Valuation & Financial Forensics Perspectives from the Bench

Recent federal court decisions demonstrate that while plaintiffs must prove damages with reasonable certainty, calculating the quantum of damages requires only substantial evidence. However, proper documentation and expert analysis remain critical to successful recovery.

As Henry Ford observed, a business that makes only money is a poor business, but one that makes no money will not survive. When wrongful conduct damages a company's profit-generating ability, the law provides remedies. Two recent cases offer valuable guidance on proving lost profits and highlight the risks of inadequate preparation.

The NuVasive Case: Standards for Lost Profits

NuVasive, Inc., a medical device manufacturer, contracted with Absolute Medical as its exclusive sales representative in Central Florida from 2013 through 2022. The agreement included a one-year noncompete clause. In late 2017, Absolute Medical's president dissolved the company and formed a new entity to distribute competitor Alphatec's products, taking key sales representatives and six major physician customers with him.

The resulting litigation exemplified what the court termed deleterious and vexatious conduct. After years of documented lies, perjury, and spoliated evidence, the court granted default judgment to NuVasive and referred the case for damages determination.

NuVasive's expert employed a before-and-after methodology, projecting sales to the six physicians based on three years of historical data. She accounted for market trends suggesting slight industry decline and separated hardware sales from bulk biologic purchases. After subtracting actual sales during the damage period, she calculated but-for revenues, then deducted cost of goods sold and commissions. Total lost profits: approximately $13.6 million.

The defendants challenged the analysis, arguing insufficient consideration of COVID-19's impact. The court disagreed. The expert had examined hospital bed availability, elective surgery restrictions, and the nature of spine procedures as the least elective of elective surgeries. While such conditions do not immediately threaten life, they persist and worsen without treatment. Patients delayed during lockdowns eventually required surgery.

Defendants also pointed to competition from Globus Medical, claiming their expert should have obtained Globus sales data. The court rejected this argument. The expert based her analysis on reliable record evidence. Defendants produced no contrary data, including from Globus, despite having access to request it themselves.

This case established critical principles. Under Delaware law, plaintiffs must prove damages exist with reasonable certainty. However, once that threshold is met, proving the amount requires only substantial evidence, defined as relevant evidence a reasonable mind might accept as adequate. Future lost profits need only meet this relaxed standard.

Importantly, defendants cannot claim lost profits are speculative based on uncertainties their own wrongdoing created. The breaching party cannot avoid making the injured party whole by pointing to an uncertain world of their own making.

The North Atlantic Case: The Perils of Poor Documentation

North Atlantic Security Company held a state contract to provide security services at Louisiana agencies. In August 2018, without hearing or proper notification, a state official revoked the company's license and notified procurement officials, terminating the contract. North Atlantic sued for due process violations and sought damages.

Before trial, the defendant moved to exclude North Atlantic's damages evidence: a spreadsheet titled Itemization of Losses and testimony from two company officers. The spreadsheet purported to show revenues, expenses, growth multipliers ranging from 6 to 30 percent, and a company valuation exceeding $9 million derived from 3.5 times projected 2024 EBITDA.

The document contained obvious mathematical errors. It showed annual revenue of $960,000 and annual income of $936,960 despite annual expenses of $384,000. It failed to explain the $9 million valuation calculation. North Atlantic argued the spreadsheet would be explained through witness testimony and reflected growth the company expected by using the state contract as a springboard to other states and private customers.

The court excluded the spreadsheet as inadmissible hearsay. While summary schedules may be admissible under Federal Rule of Evidence 1006 for voluminous data, North Atlantic failed to provide the underlying voluminous data the summary purported to represent.

Regarding witness testimony, the court noted additional challenges. The contract covered 12 months with possible renewal for two additional 12-month periods. The license revocation occurred approximately 10 months into the first period, after North Atlantic had completed roughly 80 percent of contracted services. Whether the witnesses could establish reasonable certainty that renewal would have occurred remained unclear.

Even more problematic was North Atlantic's claim for collateral damages from business it could not pursue using the state contract as a springboard. To recover such damages, North Atlantic would need to prove: (1) the breach proximately caused lost opportunities, (2) the parties contemplated such losses because they were foreseeable or the defendant knew of special circumstances when contracting, and (3) a sufficient basis existed for estimating lost profits with reasonable certainty.

The court acknowledged this constituted a high hill and expressed skepticism about North Atlantic's ability to climb it. However, it could not conclusively rule the witness testimony inadmissible at the pretrial stage, reserving objections to specific questions for trial.

Key Takeaways

•       Two-tiered proof standard: Proving damages exist requires reasonable certainty, but calculating the amount requires only substantial evidence that a reasonable mind might accept as adequate.

•       Wrongdoers cannot claim uncertainty: Defendants cannot argue lost profits are speculative based on uncertainties their own breach created.

•       Documentation matters: Lost profits calculations require reliable underlying data and proper methodology. Spreadsheets with mathematical errors and unsupported projections will be excluded.

•       Collateral damages face high hurdles: Recovering lost profits from ancillary business opportunities requires proving proximate causation, foreseeability, and reasonable certainty of the amount.

•       Expert analysis is essential: While lay witnesses may testify about revenues and expenses, proving the quantum of damages to the requisite degree of certainty typically requires expert testimony with sound methodology.

Conclusion

These cases reveal both promise and peril in lost profits litigation. Courts recognize that future damages inevitably involve some uncertainty and apply a relaxed evidentiary standard once the existence of damages is established. They also refuse to let wrongdoers benefit from uncertainty of their own creation. However, this flexibility has limits. Proper documentation, reliable data, and sound methodology remain essential. When we work with clients facing potential damages claims, these principles guide our approach to building defensible analyses that can withstand courtroom scrutiny.

Source: The Value Examiner, May/June 2025