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Calculating prejudgment interest in past losses in business litigation

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Originally published by the ABA Section of Litigation, Expert Witnesses Newsletter, Spring 2016, Vol 11, No. 1, © 2016 by the American Bar Association

Damages claims typically include calculations of lost profits, which are equal to the difference between the plaintiff’s actual earned profits, and those that would have been earned without the defendant’s improper conduct. In addition to pretrial and post-trial losses, variables that are typically considered in a lost profits analysis include the dates of the improper act and the trial, the damages period, and an interest rate to discount lost profits expected in the future.

In addition, it is also frequently necessary to determine a rate of return to accumulate prejudgment interest. This accounts for the passage of time between the wrongful act and the date of restitution, making the plaintiff whole for past damages.

Many state statutes specify prejudgment rates, making the calculations a relatively uncontested and straightforward exercise. However, this is not true of all jurisdictions or for all causes of action. For example, federal courts do not have an established prejudgment interest rate or index. In these cases, prejudgment interest is awarded to compensate the plaintiff for the defendant’s use of funds from the wrongful act through the judgment date.

Calculating prejudgment interest incorporates several factors, including the future value of the dollar and future cash flow risks. In addition, the court can determine the prejudgment period in multiple ways, and a compounding period can allow interest to be gained on past interest. The court also has significant latitude in selecting the applicable interest rate where prejudgment is calculated.

Read a recent article published by the American Bar Association with RSM US LLP’s Boris Steffen to learn how litigation counsel can better understand the challenges related to calculating prejudgment interest.

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