Measuring Damage to a Firm's Profitability: Ex Ante or Ex Post?

AuthorJeffrey C. Bodington,John D. Taurman
DOI10.1177/0003603X9203700103
Date01 March 1992
Published date01 March 1992
Subject MatterArticle
The Antitrust Bulletin/Spring 1992
Measuring damage to a firm's
profitability: ex ante or ex post?
BY JOHN D. TAURMAN* and JEFFREY C. BODINGTON**
57
In the most basic terms, abusiness enterprise is an ongoing
stream
of
coordinated transactions. The firm acquires inputs such
as labor and equipment and uses them to produce an output
of
products or services, which are sold to others. What sustains the
enterprise is profit, the excess
of
revenue from the sale
of
its out-
put over the cost of acquiring inputs.
Whether a firm achieves its profit-making mission depends on
amultitude
of
factors internal and external to the firm. One
of
these factors is the conduct
of
other participants in the market-
place-suppliers
of inputs to the firm, customers for the firm's
output, and the firm's competitors in those markets. In a variety
of
ways, their conduct may increase the firm's costs or decrease
its revenues, producing diminished profits. When it can be shown
that the conduct was wrongful, the injured firm may seek com-
pensation in the form of lost profit damages.
*Partner,
Vinson
&Elkins,Washington, DC.
** Economist, SanFrancisco, California.
e1992by
Federal
Legal
PublicatiOllll.
Inc.
58 : The antitrust bulletin
Lost profit claims typically rest on a comparison between the
injured firm's
"but
for" situation and its actual situation.' The
"but for" situation is a hypothetical construction
of
the facts as
they would exist but for the wrongful conduct, a scenario based
on the premise that the wrongful conduct never occurred. The dif-
ference between "but for" and actual is the measure
of
the firm's
loss, the extent to which the firm is worse
off
because the wrong-
ful conduct occurred. An award
of
damages is designed to make
up that difference.
The nature
of
the
"but
for"-actual
comparison to be made
depends upon the ramifications
of
the wrongful act. When the
wrongful conduct affects a single transaction, the comparison cen-
ters on the "but for" and actual characteristics
of
that transaction.2
But given the complexity of business enterprises, wrongful con-
duct frequently has more fundamental and long-lasting conse-
quences for the injured firm. Instead
of
merely affecting discrete
input
or
output transactions, wrongful conduct may disrupt the
stream
of
transactions by upsetting the firm's market relationships
See, e.g., Los Angeles Memorial Coliseum Comm'n v, National
Football League, 791 F.2d 1356, 1366-68 (9th Cir. 1986) (applying
"general principles of damages" in an antitrust case), cert, denied, 484
U.S. 826 (1987). Under the mitigation principle, the injured firm's actual
situation, which incorporates the effects of wrongful conduct, is adjusted
to account for avoidable but unavoided effects. See, e.g., Golf City, Inc.
v, Wilson Sporting Goods Co., 555 F.2d 426, 436 (5th Cir. 1977).
2Common examples are a higher cost incurred in the purchase
of
an
input because of a supplier's overcharge and a lower price received on the
sale
of
an output, or the loss of the sale outright, because of a competi-
tor's wrongful price cut to a prospective customer.
If
such conduct is
repeated, theresult may be a series of losses on a series of affected trans-
actions, but because such losses end as soon as the wrongful conduct
stops, none of the wrongful acts can be said to have long-term conse-
quences.
Many lost profits cases involve continuing transactional losses from
continuing wrongful conduct. The usual pattern is to seek accumulated
damages for affected transactions occurring during the limitations period
before the filing of suit, which is referred to as the damage period. See,
e.g., Pitchford v. Pepi, Inc., 531 F.2d 92, 98-99 &n.13 (3d Cir.), cert.
denied, 426 U.S. 935 (1976).
Measuring
damage
:59
or internal workings." When a firm's operations are disrupted, the
changes forced on the finn can be expected to impair profitability
until the firm recovers, or may be so drastic that the firm is
unable to recover and must liquidate. To assess the extent
of
the
loss caused by such disruptions entails a longer view of the diver-
gence between "but for" and actual.4The focus is on injury to the
firm's capacity to make profits, not solely on the profit lost on a
particular transaction.
Cases of harm to a firm's profit-making capacity bring to the
fore an unavoidable issue of temporal perspective. The extent
of
the loss may be measured ex ante, at the point
of
impact when the
injured finn's "but for" and actual prospects begin to diverge.
Such an assessment compares time-of-impact expectations about
the firm's subsequent experience "but for" the wrongful conduct
and time-of-impact expectations about the firm's subsequent
experience taking into account the wrongful conduct's effects."
On the other hand, the extent
of
the loss may be measured ex post,
at the time that damages are being litigated. The critical differ-
ence is that a time-of-trial assessment permits reliance on post-
3Long-term effects may arise from a single event, such as the
breach of a long-term contract or the loss of a major customer or sup-
plier. An accumulation of transactional losses, see supranote 2, may also
mature into a long-term injury; for example, continued overcharges may
lead to the purchaser's financial ruin.
It
is not uncommon to seek lost
profit damages for transactional losses during the period leading up to the
firm's demise and, in addition, to seek compensation for the terminal
impact on profitability suffered when the firm ceases operations. See,
e.g., Southern Pines Chrysler-Plymouth, Inc. v. Chrysler Corp., 826 F.2d
1360 (4th Cir. 1987).
4
If
the firm is forced out of business, the comparison may extend to
the period that the firm would probably have continued to operate but for
the wrongful conduct
5Because time may elapse between wrongful
conduct
and
its
impact on the injured firm, a different ex ante approach could be adopted
that is based on expectations at the time of the wrongful
act
A time-of-
act perspective, however, is more attuned to judging the propriety
of
the
conduct at issue, or matters of causation, than to estimating the extent of
the harmdone.

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