CACI 3903N: Lost Profits After a Business Interruption

Business interruption claims are among the most heavily contested economic damages in commercial litigation, and the reason is structural: the loss never actually happened. There are no invoices for the sales that were never made. Everything turns on the credibility of a counterfactual, and CACI 3903N sets the standard that counterfactual has to meet.

What CACI 3903N requires

CACI 3903N — Lost Profits (Economic Damage) — asks the jury to decide whether it is reasonably certain that the plaintiff would have earned profits but for the defendant’s conduct. If so, damages are the gross amount the business would have received, less the expenses it would have incurred to earn it.

Two features of that standard drive everything that follows. First, the calculation need not be mathematically precise; it needs a reasonable basis. Second, “reasonably certain” attaches to both the fact of the loss and its extent. An expert can be entirely right that profits were lost and still be excluded for having no defensible way to size them.

Net profits, not gross revenue

California measures business damages on net profits, not top-line revenue. It sounds obvious and it is violated constantly — usually by an analysis that subtracts a thin slice of direct costs and calls the remainder profit.

The subtraction that matters is of the costs the business avoided because the interruption occurred. Materials not bought, hourly labor not scheduled, commissions not paid, freight not incurred, card processing fees not charged. Rent and insurance usually continue and are not avoided. Getting this wrong in either direction is the single largest source of variance between two experts looking at the same set of financials.

The three accepted approaches

1. Before-and-after

Compare the period after the interruption with the period before it, adjusted for what else changed. Strongest for an established business with a stable operating history. It fails when the interruption coincides with something else — a market shift, the loss of a key customer, a lease change — and the analysis attributes the whole gap to the defendant.

2. Yardstick, or comparables

Use the performance of similar businesses, other locations of the same business, or industry benchmarks over the same window to establish what the plaintiff would have done. This is the approach that rescues a claim where the plaintiff’s own history is short or disrupted. It is only as good as the comparability of the yardstick, and that is where cross-examination lives.

3. Projection, or sales forecast

Build the counterfactual from contracts, pipeline, budgets or a business plan. The most persuasive version rests on documents created before the dispute, for a purpose other than the litigation. A projection first drafted after the complaint was filed carries very little weight.

All three require the same underlying judgments: what the revenue trend was, what seasonality and cyclicality look like in this business, and what macroeconomic conditions were doing over the loss period. A projection that runs flat through a quarter the whole industry lost is not neutral — it is an assumption.

Defining the loss period

The loss period has two endpoints and both are contestable. It starts when the interruption began to bite, which is not always the date of the event. It ends when the business recovered to the level it would have reached anyway — not when it reopened, and not at the date of trial because that happens to be convenient.

Mitigation belongs here too. Sales that were deferred rather than lost, customers who came back, capacity redeployed to other work: each shortens or reduces the loss, and an analysis that ignores them invites the jury to discount the whole opinion.

Fixed and variable costs

The cost decomposition is where a forensic economist and a bookkeeper part company. Chart-of-accounts labels are not a reliable guide to cost behavior — “salaries” may contain both a fixed management layer and variable production labor, and “utilities” is usually part fixed and part volume-driven.

The work is to establish how each cost actually responds to output in this business, from the financial records, and then apply that relationship to the revenue that did not occur. Where the records will not support that decomposition, the honest answer is a range, not a point estimate dressed up as one.

Discounting: a real dispute, not a formality

Once the annual loss figures exist, a stream of future losses has to be brought to present value, and the rate is genuinely contested.

One view holds that a lost-profits stream should be discounted less heavily than a business as a whole — that the relevant rate reflects the plaintiff’s own cost of borrowing, since the loss is of cash the business would have had in hand. The competing view is that the discount rate should reflect the risk of the profits themselves, which for a volatile revenue stream can be well above a borrowing rate.

What is not defensible is importing a weighted average cost of capital out of a business valuation prepared for a different purpose and applying it to a lost-profits stream without asking whether the risks match. The rate choice frequently moves the number more than the revenue projection does, and it should be defended on the record rather than assumed.

Established versus unestablished businesses

California courts have long distinguished between the two. Where an established business is interrupted, lost profits are generally recoverable, because past volume and other provable data make their occurrence and extent ascertainable with reasonable certainty.

For a business with no track record the bar is higher, though not absolute — expert testimony drawing on comparable businesses and economic data can carry a new venture’s claim. What will not carry it is optimism. In Sargon Enterprises, Inc. v. University of Southern California (2012) 55 Cal.4th 747, the California Supreme Court reinstated a trial court’s exclusion of a lost-profits opinion projecting that a small dental implant company would have grown into a global competitor. The court described the gatekeeping question as whether the material relied on can provide a reasonable basis for the opinion, or whether the opinion rests on a leap of logic — an inquiry into the reasoning, not a weighing of persuasiveness.

Sargon is the case both sides cite. It is worth reading for what it does not say: it does not require certainty, and it warns against excluding expert evidence too readily as speculative.

Insurance business interruption is a different measure

A first-party business interruption claim under a commercial property policy is not the same exercise, and CACI 3903N does not govern it.

The policy does. Coverage typically responds to the actual loss sustained during a defined period of restoration, which is measured by how long it should reasonably take to repair or replace the damaged property — not by how long the business actually took to recover. Continuing normal operating expenses and payroll may be covered, excluded or endorsed. Extra expense, contingent business interruption and civil authority coverage each have their own triggers.

Two structural points matter for the economics. Most policies require direct physical loss or damage to covered property as the trigger, which is the issue that decided the great majority of pandemic-era claims. And many contain exclusions — virus, ordinance or law, off-premises utility service — that carve out losses a tort measure would include.

The practical consequence is that the same interruption can produce two legitimately different loss numbers, one under the policy and one under CACI 3903N, and they should not be reconciled by splitting the difference. If both are in play, they need to be calculated separately and explained separately.

Six questions that test a lost-profits opinion

1. Which costs were treated as avoided, and what in the records supports that classification?
2. What would revenue have done absent the defendant’s conduct — and what evidence, created before the dispute, supports that path?
3. How was the end of the loss period determined?
4. What mitigation was considered, and what was excluded and why?
5. What discount rate was used, and to what risk is it matched?
6. If the same method were applied to a period before the interruption, would it reproduce what actually happened?

The last one is the most useful and the least often asked. A model that cannot back-test against the plaintiff’s own history is not a measurement.

Where to start

The records that decide these cases are usually available early: monthly financial statements, the general ledger, point-of-sale or order data, contracts and any pre-dispute budget. If you are evaluating whether a lost-profits claim can be proven — or whether the other side’s can — the numbers are worth looking at before the theory is committed to in a pleading.

Related: commercial litigation support · lost profits calculations · CACI breach of contract damages. Source: the Judicial Council’s California Civil Jury Instructions.