Michael B. Lehner, CPA/ABV, CFE, ASA
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Loss-of-value damages upheld despite survival of business

commercial tort claims, courts damage plaintiff suffered

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The U.S. Court of Appeals for the Eighth Circuit recently upheld a $1.5 million damages award for tortious interference with business relationships and breach of the duty of loyalty to an employer. The court found that, though the plaintiff’s business wasn’t completely destroyed, its expert’s calculation of damages based on a total loss of value supported the jury’s verdict. Here are the details.

Postsale misconduct

The owner of West Plains, an agricultural commodity trading business, sold the company to the plaintiff in March 2012. The seller declined the buyer’s offer of employment.

One of the business units sold was a small freight brokerage operation, called CT Freight (CT). After the sale, most of CT’s employees stayed with the company. Although the employees weren’t required to sign noncompete agreements, the buyer had them sign an employee handbook that prohibited “conflicts of interest and disclosing confidential information to a competitor.”

CT’s top 20 customers generated 70% to 75% of its revenue. Shortly after the sale, the seller began working with CT’s key employees to transfer CT’s largest accounts to the seller’s new company (RFG Logistics). The key employees secretly provided the seller with confidential information, including customer lists, and recruited CT’s employees. In February 2013, 10 of CT’s employees submitted their resignations and went to work for RFG Logistics.

The plaintiff’s expert testified that, in the months following the mass resignations, CT lost sales from its top 20 customers. Then RFG Logistics, “which previously hadn’t had much sales, [had] sales from these same customers.”

Lost business value or profits

The plaintiff’s expert testified that the loss of CT’s top customers was “effectively a total loss.” He valued CT before the mass resignations in February 2013 at $2,131,000, based on the value of “future profits.” He also claimed that, by October 2013, CT had suffered $330,000 in “actual losses” in an attempt to “mitigate the damage and rebuild the business.”

Before the trial, the defendants filed a motion in limine, seeking to exclude testimony on the expert’s total loss theory. The defendants cited cases in other jurisdictions, which indicate that the proper measure of damages is the market value of the business if a business is completely destroyed. However, a plaintiff may be entitled to only lost profits if the business isn’t completely destroyed. A business may not recover both lost profits and the lost market value of the business.

The district court noted that Nebraska law, which applied in this case, was silent on this issue. But it concluded that a plaintiff wasn’t required “to show complete destruction as a [prerequisite] to recovery on a lost value theory.” Instead, the critical inquiry was whether the jury could properly find a causal relationship between the defendants’ alleged wrongdoing and the plaintiff’s alleged loss in overall value as a going concern, and calculate those damages with reasonable certainty.

On appeal, the Eighth Circuit determined that the district court had committed no error in allowing the plaintiff to present this evidence. It upheld the $1.5 million damages award, concluding that it “was considerably less” than the expert’s estimate of business value before the mass resignations, and “reflected an amount a reasonable jury could have believed would fairly compensate [CT].”

No expert for the defense

In commercial tort claims, financial experts can make or break a case. In West Plains, it appears that the defendants offered no expert testimony. Instead, they relied on various legal arguments as to why their conduct wasn’t unlawful. If the defendants had hired an independent financial expert, either to rebut conclusions made by the plaintiff’s expert or to independently estimate economic damages, the outcome of the case might have been different.

Sidebar: Should you obtain a separate business appraisal review?

The Uniform Standards of Professional Appraisal Practice (USPAP) establish specific standards for conducting appraisal reviews. And several appraisal organizations offer accreditation programs specific to reviews.

However, in practice, appraisal reviews tend to be more informal, and many don’t comply with USPAP standards. It’s common for a business valuation expert to prepare a written report and then critique the opposing expert’s report.

In some cases, there may be significant advantages to retaining a separate expert to formally review the opposing expert’s valuation, including to:

Preserve credibility. Using your primary appraisal expert to critique an opponent’s expert may create a perception of advocacy. But an independent reviewer may have greater credibility, especially if he or she is accredited in appraisal review.

Maintain focus. Using a separate reviewer allows your primary expert to focus on his or her testimony without the distraction and time commitment involved with evaluating and rebutting the testimony of other experts.

Minimize scrutiny. Using one expert to value the business and perform a review gives opposing counsel a second opportunity to cross-examine your primary appraisal expert. This may be damaging to his or her direct testimony.

Be prepared. In addition to reviewing the opposing expert’s report, an independent reviewer can review your expert’s report. This can help you identify potential vulnerabilities and prepare possible explanations before deposition or trial.

Michael Lehner

This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. In addition, any discounts are used for illustrative purposes and do not purport to be specific recommendations.