In commercial litigation involving lost profits, the evidentiary burden to establish damages rests with the plaintiff. While expert witnesses are not required to prove causation—and are generally permitted to assume liability as a given—the credibility and strength of an expert’s opinion is greatly enhanced by a thorough and thoughtful consideration of causation and its alternatives.
The Role of the Expert
Experts may, and often do, assume liability has been established when calculating lost profits. However, this does not relieve the expert of the responsibility to test whether the claimed losses are reasonably attributable to the alleged wrongful act. Addressing obvious alternative explanations not only supports a more robust and defensible analysis but also protects the expert’s testimony from being diminished or excluded altogether.
Experts are not required to rule out every possible cause of a plaintiff’s financial downturn. Yet, where alternative explanations for loss are apparent—or easily identifiable—they must be considered. Courts have held that an expert’s failure to address such alternatives can render their methodology unreliable, thereby weakening the weight of their testimony or leading to its exclusion.
Common sources of alternative explanations include:
- Internal Company Projections – Seasonality, known fluctuations in sales, or internal revenue expectations may point to non-litigation-related causes of financial performance changes.
- Interviews and Testimony – Statements from key personnel may reveal factors such as third-party negligence or equipment failures unrelated to the alleged misconduct.
- Operational Summaries – Factors like supply chain disruptions, technological shifts, or product issues can materially affect a business’s performance.
- Comparable Business Data – Reviewing the performance of similar firms may highlight industry-wide trends or emerging competitive pressures.
- Industry and Regulatory Context – Changes in regulations or entry of new market players can significantly impact market conditions.
- Macroeconomic Conditions – Broader disruptions—such as the COVID-19 pandemic or inflationary pressures—should be considered when evaluating financial performance changes.
Methodology Matters
A common distinction in litigation is between the admissibility of expert testimony and the weight it is ultimately given by the trier of fact. Some courts emphasize their gatekeeping role and may exclude testimony altogether if the expert’s methodology fails to consider other plausible causes of loss. Others may admit the testimony but allow opposing counsel and their experts to challenge its foundation, leaving the final determination to the jury or judge.
Either way, the reliability of the expert’s methodology, particularly in how it handles alternative explanations, can be pivotal.
Reasonable Certainty and Avoiding Speculation
Lost profits must be proven with reasonable certainty. While the law does not require mathematical precision, speculative analyses are inadmissible. Engaging with alternative causes shows a commitment to objective analysis and enhances the expert’s credibility.
A disciplined approach to causation often involves the use of established methodologies, including:
- Before-and-After Analysis – This method compares a company’s financial performance before and after the alleged harmful event, controlling other factors.
- Benchmarking – Performance is compared against similar “guideline” businesses that were not impacted by the alleged wrongful act, to isolate the effect of the misconduct.
- Statistical Methods – Regression analysis and other econometric tools can be used to control for various explanatory variables and quantify the impact of the alleged action.
In Short
While legal causation is ultimately the court’s domain, a thoughtful and transparent approach to causation and alternative explanations enhances both the admissibility and the credibility of an expert’s opinion. Ignoring obvious alternative causes not only risks damaging the integrity of the analysis but also jeopardizes the expert’s role in informing the court’s understanding of damages. A clear, objective, and well-documented methodology remains the cornerstone of effective litigation consulting.
What Should I Do?
Hire an expert witness (like us). As an expert, we will save you time and money because:
- We are intimately familiar with the business accounting records that are relied upon to reach conclusions regarding lost profits..
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