“In my experience, most lawyers don’t understand the power of numbers, and they may ignore the discount rate in preparing for trial,” attorney and author Robert Dunn told attendees at last week’s 24th Annual Seminar by the Valuation Roundtable of San Francisco in Oakland, CA. “To a lawyer, 8% versus 12% may not sound like a lot, but of course as you all know it can make a substantial impact on the calculation of damages. After your retention in a litigation matter, make sure to graphically explain to your attorney the difference the discount rate can make,” Dunn suggested.
More good advice: In a notable number of lost profits and economic damages cases, Dunn sees only the plaintiffs presenting expert evidence on the discount rate. So if you’re in a case defending against a claim of damages, it’s even more important to alert your attorney to the need (and your ability) to develop and present discount rate testimony, Dunn explained. If not—and if the trial court accepts the plaintiff’s discount rate—then an appellate court is not likely to reject or adjust it without competing/opposing evidence from the other side.
And did you know there are only twelve significant economic damages cases that discuss the discount rate in any meaningful detail? The leading case is Energy Capital Corp. v. United States, 302 F.2d 1314 (Fed. Cir. 2002), in which the trial court used a 5.9% risk-free rate, the then-current return on 10-year Treasury notes. On appeal, the Federal Circuit Court of Appeals held that a risk-free rate was inappropriate, because it failed to factor in the risk that the plaintiff would not realize the cash flows (projected in its damages claim).
The court reviewed evidence from the plaintiff’s expert (risk-adjusted rate of 10.5%) and the defendant’s (25%), and chose the plaintiff’s as the more realistic. “There’s a lot of meat in the case,” Dunn said, including discussion of using ex post (date of judgment) vs. ex ante (date of breach) for determining overall damages. To add this important case to your legal library, we’ve just posted it as a new free download. The court opinion and case abstract is also available at BVLaw™—along with the rest of the “dirty dozen” discount rate cases.
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