Lost profits and economic damages was a hot topic at NACVA’s annual conference in San Diego. Four sessions were devoted to this growing area of practice. Insights from these sessions follow:

Key pitfalls: A major cause of problems with a damages analysis is that experts often do not understand the appropriate remedy for a particular action, according to Nancy Fannon (Meyers, Harrison & Pia), co-editor with Jonathan Dunitz, Esq. (Verrill Dana), of the newly published Comprehensive Guide to Economic Damages, Fourth Edition. Another tricky issue the editors raise is dealing with the nuances of how to calculate the damages—including those with respect to the jurisdiction you’re in or which of several available remedies fits the current situation.

In another session, Brian Buss and Doug Bania (both with Nevium) talked about calculating damages from the misuse of intellectual property and defamation over the internet. For example, trademarks can be hidden in metadata to misdirect a competitor's customers who are doing a web search. Also, social media can be a breeding ground for potentially libelous statements using Facebook, blogs, Twitter, and the like. There are tools you can use to ferret out, calculate, and prove damages with respect to internet infringement and defamation. These tools, such as Google Analytics, do not replace, but rather supplement, existing valuation and damages methodologies. Buss and Bania wrote a chapter on this topic in the new Fannon/Dunitz book.

When engaged in a damages case, “stay in your lane,” advises Chris Hamilton (Arxis Financial Inc.). You’re not the lawyer and the lawyer is not the expert, he points out. For example, your reports should not be citing the law. Also, the issue of causation is up to the lawyer, not the expert. He also stressed the importance of telling the story (“communication is key”) and making sure you understand the case at the outset and your role in it (e.g., is there personal injury involved, and, if so, will you be doing that piece of the case?).

Another pitfall when calculating damages is the failure to use an industry specialist when it’s necessary, according to Lari Masten (Masten Valuation). Some industries are unique and require a specialized expert able to issue a report that the damages expert can cite. Don’t let ego or any other reason stop you from advising counsel that an industry expert is needed. Masten cited Blair-Naughton, LLC v. Diner Concepts (available here from BVLaw—subscription required). In this case  the expert was excluded because he relied on information from his client, who the court said was not an expert in the industry.

There will be more detailed coverage of these sessions in the August issue of Business Valuation Update.