The Human (Expert) Calculator
Written by: Jay Sickler, CPA, CFF, ABV, ASA
A court decision held that even simple mathematics may help and assist a trier of fact or jury. An experienced commercial litigator once said to me that my role as an expert is that of a human calculator. I am not responsible to testify as to causation (per se) and I am not in control of the case facts or assumptions I’ve been asked to make. Those comments were made to me following a judge’s decision to set aside a huge jury award in which I testified as plaintiff’s damages expert. It is good to remember what my role is as an economic damages expert.
It is not the damages experts’ responsibility to prove causation. Having said this, causation and liability need to first be proven by plaintiff’s counsel before the judge or jury can rightly render a decision as to economic damages. I have testified in my share of cases over the past 30 years where my (or the other expert’s) opinion of economic loss became moot because the plaintiff didn’t prove liability. I am not an industry or technical expert; I am a CPA and an expert in financial forensics and business valuations. For example, I am not the expert who testifies about technical trade secrets stolen in a SaaS (Software as a Service) case, but I am the expert who can testify about the economic damages that can flow from the alleged theft.
When I construct a lost profits analysis, I most often rely on the but-for methodology, which is a generally accepted framework to compute the expectation of damages. This standard methodology attempts to answer the question: What would plaintiff’s profits have been but-for the defendant’s alleged wrongful acts? Lost profits are defined as lost revenue, less avoided costs. This damages analysis requires a forecast of the but-for world that plaintiff would have operated in, which by definition must be a hypothetical construct. Reconstructing what would have happened in the but-for world necessarily requires assumptions that are not verifiable. A but-for forecast cannot be audited. The use and reliance on a forecast, whether prepared in the ordinary course of business, or pursuant to the litigation, is a must for me in rendering a lost profits damages opinion.
Whether I receive a forecast prepared in the ordinary course of business or not, my job (or that of my associates) is to test and challenge the data and assumptions underlying the forecast. A court stated that nothing in the Federal Rules requires an expert witness to independently assess or verify the data provided. However, I still believe it is important for me and my staff to challenge the plaintiff’s forecast as I would if I was the defense’s expert. That means using my experience and skills to assess the mechanics and reasonableness of the assumptions underlying the forecast. This extra level of analysis provides the trier of fact or jury with confidence that I’ve done my job, and I’m not just parroting what the plaintiff has given me without question.
Ultimately, it is case facts, fact witnesses, and other expert witnesses presented by plaintiff’s counsel that underpin and support the assumptions I model in my economic damages analyses. It is my job to explain how all those pieces fit together.