CFL Damages Calculation & Economic Analysis 1 — Questions and Answers
Question 1: In a lost profits analysis, the 'but-for' scenario represents:
- The plaintiff's expected performance absent the defendant's wrongful conduct (Correct answer)
- The industry average performance benchmark
- The defendant's actual profits during the damages period
- The plaintiff's performance before the breach occurred
Correct answer: The plaintiff's expected performance absent the defendant's wrongful conduct
The but-for scenario models what the plaintiff's financial performance would have been if the defendant had not engaged in the wrongful conduct.
Question 2: When calculating the present value of future lost profits, the discount rate used should reflect:
- The risk associated with the projected cash flows (Correct answer)
- The prevailing prime lending rate at time of trial
- The plaintiff's cost of equity capital only
- The defendant's weighted average cost of capital
Correct answer: The risk associated with the projected cash flows
The discount rate must reflect the risk inherent in the specific projected cash flows being valued, not a generic market rate.
Question 3: The 'new business rule' in lost profits litigation historically held that a new business could not recover lost profits because:
- Its future profits were considered too speculative to establish with reasonable certainty (Correct answer)
- New businesses lack standing under most commercial statutes
- Startup losses are not recognized as compensable damages
- New businesses must first exhaust insurance remedies
Correct answer: Its future profits were considered too speculative to establish with reasonable certainty
Courts traditionally denied new businesses lost profits claims due to the speculative nature of unproven future earnings, though many jurisdictions have relaxed this rule.
Question 4: In an unjust enrichment claim, the damages measure focuses on:
- The benefit conferred on the defendant, not the plaintiff's actual loss (Correct answer)
- The plaintiff's out-of-pocket expenditures
- The fair market value of services rendered
- The defendant's gross revenues from the challenged conduct
Correct answer: The benefit conferred on the defendant, not the plaintiff's actual loss
Unjust enrichment damages disgorge the benefit wrongfully obtained by the defendant, regardless of whether the plaintiff suffered an equivalent loss.
Question 5: A plaintiff seeking damages for breach of contract has a duty to:
- Mitigate damages by taking reasonable steps to reduce losses (Correct answer)
- Elect between contract and tort remedies before filing suit
- Accept the defendant's cure offer within 30 days
- Obtain an independent appraisal before claiming lost value
Correct answer: Mitigate damages by taking reasonable steps to reduce losses
The mitigation doctrine requires plaintiffs to take reasonable steps to minimize their damages; failure to mitigate reduces the recoverable amount.
Question 6: The 'yardstick' or 'comparable business' method for estimating lost profits involves:
- Comparing the plaintiff's performance to that of similar businesses unaffected by the defendant's conduct (Correct answer)
- Using the plaintiff's pre-breach financial performance as a benchmark
- Applying industry-wide growth rate projections to the plaintiff's historical revenues
- Calculating the average profit margin of the defendant's competitors
Correct answer: Comparing the plaintiff's performance to that of similar businesses unaffected by the defendant's conduct
The yardstick method benchmarks the plaintiff's expected performance against comparable businesses to estimate what profits would have been absent the wrongful conduct.
CFL Damages Calculation & Economic Analysis 1
In a lost profits analysis, the 'but-for' scenario represents: