The Yardstick Method is a tried and true way to measure economic damages in contract, patent infringement, and other tort claims. In a nutshell, this method is based on comparisons with similar type business in the same industry. In damages cases the financial experts are hired to assist the court in estimating what a plaintiff might have earned ” but for” the defendant’s alleged wrongdoing. In order to withstand financial scrutiny, experts must base their estimates on real world comparable evidence and not pure speculation.
The market data that is used in the yardstick method is the performance of guideline companies during the damage period. The expert will compare the plaintiff’s actual financial performance with the results it could have anticipated ” but for” the defendant’s wrongful action, based on the performance of the guideline companies in the same industry. In addition to revenues it is important to consider savings from expense reductions when estimating the financial damages and that the guideline companies selected are similar enough to to be considered comparable which can be problematic when dealing with economic damages for small companies.
While most courts give significant weight to the yardstick method, it is subject to limitations such as it cannot be used for start up companies that have not produced sufficient financial results that are comparable to more established companies. It is also critically important to look at the industrial classification codes when selecting guidelines companies. Selected companies used in the yardstick method must also be comparable in terms of market share, target markets, product and service offerings, geographic location, financial performance such as leverage, assets, and revenues, and marketing strategy.
While a weak sample of guideline companies does not always render an expert yardstick analysis inadmissible, it can reduce the value of the economic damages the court may award to the plaintiff. Plaintiffs rarely if ever have the benefit of using direct evidence to show how much economic damage was caused by the defendant’s alleged wrongdoing. When using an indirect method to measure damages such as the yardstick method to estimate economic damages, it is extremely important to ensure that an expert’s report assumptions are supportable and that he or she can explain their reasoning to the court.