Court on Punitive Damages 447

Frequency of Punitive Damages 450

Frequency of Punitive Damages and the Shadow Effect of Punitive Damages 451

Purposes of Punitive Damages 452

Punishment of Corporations and Corporate Governance 453

Spillover Effects and Punishment of Corporations 454

Deterrence Theory and the Changing Litigation Environment 465

Deterrence and Regulatory Processes 467

Typical Financial Measures Used in the Determination of Punitive Damages 470

Net Worth 472

Market Capitalization 474

Uncertain Litigation Environment 480

Summary 483

References 484

Index 489