Summer 2014


Focus on Forensic Analysis and Litigation Services

Editor for This Issue: Charles A. Wilhoite, CPA Economic Damages Legal Insights

Thought Leadership:
Opinion of Trial Counsel: The Role of an Economic Expert in Establishing the Damages Case in Intellectual Property Litigation

Devon Zastrow Newman, Esq.
Intellectual property litigation is highly relevant in today’s society. It is also highly complex work that often involves explaining technical concepts to a jury at trial. When advocating for a plaintiff in an intellectual property case, trial counsel’s work in building a case for a damages award is a time-intensive process that requires careful planning and execution. More often than not, the plaintiff will use an economic expert to calculate the damages and to testify regarding economic damages during deposition and at trial. This discussion addresses when experts are necessary, how they are qualified, and how experts should be prepared to avoid disqualification. This discussion also reviews the calculation of damages for each of the principal types of intellectual property claims.

Identifying and Calculating Recoverable Damages and Predicting Risks in Cyber Security Breaches
Laura Caldera Taylor, Esq., and Thomas L. Hutchinson, Esq.
Cyber security breaches often result in the improper transfer of personal identifying information, or sensitive financial and health information. This discussion focuses on the identification of potential cyber security breaches and how courts are addressing the presentation of such cases, including the issue of damages.

Economic Damages Litigation: Lessons from Berkman
Stephen F. English, Esq., Erick J. Haynie, Esq., and Edward Choi, Esq.
Economic damages often involve an array of complex issues, intersecting both legal and economic concerns. Many professionals, let alone a panel of lay jurors, may find such issues difficult to navigate. Therefore, experts are often required to identify, quantify, and then explain economic damages. This discussion looks at a real-world example of a two-month jury trial in Portland, Oregon, from 2008. This discussion highlights some of the economic damages issues that can arise in the context of a complex civil dispute.

Valuation Controversy Insights

Best Practices:
Considering the Subject Industry in the Discounted Cash Flow Method for Dissenting Shareholder Appraisal Actions

Justin M. Nielsen
The consideration of the subject company’s industry (the “subject industry”) when applying the income approach—discounted cash flow method—is an important issue for the valuation analyst, specifically as it relates to shareholder appraisal rights actions. The Delaware Chancery Court regularly provides guidance as to the proper consideration of the subject industry when applying the discounted cash flow method within a dissenting shareholder appraisal rights action. This discussion highlights several recent Delaware Chancery Court decisions, and it provides insights into the analyst’s role in properly addressing the subject industry when applying the income approach within a dissenting shareholder appraisal rights action.

Guidelines for Critiquing and Rebutting an Expert Report
Nathan P. Novak
This discussion focuses on the concepts related to reviewing an opposing expert’s report in a litigation setting. Specifically, this discussion provides a process for preparing such a rebuttal. This discussion is presented for the purpose of emphasizing the critical lens that may be applied when reviewing an opposing expert’s analysis. Five primary guidelines are discussed: (1) understand the opposing party’s argument, (2) identify contradictions, (3) avoid self-contradictions, (4) provide alternatives to areas believed to be incorrect, and (5) verify suspect research or methodologies. In addition, an example is included to provide some context and to better illustrate the process.

Development and Application of Management Projections in an ESOP Valuation
Justin M. Nielsen and Frank (“Chip”) Brown, CPA
The proper use of company management-prepared projections when applying the income approach—discounted cash flow method—is an important issue for any valuation analyst, specifically as it relates to ESOP sponsor company valuations. This discussion describes procedures for properly using management projections when applying the income approach—discounted cash flow method—within an ESOP sponsor company valuation.

Judicial Decision Insights

Valuation-Related Issues as Decided by the Delaware Chancery Court
Chandler G. Dane
The Delaware Chancery Court routinely rules on valuation issues relating to dissenting shareholder matters. Given its sophistication in this area, the Chancery Court’s decisions are closely followed by both lawyers and valuation analysts who practice in areas involving shareholder litigation. This discussion describes several recent Delaware Chancery Court decisions, and it provides insights into the valuation aspects of each decision.

Court Excludes Speculative Lost Profits Analysis in Sargon Enterprises, Inc. v. University of Southern California
Irina V. Borushko and Lisa H. Tran
The following discussion examines judicial decisions reached by the courts in Sargon Enterprises, Inc., (“Sargon”) v. University of Southern California (“USC”), related to the reasonableness of an expert’s economic damages opinion based on estimated lost profits. Sargon brought an action against USC for breach of contract during clinical trials for a dental implant that the company developed. The Superior Court of Los Angeles County excluded the opinion of lost profits offered by Sargon’s expert due to its speculative nature. The Sargon decision highlights various factors a damages analyst should consider in the selection of guideline companies and in testing the reasonableness of projections relied on in a lost profits damages analysis.

Bankruptcy Court Addresses Challenges to a Right of First Offer in Revised Plan
Curtis R. Kimball
The following discussion examines the Chapter 11 bankruptcy decision regarding Plant Insulation Company. The plan proponents proposed a “right of first offer” (ROFO) process, designed to facilitate buy-sell terms that would benefit both owner-managers and a passive, but controlling, investor. The approval of the plan by the bankruptcy court provided affirmation of the soundness of the plan, suggesting that the ROFO process and related terms may prove to be useful in other private buy-sell agreements.

Taxation Valuation Controversy Insights

Wind Farm Valuation Issues for Ad Valorem Taxation Purposes

P. Barton DeLacy
The efficient production and distribution of electric power has to overcome an increasingly complex marketplace where public policy and economic reality often conflict. In this challenging environment, utility-scale wind farms have proliferated across the American landscape. The fuel to operate commercial wind farms (i.e., the wind) is free. Nonetheless, the capital to build the commercial wind farm is not free. As the wind energy industry matures and the incentives relied on to develop wind farms evaporate, this discussion considers the market value of such commercial wind farms. In particular, this discussion considers whether commercial wind farms are fairly assessed by state and local property authorities. This discussion explores the implications of how wind farms are project-financed. And, this discussion considers two questions that relate directly to ad valorem property tax assessment: (1) But for the economic inconsistencies of production or investment tax credits, most wind farm projects would not be built. Therefore, do these tax credits increase the market value of the wind farms? Or, are the tax incentives a form of economic obsolescence in the wind farm property tax assessment? (2) The relative productivity of a wind farm is a function of its nameplate electric generation capacity, and the “net capacity factor” measures the efficiency of the wind farm electric generation. Does the latter metric (i.e., net capacity factor) serve as a measure of functional obsolescence in the wind farm property tax assessment? These valuation issues are currently being considered in the matter of Lost Creek Wind LLC v. DeKalb County Assessor pending before the State Tax Commission and the Circuit Court of Missouri.

Book Review: Guide to Intangible Asset Valuation

Neil Beaton, CPA
Willamette Management Associates managing directors Robert Reilly and Robert Schweihs recently authored the book, Guide to Intangible Asset Valuation, which was published by the American Institute of Certified Public Accountants. This review, written by Neil Beaton, provides an overview of the contents of the book as well as the author’s views on the relevance and quality of this important book.

Book Review: Healthcare Valuation—The Financial Appraisal of Enterprises, Assets, and Services by Robert James Cimasi

Charles A. Wilhoite, CPA
Healthcare Valuation: The Financial Appraisal of Enterprises, Assets, and Services, is an authoritative text authored by Robert J. Cimasi, one of the leading health care valuation experts in the country. Cimasi has taken the U.S. health care delivery system, a topic of exponentially growing complexity, and crafted a logical structure through which the volatile health care industry can be examined and understood by both seasoned analysts, as well as clients’ other professional advisers