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QUANTIFYING DAMAGES IN COMMERCIAL DISPUTES

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CORPORATE DISPUTES Jul-Sep 20172 www.corporatedisputesmagazine.com

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www.corporatedisputesmagazine.com CORPORATE DISPUTES Jul-Sep 2017 3

PANEL EXPERTS

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Rich Bergin

Managing Director

AlixPartners

T: +1 (617) 824 9771

E: [email protected]

Rich Bergin is an expert in global financial economics, specialising in securities fraud, antitrust violations, international arbitration and commercial disputes. He has more than 20 years of experience in assisting clients with economic, financial, and valuation analyses in investigations and disputes. He has testified as an expert witness in trials, including federal and state courts, in arbitrations, and before government agencies, and regularly serves as a litigation consultant.

Andrew Grantham

Managing Director

AlixPartners UK LLP

T: +44 (0)20 7098 7474


Andrew Grantham is an experienced financial and accounting expert with over 25 years’ experience in financial investigations and as an accounting and damages expert witness. His experience covers many aspects of accounting, valuation and financial matters, including breach of contract and loss of profits claims, minority shareholder and joint venture disputes and claims arising following acquisitions and sales of businesses. He has given evidence in the High Court, Crown Court and in international arbitrations on over 30 occasions.

Timothy Gray is a forensic analyst who helps his clients respond to a range of legal and regulatory challenges with confidence and at speed. He specialises in the determination of defensible facts and insights from large, disparate, complex, structured and unstructured datasets. He has worked with disputes across a range of industries including financial services, travel and carbon trading.

Derek Holt is an economist with over 20 years of experience in the fields of competition, regulation and litigation. He has acted as an expert in matters before the European Commission, the Competition Appeals Tribunal, the CMA and sectoral regulators. He recently appeared for Visa in the High Court in a standalone competition matter, and is acting for Peugeot in a follow-on claim before the CAT.

Timothy Gray

Director, Litigation Data Analytics

AlixPartners UK LLP

T: +44 (0)7500 014 031


Derek Holt

Director

AlixPartners UK LLP

T: +44 (0)20 7098 7475




MINI-ROUNDTABLEQUANTIFYING DAMAGES IN COMMERCIAL DISPUTES

CD: How important is it for a company considering filing a commercial dispute to assess the potential damages thoroughly?

Grantham: Assessing potential damages is

incredibly important. Our 2016 Litigation Survey

suggests that one in 10 companies have been

involved in a ‘bet-the-company’ lawsuit, which is a

surprisingly large number. Admittedly, these are the

top end of the cases in terms of magnitude, but if

a company is considering investing time and cost

in bringing a claim of any significant size it needs

to know what the likely ‘return’ on that investment

would be, and the possible risks associated with it. At

an early stage, a high-level view from an experienced

expert will be valuable in helping a company with

the decision of whether to bring the claim. In

addition, this early assessment will assist when it

comes to thinking about if and how to consider the

involvement of litigation support funders. They will

undoubtedly carry out their own assessment and it

will assist the company considerably to have its own

independent assessment.

Bergin: Assessing damages is quite critical as it

can help the filing party assess the viability of taking

legal action. We have occasionally seen situations

where a party, after filing its claim, decided to drop

one or more claims after reviewing the quantum

of damages prepared. Having arrived at such an

understanding before the claim was filed would

have saved the party considerable costs and the

potentially embarrassing climb-down. In addition,

understanding where the losses arise – the heads

of claim – helps focus minds on the evidence that

may be required and how complex the case may

become. That may also elicit other remedies which

may be relevant, injunctions, for example, or where

mitigating action should or is being taken.

Holt: There are some specific factors when it

comes to competition claims that are worth thinking

about. Our 2016 Litigation Survey indicates that

over 50 percent of all cases are class actions. In

standalone cases, the judge or tribunal assesses

whether a party infringed competition law. The

potential damages in such cases can depend on

a lot of factors and it is important to think through

how the alleged distortion to competition caused

loss. For example, this may be as a result of raising

input costs, foreclosing access to supplies or

restricting access to customers. Second, if liability

has been established, the focus will be on the

damages caused by the anti-competitive activity.

The level of damages can vary widely, depending

on how widespread the practice was, its duration

and any mitigation. For example, in most cartel

damages matters, we engage early on to discuss

what evidence there may be regarding whether the

company passed on an overcharge to its customers.


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Evidence of this could significantly reduce the value

of a prospective claim.

Gray: From a forensic IT perspective, a thorough

damages assessment will include an assessment

of structured data, semi-structured data and

unstructured data. Increasingly we see

the use of data in its broadest sense being

employed in cases to great effect, while

simultaneously observing that parties are

often less familiar with employing the

use of data, particularly structured data.

A thorough damages assessment helps

to identify all the possible opportunities

available to the case, thereby

strengthening the case. A thorough

damages assessment will include an

assessment of the data requirements.

This assessment will describe whether

the data can be sensibly obtained, where the data

can be obtained from and any likely obstacles and

challenges. As such, a thorough assessment will

determine case feasibility, costs and timelines, and

will place the party in the strongest possible decision

making position.

CD: Given the time and cost associated with a commercial dispute, is it preferable to enlist the aid of experts before making a final decision on how to proceed?

Grantham: We all recognise that this can be

a finely balanced decision: should you incur the

cost of an expert before bringing the case? If the

company has gone past the stage of considering the

‘go or no go’ decision, then there are issues of cost

proportionality to consider. However, our experience

has been that costs do not necessarily increase

because an expert has been brought onto a case

earlier. Clearly, the financial expert can assist with

the quantum aspects: helping identify heads of loss,

quantifying loss, commenting on the strengths and

weaknesses, and flagging where the case is well

supported or where further evidence is needed.

However, an expert accountant brings more to the

table than just numbers. An experienced expert

may have seen or worked on similar cases, and will

be able to discuss the various aspects that need

to be considered, including the nature and content

Timothy Gray,AlixPartners UK LLP

“A thorough damages assessment helps to identify all the possible opportunities available to the case, thereby strengthening the case.”



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of information that should be provided by way of

evidence. It is always worth an initial conversation

with an expert, regardless, to see what insights he or

she can bring.

Bergin: Obtaining early-assessment expert help

can be valuable. An effective litigation strategy

should ideally focus on pillars that are likely

to be supported by expert opinion and

yield favourable outcomes. An expert can

identify documents that are likely to support

such favourable opinions, if they are readily

present at such an early stage, and also

have a critical impact on discovery and

information requests on a go-forward basis.

Holt: It is helpful to enlist the support

of experts before making a final decision

on how to proceed. The expert can assist

in identifying the prospect of success for

a standalone competition claim, as well as provide

an indication of the potential scale of damages.

In a competition dispute context, in addition to

developing an initial understanding of the likely

range for any damages, the expert could also identify

the sort of factual evidence that would be required

to support the ‘theory of harm’ and quantification.

This can help the company consider what evidence

is already available and what would need to be

requested from the other side to demonstrate that

the alleged activity breached competition law.

Gray: A recent dispute comes to mind. Rather

than rely on forensic IT experts, the party decided

to use in-house technical resources. With the best

intentions, the analytical resources employed

various forensic tools and techniques to gather

evidence for the case. Unwittingly, by running

queries on the target datasets, the party’s systems

started to wipe data stored in its temporary memory

– previously deleted data – and risked undermining

the case. A forensic IT expert will often seek access

to ‘deleted data’ that is hidden from standard users,

and will often see this data as crucial to the case.

Crucially, the use of structured datasets is a relatively

new avenue for disputes. Engaging data dispute

professionals to highlight all possible avenues before

making a decision to proceed can help parties make

a better decision. Data, systems and databases can

be very complex, especially in a dispute context.

Rich Bergin,AlixPartners

“An effective litigation strategy should ideally focus on pillars that are likely to be supported by expert opinion and yield favourable outcomes.”



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Rigorous data preservation, collection and control

processes, accompanied by auditable, transparent

analysis are essential. There may be costs to not

involving experts both in terms omitting valuable

avenues and in terms of undermining the quality of

the analytics completed.

CD: Many damage assessments include considering losses which will arise in the future. How do you go about quantifying something that has not yet happened?

Grantham: This is where it becomes particuarly

important for the expert to gain a strong

understanding of the business. When asked to

consider losses in the future, we want to understand

what it is the business does, how it operates

and what its plans are. We all understand and

acknowledge the old adage, especially when it

comes to share price, that past performance is not

necessarily an indicator of what might happen in the

future. However, when it comes to assessing future

damages, understanding how good a company

has been in the past at forecasting results, and

being able to demonstrate this track record, will

add a significant amount of certainty to what many

will describe as a speculative process. In addition,

though, what is forecast to happen in the future

needs to make sense compared to what happened

in the past. The future needs to fit contextually

– is growth realistic? Does it fit in the market? Is

the business positioned to do what is forecast? In

many cases, a ‘discounted cash flow’ forecast is

prepared, which considers both the value of the

future cash flows and when the cash flows are

likely to arise. These future cash flows are then

discounted back to a present value using a discount

rate to reflect the risks, uncertainty, and the time

value of money. Alternatively, some of these risks

or uncertainties can also be incorporated into the

cash flows themselves. However, this can be a time

consuming exercise and might not be warranted

when considering cost proportionality. Also, some

might argue that this exercise still demands a high

level of subjectivity which, as a result, does not

add any greater level of assurance to the damages

assessment.

Bergin: Econometric modelling plays a major

role in calculating future damages in many cases.

Economic damages are computed by comparing

outcomes in the real world with outcomes in

the ‘but-for’ world. In both the real and ‘but-for’

world, an econometric model may be employed to

generate reasonable forecasts of future outcomes.

Holt: Anti-competitive behaviour, such as

predatory pricing by a dominant firm, may take

place over a particular period. However, the effects

of these actions could persist, potentially into

the future. A good example of the need for this

type of analysis relates to the effect of cartels.



Just because a cartel is found to have

stopped on a certain date does not

mean that prices immediately return

to a competitive level. To assess

whether this is the case, an expert

may use benchmarking analysis,

for example, comparing prices in

similar markets or geographies.

To value these effects, it will be

important to discount the series


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of cash flows back to their present value.

Gray: From a forensic

IT perspective,

the approach to

quantifying the value

of future events

depends on the

damages model

undertaken,

though there are

common themes.

One area that

has seen growth

is in the use of

artificial intelligence

or machine learning

models to predict

the characteristics of

future events. These

models will analyse

historical data to identify

the sometimes nuanced and

complex relationships between

cause and effect, as distinct

from simple correlations. A key

approach to proving the validity of

these models is to apply the model

to a historical dataset previously

unseen by the learning model and

thereby evidencing the accuracy of the

predictions. Utilising these cutting-edge models is

not always appropriate. What they achieve in terms

of accuracy they may lose in terms of obfuscation.

A clearly defined, transparent, easy to understand

damages model is a noble aim. Key themes to

building credibility in a future based damages model

from a data perspective include involving a data

expert along with the traditional economists and

quantum experts – they will likely be able to find

ways to strengthen the model, for example, replace

assumptions with facts. Other themes include:

searching for models that have been successfully

used in at least five other cases; testing assumptions

against recognised benchmarks, historical data,

industry research, recognised market data and

expert opinion; and, where appropriate, employing

the use of regressing testing.

CD: What steps need to be taken to collect and analyse data relevant to the case, for the purposes of evaluating damages?

Grantham: If you already have an expert on

board, ask them what they will need as soon as

you can. There may be confidentiality issues or

commercial considerations to work through in

collating disclosure, and dealing with those early

will be helpful in the long term. Data can come

from all sorts of places both within the company

and externally, and experts will help you navigate




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in finding what is relevant and useful. For many

companies, there can be a real challenge of having

too much data to deal with. Every case is different,

and data requirements may evolve over time or

only become clear as the issues crystallise. Judges

or tribunals sometimes express concerns as to the

proportionality of a damages exercise in the cold

light of judgment or award, and in those

cases guidance from the judge or tribunal

around what should or should not have

been done would be useful for future

cases.

Bergin: In a typical dispute involving

financial economics, there are four main

steps. First, identify what data is needed

in an ideal world. Second, work with the

company to determine how much of this

data is available, and talk with owners of

this data to get an understanding of its adequacy.

One is then able to analyse the data and collate

preliminary findings, identifying gaps that require

additional data. Third, research the public domain for

similar data and investigate whether the publically

available data broadly agrees with the preliminary

findings based on the company data. One can then

assess whether the public information can close the

gaps in company data. Finally, work collaboratively

with parties to prepare discovery requests to close

any remaining gaps.

Holt: During the initial phases of collating and

analysing data, close interaction between the expert

and the company is required to ensure the data is

understood in its proper context. Various processes

should be carried out to ensure the data is as robust

as possible: data will often need to be ‘cleaned’,

by identifying and addressing gaps and anomalies.

Initially, obtaining sufficient data may be seen as a

challenge, particularly if the alleged activity and its

effects go back many years. However, asking parties

the right questions often leads to additional data

being identified, which they may not have initially

appreciated was relevant. A useful starting point with

the data is to simply graph the trends and to observe

any apparent relationships – even simple graphs

may highlight important relationships. However, it is

important to develop robust models, properly ‘road-

tested’ in a litigation context.

Derek Holt,AlixPartners UK LLP

“During the initial phases of collating and analysing data, close interaction between the expert and the company is required to ensure the data is understood in its proper context.”



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Gray: Data collection and analysis in a disputes

context presents many unique challenges, each

of which must be carefully managed in order to

support the case. Some of the most important

steps include the identification of relevant data.

Over 2.5 quintillion bytes of data have been created

in the past two years alone. Any one organisation

will have vast data stores. Answering seemingly

basic questions, such as ‘what data is needed and

why?’ and ‘in what technologies does the data

reside and in what format?’ is essential to avoiding

information overload. Custody, privacy and control

issue resolution must be addressed. Relevant

data may span multiple jurisdictions and third

parties. Data may involve proprietary architecture

and code. Sensitive information, including trade

secrets, employee records and financial records,

may be required. Chains of custody will need to be

established. A ‘single version of the truth’ is a further

important step. Building an independent disputes

data model that acts as a reliable, single version of

truth for the case is critical. To achieve the single

version of the truth, the model must be auditable,

transparent and tightly controlled. All assumptions

must be clearly stated. Data lineage must be

established from a single aggregated number

back to the lowest level system transactions.

Data preservation systems are both complex and

fragile. It is easy to lose information vital to the

case and undermine data integrity unless the

correct preservation protocols are adopted. Data

visualisation is a further issue. Given that a case

may involve many millions of records and highly

complex algorithms, it is essential that the data be

aggregated and communicated in a way that is easy

to comprehend.

CD: In your experience, how important are the factual witnesses and evidence when quantifying damages?

Holt: Losses must be measured by reference to

a hypothetical counterfactual, which means that

there may not always be a set of facts that a factual

witness can speak to. Instead, the expert needs to

use empirical techniques and an analysis of the

incentives of the parties to infer what may have

happened. However, the experts’ analysis should

not be a purely theoretical exercise removed from

the way in which the business actually operates.

It is, therefore, essential that the factual witnesses

clearly describe the business’ operations, including

how it engages with its suppliers and customers,

and what mitigating steps it took against the adverse

parties’ action. This may be especially important

when addressing the question of pass-on of cartel

damages, which by its nature involves a detailed

analysis of the pricing strategy and practice of the

claimant. The link of the economic evidence to the

factual evidence has been particularly important in

the context of a recent case on Visa’s interchange

fees before the High Court. For example, when



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considering what might happen without interchange

fees, one question was whether the banks would

then negotiate bilateral interchange fees. As an

expert considering this from the perspective of

the incentives of each party to engage in bilateral

negotiations, it is important to take account of the

factual witness evidence as to how prevalent such

arrangements are and how practical it would be to

establish such arrangements.

Bergin: Damages analyses can often be

theoretical exercises relying on empirical techniques

and models. We occasionally run into damages

models supported by seemingly rational economic

assumptions, but which are easily refuted by the

industry-specific conditions and factors existing at

the time the damages calculation is attempting to

model. Collaboration with factual witnesses can help

avoid this trap and should serve as a reality check on

similar models and analyses.

Grantham: A damages expert will recognise

that no matter how qualified he or she may be, or

how much experience he or she has, they do not

know a company or its business as well as those

who run the company themselves. In addition, an

expert was not there at the time the circumstances

giving rise to a claim occurred, and rarely would

an expert have direct experience in working in

the specific industry on the same issues. Those

running the company were and do. One skill of the

expert lies in taking what the factual witnesses and

evidence tell them, testing it, checking consistency

and fitting it into the overall assessment of damages

that is made, balancing against assumptions and

modelling. Having factual statements to point and

refer to is very helpful to the expert in rationalising

his modelling, assumptions and assessment of

damages.

Gray: The value of factual witnesses from a

forensic IT perspective, largely depends on the type

of commercial dispute in question. If the dispute is

based upon the analysis of historical transactions,

then the factual witness becomes important. In

contrast, a dispute centred on economic theory will

likely have less demand, from a data perspective.

Factual witnesses can help accelerate the creation

of the case data model – the single version of the

truth – by explaining the interplay between business

operations as a collection of people and processes

with the systems and data. The factual witnesses

will be able to describe the ‘data journey’, which

describes the journey from data creation, including

data touch points, through to data usages. Forensic

IT experts will often need to cleanse and manipulate

a great deal of complex, company specific data

– factual witnesses can support with the translation

of the systems language to that of the case. By

contrast, in some instances, experts are required

to analyse systems that contain essential data,

but for which there is no supporting information;



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essentially they are presented with a ‘black box’.

These opportunities present interesting challenges

for experts to overcome.

CD: The temptation is to pair the expert accountant with the company’s financial director since they talk the same language – but in your experience, is that the right thing to do?

Grantham: The financial director clearly

has a stake in any dispute, be it as part of

the decision to bring a claim and investing

in the case, or by being on the receiving

end of a claim and deciding whether to

fight and risk losing, or as part of the decision to

settle. The financial director can often act as the

single point of contact within a company, to help

coordinate efforts, identify and make connections

with the right people, manage the information flow

and retain control over costs. However, the financial

director is often several steps removed from the

circumstances giving rise to the claim. He or she is

typically not the one at the coal face. Much of the

most useful witness evidence comes from those in

operational, sales or purchasing roles, depending on

the issues in dispute. While the financial director will

have a sense of the issues, in so far as people report

to them, it is the staff who directly deal with the

issues who have the direct experience and can talk

credibly to them.

Bergin: This is typically not a good idea. The role

of the CFO generally has broadened over the past

decade. Beyond the core responsibilities of financial

reporting, audit and compliance, planning, treasury

and capital structure, many CFOs are playing a

stronger role in corporate portfolio management and

capital allocation. Others have become prominent

as the voice of the company in investor relations

and in communications to the board, as leaders

in performance management and as exporters of

finance-experienced personnel to the rest of the

organisation.

Holt: While the financial director can assist in

explaining the financial position of the company,

Andrew Grantham,AlixPartners UK LLP

“Much of the most useful witness evidence comes from those in operational, sales or purchasing roles, depending on the issues in dispute.”



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many competition matters relate to the relationship

between a company and its suppliers and

customers, rather than the financial markets. This

is particularly the case in cartel damages cases.

In these cases, it will be important to understand

the data held by the procurement function of the

prospective claimant. This might include purchase

contracts, databases containing the value of

purchased inputs and associated information for

orders from suppliers, such as prices, units, delivery

costs and location, as well as any significant changes

in the nature of the supplied products over time.

In other cases, including allegations of abuse of

dominance, it may be critical to understand from

the sales director how pricing strategy is developed,

for example, how rivals’ pricing benchmarks are

identified and how firms in the sector use discounts

to win business.

Gray: A useful addition to the typical roles

involved in commercial disputes is the IT director.

Where analysis of structured data is concerned, the

IT director becomes an essential resource to confirm

the systems and data landscape. The IT director

can typically provide the technology infrastructure

details, systems libraries, data dictionaries, backup

plans and essentially the contact details of the

relevant IT resources that can assist with the

extraction of data. The IT director will describe how

the systems have been managed and will assist

with designing the optimum way of extracting the

data. There are exceptions, however. Occasionally,

the lack of strong IT infrastructure governance is a

contributor to the dispute. The IT systems and the

data contained within them are often a reflection of

the organisation’s maturity and overall quality; with

poorly defined processes, inadequate controls and

limited management of people, the data quality will

be poor, possibly contradictory and the opportunities

for exploitation will arise.

CD: Finally, when it comes to quantifying damages, what in your experience is the one thing that has been the difference between a good outcome and a great outcome?

Holt: The most important issue is to avoid falling

into the trap of confirmation or optimism bias.

When looking at a broad range of evidence, it may

be tempting for the legal advisers to focus only on

that which supports the case. However, the expert

should engage with all of the evidence, consistent

with the duty to the court, while setting out why they

have chosen a particular framework for looking at

this evidence. This can be important in maintaining

a credible position before the judge. Secondly, it is

important to tell a story in a coherent way, referring

not only the conceptual theory of harm and the

empirical analysis but how these are consistent with

the facts of the case.



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Grantham: For me, it is the coordination between

the legal team, be that solicitors and barristers, and

the expert. There really is no substitute for getting

people in a room together regularly to discuss the

case, update on progress, and work through issues

and points face-to-face. That working relationship is

so important and contributes to strong, compelling

expert evidence.

Bergin: As an expert, it is important to be able to

understand the possible limitations and weaknesses

of your arguments or analyses by putting yourself in

the shoes of the opposing expert and anticipating

possible rebuttal points they will come up with. This

is an important consideration, and rather than being

left to the end of a dispute, one that you should

consider as your work as an expert progresses. How

effectively could you respond to said criticism and

handle potential cross-examination?

Gray: Deep and thorough investigations of data,

accompanied by an open mind, are vital. A recent

case comes to mind whereby a party acquired

a business for £600m and upon receiving the

business realised that the business had material

performance issues. The acquiring party was unsure

as to whether they themselves had simply exercised

poor judgement or whether they were misled. With

unclear expectations of what to find, the team dug

into a huge amount of data to gain a complete

understanding of the acquisition. This included

identifying key parties to the acquisition, comparing

assertions made publicly and privately and creating

an independent assessment of company value

based upon the system data. The independent

assessment valued the business at £75m and clearly

evidenced misleading activity. In this case, the

decision to ‘fish’ within the data took the case in a

direction that could not have been anticipated at the

outset. CD


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QUANTIFYING DAMAGES IN COMMERCIAL DISPUTES€¦ · and private equity fund disputes ampnmpBrc ABbgqnsrcq ()0 .@2 16? A@2? uuuampnmprcbgqnsrcqeglcamN *5, 3%0 REPRINTED FROM: CORPORATE