Med Mal Damages: Quantifying the Seemingly Unquantifiable

Failure to Diagnose?

The decedent, former New Jersey resident Michael White, was a successful businessman and part owner of “SUDZ,” a prosperous detergent company. Between 2003 and 2006, Mr. White received significant dividends as a result of his ownership in SUDZ. The dividends varied from year to year, depending on the company's profits. In 2006, Mr. White sold his ownership of SUDZ and started his own consulting firm, “Gray Consulting.” At that time, SUDZ was his one and only client; however, given his connections in the detergent business, Mr. White anticipated no difficulty in procuring additional clients.

In 2006, Mr. White's income was the net value of the agreed-upon dividends from the sale of his holdings in SUDZ and the services rendered through his new consulting firm. In 2007, his income was solely derived through his burgeoning consulting firm, which still had only one client, SUDZ.

In mid-2007, Mr. White was taken to XYZ Hospital's Emergency Department with complaints of “not feeling right,” back pain, shortness of breath and chest pain that was described as “ripping.” Upon arrival in the emergency department, Mr. White was triaged and seen by a cardiology fellow who ordered that he be admitted. The cardiology fellow made a notation that the patient would be seen in the morning to undergo diagnostic testing to rule out aortic dissection. Unfortunately, Mr. White did not make it to the morning. During the evening hours his aorta ruptured and he passed away. Subsequently, Mr. White's estate filed a medical malpractice suit, claiming that Mr. White's passing was a direct result of the defendants' medical malpractice ' more specifically, failure to diagnose and treat an aortic dissection. Parts of the estate's damages claim included economic losses.

Figuring the Economic Loss

For purposes of this article, it will be presumed that there was a material issue of fact as to whether Mr. White had divested all of his shares in SUDZ. With this presumption in mind, there are two ways in which the Estate's economist could value Mr. White's lost economic potential.

First, if it could be shown that Mr. White had retained ownership of the company in some capacity, economic loss could be calculated by examining the company's earnings history, and arriving at an average figure. Furthermore, if proven to be a shareholder of the company, Mr. White would have benefited from SUDZ's future profits and would be entitled to a quantified sum of those earnings.

Alternatively, if at the time of his passing Mr. White no longer retained an ownership interest in SUDZ but rather intended to start a new business or expand his consulting firm, it would be necessary to calculate the potential loss of an unknown business. This is not as simple (or reliable) as calculation of an ownership in a company with a track record, like SUDZ.

Mr. White's knowledge of and contacts in the detergent industry is not directly transferrable to dollars and cents. The Estate's economic expert found both of these pathways to be substantiated within the facts of the case, leading him to report a net economic loss of $1,859,333 (after withdrawing taxes, personal consumption and reducing to present value). This number was obtained by adding the value of Mr. White's shareholding profits from SUDZ and his consulting earnings from 2003 to 2006 and dividing by four. Further, the economist placed a value on Mr. White's consulting business that was substantially greater than the business's actual earnings.

The Estate maintains the burden of proof as to the reasonableness of the economic loss figure. The Estate would argue that it is evident Gray Consulting would be profitable, as Mr. White was an educated and sophisticated businessman who had already been successful in the detergent industry. The Estate would also argue that, given his experience, knowledge and contacts, Mr. White's success was guaranteed.

The Defense, and NJ's New-Business Rule

On the other hand, the defendants would argue that the opinions of the plaintiff's economist as they relate to the earnings of Mr. White's consulting business, were unsupported and, thus, an impermissible net opinion. It is well established that net-opinion rule requires an expert witness to give the why and wherefore of his expert opinion. Moreover, ultimately, “[a]n opinion is no stronger than the facts which support it.” Parker v. Goldstein, 78 N.J. Super. 474, 484 (App. Div. 1963), cert. denied 40 N.J. 225 (1963).

Are the purported lost wages associated with Gray Consulting recoverable or should they be barred under New Jersey's New Business Rule (hereinafter “NBR”)? New Jersey courts employ the NBR when assessing claims of lost profits in new businesses that lack provable data. In this case, while the Estate categorizes Mr. White's losses as “wages,” in reality the projected income would be derived through Gray Consulting only in the event the business survived.

Under the NBR, prospective profits of a new business are considered too remote and speculative to meet the legal standard of reasonable certainty, and therefore are barred. See, inter alia, Weiss v. Revenue Bldg. & Loan Assn, 116 N.J.L. 208, 212 (E & A 1936). In Weiss , the court described the new-business rule as follows: “There is a well-established distinction, in respect of the ascertainment of future probable profits, between a new business or venture and one in actual operation. In the first, the prospective profits are too remote, contingent, and speculative to meet the legal standard of reasonable certainty; while in the second, the provable data furnished by actual experience provides the basis for an estimation of the quantum of such profits with a satisfactory degree of definiteness.” As confirmed by New Jersey's Appellate Division, alleged damages must be calculated with “reasonable certainty.” New Jersey courts continues to follow the NBR and bar lost profit claims that are not proven with reasonable certainty.

Reconciling the well-established NBR with the record leads to the conclusion that the lost profits of Gray Consulting would be deemed simply too speculative. First, the record is presumably silent on the possibility of Mr. White ever having any additional consulting clients. At the time of his passing, SUDZ was his one and only client, making it more of a jump than an educated assumption to predict that he would have actively sought out and ultimately retained new clients. The basis for the lost wage claim made by the estate thus may be adequately described as a net opinion. Nowhere in the record is the estate's claim backed by facts or verified by any meaningful documents or data. The economist's opinion as to Mr. White's lost wages is based solely on assumptions gleaned from the estate's obvious interests, and does not provide substantial grounds for these assumptions to stand upon. In order to avoid having its economist's opinions barred, the estate would have to present sufficient, credible evidence that, despite only having one client at the time of his passing, Mr. White's consulting business would have been successful within reasonable certainty. Such a task would certainly require the services of a forensic economist.

Conclusion

Through this hypothetical, we can see not only the importance of forensic accounting, but also that attention to detail is required for a holistic understanding of a particular wage claim to be realized. An unexamined view of the facts might lead the estate of Mr. White to make foundationless claims to economic damages that, under further inspection, have no factual basis. Attention to detail and attentive research are required for a forensic accountant to obtain an understanding based on evidence, not wishful thinking.

Robert E. Spitzer, a member of this newsletter's Board of Editors, is an attorney with Post, Polak, Goodsell, MacNeill & Strauchler, P.A., where he concentrates his practice on medical malpractice, as well as commercial litigation.

In order to assess the validity of economic losses within the field of medical malpractice, a number of variables must be taken into consideration. And depending on the alleged loss advanced, there exist subjective elements that make it difficult to gauge and evaluate those allegedly caused by the medical malpractice.

While each case is unique, the most complex damages stem from lost economic advantage or potential. Generally, assessing economic damages is contingent on the relationship between the claimant and a business entity or potential business entity. With an employee who has a set salary, there is generally no dispute as to the quantum of lost earnings, making the loss easier to assess. On the other hand, a consultant or shareholder has a drastically different relationship with his or her respective business or prospective business, making it far more difficult to quantify the economic damages a plaintiff may or may not have suffered.

Through the use of the below hypothetical fact pattern, let's examine the importance of quality forensic accounting in the medical malpractice arena.

Failure to Diagnose?

The decedent, former New Jersey resident Michael White, was a successful businessman and part owner of “SUDZ,” a prosperous detergent company. Between 2003 and 2006, Mr. White received significant dividends as a result of his ownership in SUDZ. The dividends varied from year to year, depending on the company's profits. In 2006, Mr. White sold his ownership of SUDZ and started his own consulting firm, “Gray Consulting.” At that time, SUDZ was his one and only client; however, given his connections in the detergent business, Mr. White anticipated no difficulty in procuring additional clients.

In 2006, Mr. White's income was the net value of the agreed-upon dividends from the sale of his holdings in SUDZ and the services rendered through his new consulting firm. In 2007, his income was solely derived through his burgeoning consulting firm, which still had only one client, SUDZ.

In mid-2007, Mr. White was taken to XYZ Hospital's Emergency Department with complaints of “not feeling right,” back pain, shortness of breath and chest pain that was described as “ripping.” Upon arrival in the emergency department, Mr. White was triaged and seen by a cardiology fellow who ordered that he be admitted. The cardiology fellow made a notation that the patient would be seen in the morning to undergo diagnostic testing to rule out aortic dissection. Unfortunately, Mr. White did not make it to the morning. During the evening hours his aorta ruptured and he passed away. Subsequently, Mr. White's estate filed a medical malpractice suit, claiming that Mr. White's passing was a direct result of the defendants' medical malpractice ' more specifically, failure to diagnose and treat an aortic dissection. Parts of the estate's damages claim included economic losses.

Figuring the Economic Loss

For purposes of this article, it will be presumed that there was a material issue of fact as to whether Mr. White had divested all of his shares in SUDZ. With this presumption in mind, there are two ways in which the Estate's economist could value Mr. White's lost economic potential.

First, if it could be shown that Mr. White had retained ownership of the company in some capacity, economic loss could be calculated by examining the company's earnings history, and arriving at an average figure. Furthermore, if proven to be a shareholder of the company, Mr. White would have benefited from SUDZ's future profits and would be entitled to a quantified sum of those earnings.

Alternatively, if at the time of his passing Mr. White no longer retained an ownership interest in SUDZ but rather intended to start a new business or expand his consulting firm, it would be necessary to calculate the potential loss of an unknown business. This is not as simple (or reliable) as calculation of an ownership in a company with a track record, like SUDZ.

Mr. White's knowledge of and contacts in the detergent industry is not directly transferrable to dollars and cents. The Estate's economic expert found both of these pathways to be substantiated within the facts of the case, leading him to report a net economic loss of $1,859,333 (after withdrawing taxes, personal consumption and reducing to present value). This number was obtained by adding the value of Mr. White's shareholding profits from SUDZ and his consulting earnings from 2003 to 2006 and dividing by four. Further, the economist placed a value on Mr. White's consulting business that was substantially greater than the business's actual earnings.

The Estate maintains the burden of proof as to the reasonableness of the economic loss figure. The Estate would argue that it is evident Gray Consulting would be profitable, as Mr. White was an educated and sophisticated businessman who had already been successful in the detergent industry. The Estate would also argue that, given his experience, knowledge and contacts, Mr. White's success was guaranteed.

The Defense, and NJ's New-Business Rule

On the other hand, the defendants would argue that the opinions of the plaintiff's economist as they relate to the earnings of Mr. White's consulting business, were unsupported and, thus, an impermissible net opinion. It is well established that net-opinion rule requires an expert witness to give the why and wherefore of his expert opinion. Moreover, ultimately, “[a]n opinion is no stronger than the facts which support it.” Parker v. Goldstein , 78 N.J. Super. 474, 484 (App. Div. 1963), cert. denied 40 N.J. 225 (1963).

Are the purported lost wages associated with Gray Consulting recoverable or should they be barred under New Jersey's New Business Rule (hereinafter “NBR”)? New Jersey courts employ the NBR when assessing claims of lost profits in new businesses that lack provable data. In this case, while the Estate categorizes Mr. White's losses as “wages,” in reality the projected income would be derived through Gray Consulting only in the event the business survived.

Under the NBR, prospective profits of a new business are considered too remote and speculative to meet the legal standard of reasonable certainty, and therefore are barred. See, inter alia, Weiss v. Revenue Bldg. & Loan Ass n , 116 N.J.L. 208, 212 (E & A 1936). In Weiss , the court described the new-business rule as follows: “There is a well-established distinction, in respect of the ascertainment of future probable profits, between a new business or venture and one in actual operation. In the first, the prospective profits are too remote, contingent, and speculative to meet the legal standard of reasonable certainty; while in the second, the provable data furnished by actual experience provides the basis for an estimation of the quantum of such profits with a satisfactory degree of definiteness.” As confirmed by New Jersey's Appellate Division, alleged damages must be calculated with “reasonable certainty.” New Jersey courts continues to follow the NBR and bar lost profit claims that are not proven with reasonable certainty.

Reconciling the well-established NBR with the record leads to the conclusion that the lost profits of Gray Consulting would be deemed simply too speculative. First, the record is presumably silent on the possibility of Mr. White ever having any additional consulting clients. At the time of his passing, SUDZ was his one and only client, making it more of a jump than an educated assumption to predict that he would have actively sought out and ultimately retained new clients. The basis for the lost wage claim made by the estate thus may be adequately described as a net opinion. Nowhere in the record is the estate's claim backed by facts or verified by any meaningful documents or data. The economist's opinion as to Mr. White's lost wages is based solely on assumptions gleaned from the estate's obvious interests, and does not provide substantial grounds for these assumptions to stand upon. In order to avoid having its economist's opinions barred, the estate would have to present sufficient, credible evidence that, despite only having one client at the time of his passing, Mr. White's consulting business would have been successful within reasonable certainty. Such a task would certainly require the services of a forensic economist.

Conclusion

Through this hypothetical, we can see not only the importance of forensic accounting, but also that attention to detail is required for a holistic understanding of a particular wage claim to be realized. An unexamined view of the facts might lead the estate of Mr. White to make foundationless claims to economic damages that, under further inspection, have no factual basis. Attention to detail and attentive research are required for a forensic accountant to obtain an understanding based on evidence, not wishful thinking.

Robert E. Spitzer, a member of this newsletter's Board of Editors, is an attorney with Post, Polak, Goodsell, MacNeill & Strauchler, P.A., where he concentrates his practice on medical malpractice, as well as commercial litigation.