Court Reverses Damage Award Due to Improper Measure of Damages

In Flourine v. Florogas, 380 F.3d 849, 860-861 (5^th Cir. 2004) the court reversed a $120 million reward for "loss of income-producing asset" damages because the plaintiff’s expert did not satisfy the court with evidence of the market value of the lost asset. The court found the appropriate measure of damages to be the lost current market value of the asset (a contract) at the time of breach, not the lost profits the asset could have produced in the future.

Plaintiff’s expert provided a damage estimate of $130 million by discounting projections of future lost profits over an 11-year contract period to present value. The expert based his value solely on expected future profits and did not analyze what a buyer would have paid for the chance to make these profits. Because the expert did not perform calculations that distinguish a lost asset damage model from a lost-profits one, the record contained no evidence of the market value of the exclusive license. As the only evidence of damages reflected the lost-profit analysis but not evidence of the market value of the lost asset, the court reversed the $120 million award of lost asset damages upon appeal.

This case addresses the frequent issue of what should be valued; the underlying asset or the stream of profits it is expected to produce. This analysis offers insight to the debate over whether lost profits can be greater than the value of the business as a whole.

A presentation by G. William Kennedy and Thomas E. Hilton at the 2005 AICPA Litigation and Fraud Conference surveyed the current status of this issue to the effect lost profits do exceed the value of the business when the period of the losses is different from a typical valuation period and the performance of the business is impaired over a long period.

Exposure Draft of Proposed Standards for Indemnification/Limitation

of Liability Provisions and Forensic Accounting Services

With the growing use of indemnity provisions in CPA engagement letters, the AICPA issued an omnibus exposure draft proposing two new interpretations under Rule 101, Independence. The first proposal provides guidance on the impact that certain indemnification and limitation of liability provisions may have on a member’s independence when included in engagement letters or other client agreements. In summary, certain indemnification or limitation of liability provisions could threaten a member’s independence by reducing the member’s performance of sufficient attest procedures due to reliance on indemnification or limitation of liability clause. There would be an exception for claims resulting from knowing misrepresentations of management.

The second proposal provides guidance on the impact of litigation and forensic accounting services on a member’s independence with attest (e.g. audit) clients. This proposal addresses the potential that information is uncovered by the member during the course of the forensic engagement but the disclosure is restricted and therefore, cannot be shared with members of the attest engagement team. The exposure draft may be downloaded at <http://www.aicpa.org/download/ethics/2005_0915_ed_Indemn.pdf> The AICPA is receiving comments through December 16, 2005.

In the October 2005 issue of The Tax Advisor, Robert W. Wood surveys the status of damage taxation. He notes the efforts of plaintiffs who have sought a gross-up of an award, or additional damages, when all or part of the award is taxable. Likewise, he describes how defendants may request a deduction from damages when the damages are tax-free or result in tax benefits (such as tax credits and depreciation). The problem particularly of attorney fee awards and their taxability to the plaintiff, with sometimes surprisingly adverse consequences, has been addressed in many sources, including our prior newsletters. Allen Wendler of J.A. Compton & Co., works with the proper planning of settlements and judgment to disclose and, if possible, avoid after-tax reductions. Please contact Allen with questions regarding avoidance of potential after-tax reduction of settlements and judgments.

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