Recently, a 1952 Mickey Mantle baseball card, in near-mint condition, sold for a record $12.6 million at auction. Imagine if the new owner brought the card home and showed it to a friend, carefully instructing the friend not to take it out of its protective cover. But while the new owner’s attention is diverted, the friend removes the card from its sleeve, lays it on the table, and proceeds to spill his nearby beer. Luckily, the friend is able to swipe the card off the table before it is completely ruined, but a few small drops of beer permanently stain the once-near-mint condition card.
Has the new owner of the card been damaged by his friend’s negligence? Surely, yes.
Can those damages be quantified for a jury in the litigation that is sure to follow? Probably. If the card had been totally destroyed, then the damages would presumably be the $12.6 million that the new owner just paid. But what is the value of a once-near-mint condition Mickey Mantle card that now has a few small beer stains? Expert testimony would be necessary to establish that difference. Such testimony would likely lead to many issues under the Rules of Evidence governing the admissibility of expert testimony, including the Daubert standard. But few would doubt the analytical framework for the damages claim. The friend’s negligence did not destroy the baseball card entirely, but surely did decrease its value in a tangible and measurable way. Put differently, if the new owner tried to re-sell the beer-stained card, it would sell for less than the $12.6 million he just paid, and that diminution in value is his damages.
Can the same analysis apply to business torts? If a competitor engages in unfair competition, or tortiously interferes with a prospective economic advantage, there may be straight-forward methods to calculate damages. For example, if the victim of the torts immediately began to lose money as a result of the wrongdoing, then a straight-forward lost-profits analysis would be appropriate.
But sometimes the harm caused by tortious conduct can be hidden by market forces. For example, imagine that the two companies in this hypothetical compete in a rapidly growing market. The tortious conduct causes the victim to lose market share vis-à-vis the tortfeasor, but because the market is growing so quickly, the victim still manages to increase its profits year-over-year. In that case, the victim has still been damaged. It made more money year-over-year, but if it had maintained the same market share, it would have made even more. That difference—though more difficult to quantify than the traditional lost profits scenario—represents compensable damages that a jury could award.
One method for calculating the damages in a scenario like that is through a “business enterprise valuation,” or “BEV” analysis. Like the beer-stained Mickey Mantle card, the measure of damages in a BEV analysis is the value of the entire business before the tortious conduct compared to the value of the entire business after the tortious conduct. The BEV analysis necessarily takes into consideration all aspects of the business, including the falling market share and any other effects of the tortious conduct.
This may seem at first blush to be more speculative than a traditional lost profits calculation, but in practice it is not. Businesses of every size and in every industry are bought and sold every day. Those transactions are possible because finance experts are able to conduct BEV analyses of those businesses to determine a fair purchase price. Like any other sort of valuation (think art or real estate appraisals), there is room for disagreement between experts. But there are also well-defined methodologies and industry standards that guide the reasonableness of those valuations. And in the litigation context, it is precisely such standards that guide the jury’s inquiry when experts battle over differing opinions.
The use of BEV analysis as a measure of damages is less common than traditional lost profits methodologies, but it is not novel and has been approved of by various courts. For example, as far back as 1984, the Third Circuit Court of Appeals held in Malley-Duff & Associates, Inc. v. Crown Life Ins. Co., 734 F.2d 133, 148 (3d Cir. 1984), an antitrust case, that lost business can be measured either by lost future profits or the “going concern value,” which the court explained is “the price a willing buyer would pay and a willing seller would accept in a free marketplace for the business in question.” Many other courts have followed the Third Circuit’s lead since that time.
Though seen less often than other damage methodologies, business enterprise valuation is a well-grounded and widely-recognized methodology for calculating damages in complex business torts.