In a recent Virginia trade secrets case, the appellate court’s ruling illustrates that in any case for damages, the manner and measure of valuation is paramount. In 21st Century Systems, Inc. v. Perot Systems Government Services, Inc., a Virginia jury awarded Perot Systems Government Services, Inc. (Perot) $3,743,843 in damages for lost goodwill from actions by 21st Century Systems, Inc. (21CSI) and former Perot employees that Perot characterized as tortious interference with contract, breach of fiduciary duty, and misuse of confidential information. The goodwill award was trebled to $11,228,529.
Perot’s expert business valuation witness relied solely on the price of the actual sale of Perot to Dell, rather than comparing the value of Perot to other comparable businesses. 21CSI appealed the verdict, arguing that Perot’s expert should have demonstrated that the actual sale price reflected a loss of goodwill, and that loss was caused by the misconduct of the defendants.
The certified valuation expert for Perot admitted he did not know whether Dell considered the defendants’ actions in Dell’s goodwill calculation at the time of the Perot acquisition. However, he testified that while he would typically value the sale of a publicly traded company by comparing sales prices of similar companies, he did not need to do so when, as here, the company at issue had been actually sold, establishing a market value, with a component for goodwill ($1.6 billion, or $2.57 of goodwill for every $1 of revenue). Based on those assumptions, the expert opined that Perot lost $1.45 million in revenue to 21CSI, which amounts to lost goodwill of $3,742,843 (1:2.57 ratio).
The appeals court acknowledged that a market value approach of valuing lost goodwill is typical, but noted that Perot’s expert could not demonstrate its actual sale price reflected a loss of goodwill as a result of the conspiracy, and there was no evidence of diminution in fair market value or assets based on the defection of the former Perot employees to 21CSI. In fact, the trial evidence showed Dell bought Perot at a premium, even after the allegedly unfair defection and competition.
Thus, the appeals court held Perot’s evidence insufficient as a matter of law to support an award of lost goodwill due to conspiracy, and ruled the trial court abused its discretion, reversing the more than $11 million awarded for lost goodwill and remanding the matter of attorneys’ fees to the trial court to reconsider and adjust, due to the reversal. The remainder of the jury verdict was upheld, totaling almost $2,000,000.
This case demonstrates how courts may consider the degree of rigor used by valuation experts in reaching an opinion on loss of good will.