Causation in Economic Damages: A Quick Case Study

Written by Luigi D’Onorio Demeo

Causation appears to be a simple concept. Did the defendant’s alleged wrongful conduct cause the damages suffered by the plaintiff? We recently completed a case which resulted in a positive outcome for our client, the Plaintiff in this specific circumstance. This was a complex commercial litigation case where the Plaintiff, who was forced into bankruptcy, was seeking damages as a result of actions committed by the Defendant.  

This case reminded us just how important Causation is with respect to the work of an economic expert. All too often we see damage calculations which ASSUME CAUSATION. Calculating lost profits, for example is possible in almost all cases but an expert that proves that those lost profits are as a result of the breach or actions of the defendant is key. Expert reports which use objective data and statistical analyses to make a case and prove that the damages exist are extremely valuable to counsel. This can be the difference between the expert answering a question at a deposition in one of two ways…, “I was asked to calculate damages assuming X…” OR “I prove in Exhibit B that damages were a proximate result of the Defendant’s actions.” The reason many experts do not include this in their reports is because it is a tedious and intricate analysis, and they are afraid to charge the client a little bit more for the work product.

Getting back to our recent case, we were asked to prove that the failure of this retail store was a result of the Defendant’s actions and not a result of just a failing store. In our analysis, we conducted a deep dive of the local geographical market in that retail industry, let’s call it a coffee shop. We looked at US Census data for a set of specific zip codes to measure the demand for coffee from residents and employees in the geographical location, over time. We also were able to extract data on the amount of square footage of coffee shops in the same location and corroborated it by walking the area by foot.  Using data on the demand and supply of the zip codes, we were able to measure what percentage our client’s coffee shop was of the total market BEFORE and AFTER the actions of the Defendant. We then proved, using statistical techniques that the demand for coffee was growing rapidly in the zip codes after the Defendant’s actions, HOWEVER our client’s sales were dropping precipitously. There was a direct inverse relationship between our client’s sales and demand for coffee in the zip codes, whereas prior to the Defendant’s actions, these two data sets were correlated. This analysis was useful in demonstrating that market forces were not the result of our client’s business failure.

 In the graph below, we show a similar depiction (the data has been changed for privacy) that we used in our analysis. It is quickly visible to the naked eye that our client (Red Line) was outperforming the market (Gray Line) in terms of Sales per Square Footage Growth up until 2014. It is additionally apparent that the market demand per square foot accelerated after 2014, at a time when our client’s sales were dropping off a cliff. The statistical analysis that followed the graphs presented in our Report provided empirical evidence that the market was not a factor in our client’s coffee shop failing as the Defense argued.

Causation is a simple yet widely overlooked concept in the economic damages community. Too often the focus is on the amount of damages rather than helping counsel prove the proximate cause of damages. With economic and statistical techniques such as the Total Addressable Market Analysis we used in this case, we can identify the cause of damages, should they exist and prepare a more accurate damages calculation. In this specific case we highlighted, the feedback from our partners were that this specific analysis was instrumental in obtaining a positive outcome.