Executive Summary


The American Institute of Certified Public Accountants (AICPA) has issued a 2015 Practice Aid discussing significant issues that should be addressed in order to attain reasonable certainty when opining on economic damages.

 This paper highlights information in the AICPA Practice Aid, 2015, Forensic & Valuation Practice Aide, Attaining Reasonable Certainty in Economic Damages.

 The Issue:

There is a borderline between permissible speculations to that of intolerable guesswork. A damages calculation need not prove that all elements are certain. The question is: do “uncertain” profits differ from “certain” profits?

 What to Focus On:

Note that uncertain profits or speculative value is a characterization of the evidence and not a classification of profits or value. It is becoming ever more important that the damages expert focuses on:

  • Rules for attaining reasonable certainty
  • Factors for attaining reasonable certainty
  • Guidelines for what is reasonable certainty

The Issue at Hand

 In the US, most courts require expert witnesses to prove damage amounts with “reasonable certainty.” In other words, has the plaintiff’s expert presented sufficient evidence to make a fair estimate of damages? To offer an opinion under Rule 702, an expert must satisfy the court that his or her opinion is:

  • Guided by principles, and
  • Methods are regularly applied by others damages experts

Reasonable certainty means that profits that form the basis of economic damages need not be absolutely certain in order to calculate damages that have a reasonable basis. The question is: do “uncertain” profits differ from “certain” profits? Neither court nor jury is required to attain “certainty” in awarding damages; and this is just as true with respect to “value” as with respect to “profits.”   Note that “uncertain profits” or “speculative value” are each a characterization of the evidence and not a classification of profits or value.

Reasonable certainty in damages cases is a question of whether the plaintiff has evidence and can value the impact by the probability of success. There is a borderline between permissible speculations to that of intolerable guesswork. A damage calculation need not prove that all elements are certain, but such calculations must be:

  • Moored in facts
  • Use sound methodologies
  • Yield reasonable results

The following is a discussion of rules, factors and guidelines for what is reasonable certainty.

Rules for Attaining Reasonable Certainty

While courts have issued opinions that may appear to be inconsistent, there are certain “rules” that are frequently cited.

Rules for Attaining Reasonable Certainty

RuleQuestionGeneral Application
Fact and AmountIf the fact that a plaintiff suffered damages can be proven with reasonable certainty, what level of precision is required to calculate the amount of loss?A higher degree of certainty is required to determine whether the plaintiff incurred some damages than is required to determine the amount of damages incurred.
WrongdoerHow should the defendant’s wrongdoing affect the plaintiff’s ability to recover damages?A plaintiff should not be precluded from recovering damages just because the amount is difficult to calculate. If the defendant caused the harm, it cannot avoid damages simply because it is difficult to estimate the precise amount.
Best EvidenceCan plaintiffs recover lost profits without presenting the "best evidence" available?As the quality of the evidence improves, so does the court’s confidence in the level of certainty associated with the damages calculation.
New BusinessCan an unestablished business recover lost profits?This issue is extensive and will be addressed in a subsequent report. However, most states now allow unestablished businesses to recover lost profits, although the level of scrutiny may be increased.

These are frequently described as “rules” and are not consistently enforced. For example, it is generally accepted that wrongdoers should not be free to act without consequences or reap windfalls. But at the same time, wrongdoers should not be profit guarantors.  Given the above rules, there are some structural practices that are often challenging to the expert, such as:

Client-Supplied Information – This issue is confronted by all experts when information integral to the damages analysis was provided by the client or retaining counsel.

Causation Considerations – This analyzes common approaches by damages experts to this issue. One significant issue is addressing whether portions of loss not attributable to the alleged wrongdoing have been excluded.

Client Supplied Information

Damages experts often rely upon information supplied by client management when performing economic damage calculations. Such information includes the following:

  • Projections of financial performance
  • Assumptions
  • Business information
  • Technical information

While damages experts may rely on client’s representations and information as part of the normal delivery of professional services, it should not be done without appropriate consideration. The weight of the damages expert testimony will rely on the following considerations:

  • Use management-supplied projections that rest on assumptions that are testable, and that have a linkage to the operative reality of the company’s business.
  • Rely on management representations that are made by client personnel who are qualified to make the representations, as opposed to representations made by client personnel who are unqualified, based upon their day-to-day responsibilities or background, to provide the information.
  • Consider the underlying data and assumptions that go into management-provided information, and consider further corroborating evidence.
  • Use management-supplied projections that are prepared in the normal course of business, as opposed to projections that are prepared solely for litigation purposes.

Causation Considerations

A damages expert must demonstrate that, subsequent to the wrongful act, the plaintiff experienced some economic harm, such as a reduction in its sales, profits or value. But just as important, the damages expert should consider the impact of qualitative factors, such as:

  • Generally prevailing economic conditions
  • Product quality issues unrelated to the defendant’s alleged conduct
  • Technology changes such as the loss of intellectual property
  • Market changes such as the development or acquisition of IP by a competitor
  • Reputational harm for any reason other than the conduct of the defendant
  • Loss of key personnel
  • Environmental issues such as hurricanes, earthquakes, freezes, and the like

 Factors for Attaining Reasonable Certainty

There are several factors that damages experts should consider in their assessment of reasonable certainty. Several of these factors are not directly relevant to the work of the damages expert, but may be indirectly relevant because of the impact on the receptiveness of the court to the positions espoused by the damage expert.

Factors for Attaining Reasonable Certainty

Confidence that the estimate is accurate.Is the claim supported by verifiable data?
Does the business have a track record?
The number of difficult-to-quantify risks in the business projections.
The extent to which lost profits fall within a defined range.
Whether the injured party suffered at least some damage.How clear is the damage causation?
Can the damages be quantified at all?
The degree of blameworthiness or moral fault on the part of the defendant.Often not relevant to the damages expert’s calculations and it is fact and circumstance specific.
Influenced by the wrongdoer rule.
Whether the plaintiff used the best available evidence to prove its damages.As the quality of the data used in the damage analysis improves (for example, because it is verifiable), the likelihood that the related calculation will be accepted increases.
The amount that is at stake.There are usually more complexities and nuances in cases involving large dollar amounts.
In addition, a jury may place more scrutiny on the data and methods applied to calculate damages as the absolute amount of the asserted damages increases.
Where alternative methods exist to compensate the injured party.Is “lost profits” the best measure of damages?
Can lost business value based upon (for example, contemporaneous purchase offers) be used as an alternative to otherwise less certain projections?

Standards for Recovery

Recovery of economic damages is based on a 4-step test; for which reasonable certainty is only one step in the process. The following chart presents the major steps that must be addressed by the damages expert and legal counsel.

Reasonable Certainty in Economic Damages

How ValueScope Can Help

ValueScope has over twenty years of financial and valuation experience assisting attorneys, investors, regulators and financial institutions in investment analysis, bankruptcy and workout situations, forensic investigations and expert witness testimony. The firm is experienced in the application of financial and econometric analysis to value measurement and shareholder value growth. The firm is one of the leading valuation, litigation support and financial advisory firms in the country. Clients include middle market business owners, corporate executives, major corporations, government agencies, private equity firms, attorneys, accountants and other professional advisers.

 ValueScope specializes in preparing thoroughly documented valuations and economic studies and provides expert testimony for clients involved in negotiation, mediation, due diligence, reporting, audit, commercial damages or other disputes. It has a team of qualified individuals that include CFA, ASA, CPA, PhD, MBA and other relevant credentials.* Litigation services include:

  • Economic loss valuations
  • Patent and trademark infringement valuation
  • Dissenting shareholder suit support
  • Class action damages and securities
  • Shareholder oppression analysis
  • Wrongful termination and related lost profits
  • Business interruption claims valuation
  • Marital dissolution analysis- valuation and tracing
  • Analyzing and adjusting financial statements
  • Cheap stock issues and early stage valuations
  • Solvency and fairness opinions
  • General business contract dispute analysis

ValueScope has extensive experience in valuing intellectual property and other types of intangible assets. Having analyzed and overseen the valuation of hundreds of businesses, our professionals have gained the technical background necessary to analyze complex intellectual property valuations including:

  • Contract-related (e.g., favorable supplier or other product/service contracts)
  • Customer-related (e.g., customer lists and customer relationships)
  • Data processing-related (e.g., computer software, automated databases)
  • Engineering-related (e.g., patents, trade secrets)
  • Goodwill-related (e.g., going-concern value)
  • Human capital-related (e.g., employment agreements, a trained and assembled workforce)
  • Internet-related (e.g., domain names, process applications, services and delivery systems)
  • Literary-related (e.g., literary copyrights, musical composition copyrights)
  • Location-related (e.g., leasehold interests, certificates of need)
  • Marketing-related (e.g., trademarks and trade names)
  • Technology-related (e.g., engineering drawings and technical documentation)

*ValueScope is not a licensed CPA firm.

For more information contact:

Steve Hastings
ValueScope, Inc.
950 E. State Highway 114 | Suite 120 | Southlake, TX | 76092
(Office) 817-481-4901  |   (Fax) 817-481-4905

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