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Economic Damages: Total Business Loss Evidence Allowed in Recent Case

Posted by Meaden & Moore on Jan 15, 2019 8:00:00 AM

judge gavelThe Eigth Circuit Court of Appeals recently issued a surprising decision: It allowed a qualified damages expert to present a conclusion for the loss of a company’s entire value in a case where the plaintiff continued to operate after the defendants’ alleged wrongdoing. This article summarizes this case.

West Plains L.L.P., dba CT Freight Co. v. Retzlaff Grain Co. Inc., dba RFG Logistics, et al. 870 F.3d 774, No. 16-2650, 8th Cir., August 30, 2017

Mass exodus

In 2012, CT Freight’s primary source of revenue was shipping dry agricultural commodities (a business known as the “bulk hopper” industry). In February 2013, 10 employees resigned from the Nebraska Company to join a competing startup freight brokerage operation. The resigning employees brought several large accounts with them. CT Freight sued the startup, its owner, and the 10 employees for, among other things, tortious interference with business relationships.

The plaintiff hired a valuation expert who compared the revenue generated by CT Freight’s top 20 customers in 2012 and 2013 and found that revenue from the company’s top customers effectively disappeared in March and April 2013. The expert then analyzed the startup’s revenue from its top customers in 2013 and found that the startup, which hadn’t previously had many sales, realized significant revenue from CT Freight’s former top customers.

Based on his review of the company’s financial results for 2011 to 2014, the expert also found that CT Freight was unprofitable following the mass resignation through 2014. The expert concluded that the market value of CT Freight was $2,131,000 before the defendants resigned, based on “the value of future profits.”

A jury found the defendants liable and awarded the plaintiff about $1.5 million, which is equivalent to approximately 70% of its value before the employees left. It’s possible that the jury arrived at that amount because the top 20 customers generated about 70 to 75% of the company’s revenue. The defendants appealed.

Disputed damages evidence

In lawsuits alleging injury to a business, plaintiffs generally may recover damages for either 1) the market value of the business if the business is completely destroyed, or 2) lost profits if the business isn’t destroyed.

On appeal, the Eighth Circuit considered, among other issues, whether the district court had erred by allowing the jury to consider evidence of total loss of business value damages. This was particularly unusual, because CT Freight continued to operate after the alleged wrongdoing, although it had substantial difficulties replacing lost customers and employees who resigned and was forced to expand into new sectors.

As long as sufficient evidence of a loss of profits is presented, the court explained, Nebraska state law permits a jury to determine the probable loss from the best evidence “the nature of the case allows.” In this case, the best evidence had been presented by an experienced CPA and valuation professional who found that, after the employees’ resignation, CT Freight’s business was effectively a total loss. The Eighth Circuit, therefore, affirmed the district court’s ruling, holding that the district court hadn’t erred in admitting the plaintiff’s expert’s testimony on the company’s value.

Useful resource in deliberations

It’s unusual for a court to allow a plaintiff in business litigation to be awarded a loss based on the value of the entire business – especially when the business continues to operate. But this evidence can, nonetheless, be helpful to a judge or jury when awarding economic damages.

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Topics: Investigative and Forensic Accounting

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