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Mitigation of Damages in Lost Profits Damages

by Antonio Argiz on Categories: litigation support

Mitigation of Damages in  Lost Profits Damages
The duty of mitigation requires that the plaintiff take appropriate actions to overcome the damage purportedly caused by the defendant 1. The plaintiff is generally not permitted to recover damages that were foreseeable and could have been avoided by their reasonable efforts without causing undue expense or risk. In other words, the amount of earnings lost as a result of the plaintiff’s failure to mitigate its own damages would likely not be recoverable 2. Although the defendant may argue that the plaintiff could have mitigated its damages beyond the steps that it took, the plaintiff only needs to show that it took reasonable steps to mitigate its damages 3. It does not need to show that it took all of the steps that the defendant may assert should have been taken 4. It is up to the trier of fact to decide if the mitigation efforts of the plaintiff were reasonable and sufficient.

The plaintiff’s ability to mitigate is dependent upon several factors, which may include but are not limited to the following:

Plaintiff’s financial ability to mitigate. Mitigation of damages may not be possible if the plaintiff is financially unable to accomplish it.

The cost to mitigate as compared to the economic damages suffered by the plaintiff. If the cost to mitigate is greater than the economic damage suffered as a result for the defendant’s breach, it may not be possible for the plaintiff to mitigate the damages 5.

Reasonable expenses incurred in an effort to mitigate damages, even if plaintiff’s efforts are unsuccessful, are typically recoverable damages. The period of recovery for lost profits must be reasonable and may be influenced by the plaintiff’s actions to mitigate 6.

Additionally, in some instances, the plaintiff may receive certain tax benefits from the losses they may have incurred as a result of the defendant’s actions. These benefits could be in the form of tax losses, which can be used to offset positive income in future periods 7.

This concept of mitigation is best illustrated by the following examples.

The first example, involves a claim of tortious business interference between two companies arising from the actions of a former disgruntled employee. As an expert for the plaintiff, one would be required to collect information as to sales that occurred after the event of the employee’s termination which provided evidence of the decline in sales. The plaintiff expert should also challenge whether the decline in sales were due directly from the former employer’s actions or whether there were other intervening factors that caused a decline in sales such as a general market or economic downturn in the industry. As a rebuttal expert in this case, the professional would have to analyze and scrutinize any decline in sales to determine whether such declines in sales related to the former employee’s conduct or whether there were intervening events. In addition, a rebuttal expert should also be sensitive to lost profit claims that exceeded the financial capacity (i.e. working capital and liquidity) of the company to achieve.

Another example where mitigation of damages occurs is in employment discrimination cases. Although wrongfully terminated, the plaintiff has the responsibility to mitigate his/her salary losses by recruiting for and obtaining a replacement job. Expert issues related to mitigation of damages under employment discrimination cases will include comparability of position, level of effort expended in recruiting for a new position, and the full compensation package, including fringe benefits and perquisites.

Mitigation of damage expert testimony can drastically reshape any damage claim that is asserted by a plaintiff. Careful analysis of such claims and the relevant economic and evidentiary facts must be undertaken as part of an expert’s analysis and report.  

1 AICPA Lost Profits 06-04, Paragraph 134.
2 AICPA Lost Profits 06-04, Paragraphs 134-140.
3 In re Magna Cum Latte, 2008 WL 2047937 (Bankr. SD Tex 2008) (Defendant failed to prove burden to show that Plaintiff did not take reasonable steps to mitigate losses from breach of franchise agreement.)
4 Brandon & Tibbs v. George Kevorkian Accountancy Corp., 226 Cal. App. 3d 442, 227 Cal. Rptr. 40 (1990)
5 AICPA Lost Profits 06-04, Paragraph 139.
6 AICPA Lost Profits 06-04, Paragraph 137.
7 Patrick A. Gaughan, Measuring Commercial Damages.

Marta Alfonso, CPA/CFF, CIRA, JD and Rolando Couto
Morrison Brown Argiz & Farra, LLC
1001 Brickell Bay Drive, 9th Floor
Miami, FL 33131

South Florida Legal Guide 2013 Edition

Tags: mitigation of damages in lost profits damages

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