Financial Litigation
The Financial Litigation domain tests your ability to quantify economic damages, apply admissibility standards for expert testimony, and connect a defendant's conduct to a plaintiff's loss. Questions often require you to choose between lost profits and lost business value, and to defend every assumption.
Damages framework
- Compensatory damages restore the plaintiff to the position it would have occupied but for the wrongful act. The amount must be proved with reasonable certainty; speculation and conjecture are rejected.
- Lost profits equal but-for revenue minus actual revenue, multiplied by the contribution margin, less avoided costs and mitigation, then discounted to present value.
- Causation must be established separately from amount. Mitigation is required when reasonable, and prejudgment interest may be added under statute or agreement.
Expert standards
- Under Daubert, federal courts consider testability, known error rate, peer review and publication, and general acceptance. Some state courts still apply Frye's general-acceptance test.
- A litigation support consultant works behind the scenes and may be protected by privilege; a testifying expert's file and draft reports are generally discoverable.
Special contexts
- Intellectual property: lost profits require proof of demand, absence of acceptable noninfringing substitutes, capacity to exploit demand, and the profit margin (the Panduit factors); a reasonable royalty is the fallback.
- Business interruption: gross earnings less continuing expenses, plus extra expense, over the indemnity period.
Worked example
But-for revenue is $5.0 million and actual revenue is $3.0 million. Variable costs are 60% of revenue, so the contribution margin is 40%. Lost contribution = $2.0 million × 40% = $800,000. The plaintiff mitigated the loss by generating $150,000 of replacement contribution. Net lost profit before discounting = $650,000. Discounted one year at 10%, the present value is $650,000 ÷ 1.10 = $590,909. Fixed costs that would have been incurred anyway are not deducted.
Traps
- Claiming lost revenue instead of lost profit.
- Deducting fixed costs that would not have changed.
- Ignoring mitigation or failing to subtract avoided costs.
- Double-counting lost profits and diminished business value for the same loss.
- Offering legal conclusions rather than financial opinions.