When the President Steals the Deal: The $3.7 Million Cost of Lost Profits
Hi, Welcome to ValuationPodcast.com. I’m Melissa Gragg, a financial mediator and business valuation expert, and today I’m joined by Kelly Lise Murray, a lawyer, professor, legal scholar, and serial entrepreneur who brings a fascinating perspective to the intersection of litigation, business, and valuation.
In this episode, Kelly and I dive into a remarkable federal case involving a president, a business opportunity, lost profits, and millions of dollars in litigation costs. The case, Zip By v. Parzich, gives us a front-row look at what can happen when a corporate executive pursues an opportunity that belonged to the company he was leading—and how the financial consequences can extend far beyond the original dispute.
We explore how lost profits were calculated, why the valuation date matters, how COVID-19 affected the analysis, and why business projections must be tested against reality before they become the foundation of an expert opinion. We also discuss the importance of expert witnesses, what happens when one side fails to present its own damages expert, and how an apparently shaky expert opinion can become much more powerful when there is no competing number for the judge or jury to consider.
Key Takeaways
Lost profits require a defensible foundation.
Financial projections used to calculate lost profits should be tested against historical performance, available financial records, market conditions, and the assumptions underlying the forecast.The valuation date can dramatically change the analysis.
In a damages case, experts generally must distinguish between information that was known or reasonably knowable at the relevant date and information that became available afterward. COVID-19 illustrates why timing can be critical.A defense expert can establish a critical alternative position.
Even when the defense believes damages should be zero, failing to present an expert can leave the opposing expert's number as the only financial anchor available to the jury.Fee-shifting provisions can completely change litigation economics.
Legal and expert fees can turn an apparently manageable dispute into a multimillion-dollar exposure. Contractual fee-shifting provisions should therefore be considered when evaluating litigation and settlement strategy.Litigation strategy should account for the cost of winning or losing.
A judgment does not necessarily equal a financial victory. Parties should compare potential damages, attorney fees, expert costs, enforceability, and settlement alternatives before committing substantial resources to litigation.
Q&As from episode
Q1: How are lost profits calculated in a business litigation case?
A: Lost profits are generally calculated by estimating the profits a business or opportunity would reasonably have generated but for the wrongful conduct, while accounting for appropriate expenses, assumptions, causation, and available evidence. In complex cases, a business valuation or damages expert may be needed to establish and defend the calculation.
Q2: Why is the valuation date important when calculating lost profits?
A: The valuation date is important because a damages analysis typically focuses on what was known or reasonably knowable at the relevant time. Later events may provide useful evidence for testing a projection, but they should not automatically be treated as information that was available when the business decision or alleged loss occurred.
Q3: Should a defendant hire a business valuation expert in a lost profits case?
A: A defendant should carefully consider hiring a business valuation or damages expert, particularly when the plaintiff presents its own lost-profit calculation. A defense expert can challenge the assumptions, methodology, projections, causation, and damages amount while also establishing an alternative damages position or reasonable range.
Q4: What is a fee-shifting provision in a business contract?
A: A fee-shifting provision is a contractual term that can require one party to pay some or all of the other party's attorney fees and litigation expenses under specified circumstances. In business disputes, fee shifting can significantly change the financial risk and should be considered when evaluating litigation, settlement, and damages exposure.
Q5: Why should businesses evaluate litigation costs before going to trial?
A: Businesses should compare the potential damages, attorney fees, expert costs, contractual fee shifting, collection risks, and settlement alternatives before committing to a lengthy trial. A favorable judgment may still produce little or no net financial benefit if the cost of obtaining it approaches or exceeds the amount recovered.
