Part 8: From Data to Damages How a Defensible Damages Model Gets Built
With the methodology selected, the work of building the damages model begins. This is where the financial analysis takes shape, where the data that has been gathered, analyzed, and tested gets summarized into a number that can be presented to a judge or jury.
It sounds straightforward. It is not.
What a Damages Model Is Designed to Do
A damages model is not just a spreadsheet with numbers in it. It is a structured financial argument. Every input, every assumption, and every calculation is a building block in a chain of reasoning that connects the facts of the case to a damages conclusion. The model has to be accurate, internally consistent, supported by facts and assumptions, and built in a way that a non-financial audience can follow and understand.
What makes this particularly challenging is there is no template, no standard set of instructions, and no universally accepted damages model for computing lost profits. Every case is different, and the model has to be constructed from the ground up based on the specific facts, the chosen methodology, the available data, and assumptions. That requires professional judgment, experience, and a clear understanding of what the analysis is trying to measure and convey.
The Role of Assumptions
Every damages model rests on assumptions. Some are grounded in hard data. Others involve judgment calls about what is reasonable given the facts of the case. The quality of those assumptions is often what separates a defensible damages model from one that falls apart under cross examination.
A good assumption is clearly documented, tied to a specific source or rationale, and reasonable given everything we know about the business and the industry. An assumption that cannot be clearly documented and supported is one that will not hold up under scrutiny. Opposing counsel will go after every assumption in the model. The stronger the support for each one, the harder their job becomes.
Not all assumptions originate with the damages expert. Some are legal in nature and are provided by counsel based on the theory of the case. In those situations, the expert relies on the assumption as provided and should clearly disclose that reliance both in their report and testimony. An expert under our professional standards can also rely on assumptions provided by the litigant/client, again with proper disclosure. Disclosure is not a weakness. It is a requirement.
That said, disclosure alone is not enough. Assumptions provided by counsel or client still need to be vetted for reasonableness. Again, initially accept but test. Healthy skepticism needs to be brought into the analysis. Vetting for reasonableness does not always have to come from a source document. It can be established through fact witness testimony, an industry expert, or other evidence that will be presented at trial. What matters is that the assumption, like all other assumptions, is not left floating in the model without any support behind it. A damages expert and counsel need to be aligned early on about what each assumption is, where the support for it is coming from, and who is responsible for establishing it in the record.
Mitigation
In most damages cases, the plaintiff has a legal obligation to take reasonable steps to reduce their losses. A damages model that ignores mitigation is one that opposing counsel will challenge aggressively.
A well-built model accounts for mitigation honestly. That means considering what steps the plaintiff took to reduce the impact of the harm, what expenses were saved as a result of the damaging event, and whether the plaintiff's conduct during the damages period was reasonable. Acknowledging mitigation is not a concession. It is a sign that the analysis is credible and complete. It is a sign that required and proper actions were taken to reduce the damage.
Sensitivity Analysis and Alternative Outcomes
No damages model is built on absolute certainty. A well-constructed model anticipates that reality by testing how the damages figure changes when key assumptions are adjusted. By running the model under different scenarios, the damages expert can demonstrate that the conclusion is not out of line by using a range of reasonable assumptions rather than dependent on a single set of inputs.
Alternative outcomes also help counsel understand the range of possible results going into mediation or trial. Knowing the damages figure holds up under conservative assumptions is valuable information for settlement discussions.
Building With the End in Mind
A damages model that cannot be explained clearly is a liability at trial. From the very beginning of the modeling process, we are thinking about how the analysis will be understood, what the key inputs are, how the logic flows, and what visual aids will be needed to make it clearly accessible and understandable to a non-financial audience.
A well-built model translates naturally into a clearer expert opinion and more understandable trial testimony. A poorly built one creates problems at every stage that follows.
Up next: Once the model is built, the next step is turning it into a formal expert report. In Part 9 we will cover what FRCP Rule 26 requires in federal matters, why the report deserves more attention than it gets, and what a strong expert report actually looks like.