Please do not accept assertions by opposing counsel and/or their expert witness that 100% of costs are an appropriate deduction from lost profits or disgorgement calculations. Nor should you blindly accept assertions that none of the costs are deductible. While there are circumstances in which deduction of 0% or 100% of costs is appropriate, they are rarely applicable.
What are Deductible Costs?
In certain damages calculations, most commonly lost profits and disgorgement, deductible costs are a permitted reduction of the damage award. These are costs that would have been paid absent the alleged wrongful conduct and would have reduced the profits experienced. These costs are often referred to as “saved costs” or “variable costs.” Lost profits and disgorgement calculations need to consider the incremental costs of achieving the alleged wrongful revenue. Deductible costs represent those expenditures that are necessary to achieve or support alleged infringing revenues.
To award damages without consideration of these costs would represent an impermissible litigation windfall to either party.
How are Deductible Costs Calculated?
Generally, variable expenses should be deducted. In contrast, fixed costs can appropriately be ignored as these costs would have been paid regardless of the calculated lost revenues. There are a handful of ways experts use to identify deductible costs.
Specific Identification: An expert can, based on their training, experience and input from their client, identify certain costs are variable costs. Cost of Goods Sold/Cost of Sales are generally accepted to be entirely variable costs as are Sales Commissions. Beyond there, there are certain costs that may be variable costs, depending on the nature of the business. Payroll costs, utilities and marketing are likely variable costs.
Analysis: There are certain analytical and statistical tools that an expert can employ to quantify variable costs. On the plus side, this does provide a certain confidence in the conclusions. On the negative, it does require a long data set, and that the financial and accounting data cooperate. The most commonly used toll in this category is a regression.
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 deductible costs..
- We have experience defending conclusions in deposition and at trial. We can provide expert witnesses testimony in a simple, efficient manner so that triers of fact can understand otherwise complicated subjects.
- Our Team have served as an expert in hundreds of matters across every imaginable industry.