M&A Technology v. iValue Group Inc., 2009 WL 2456289(Tex. App—El Paso)
A Texas jury sided with the underdog and its damages expert to find that a small Internet start-up without any capital, customers, or products would have been worth $3 million, “but for” the defendant’s bad acts. Then it added $6 million in punitive damages, plus interest and penalties, for a total judgment of $10 million—this for a company that had $238.00 in its bank account the day the defendants allegedly shut it down.
Company would be the amazon.com of adventure travel. iValue began in 1999, as its founder’s dream of creating an online gift market similar to Buy.com. When this didn’t pan out, the company acquired Explore.com’s stock, hoping to become a “one-stop shop” for outdoor gear and adventure travel. The economic downturn of 2000 exhausted its working capital, however, and its parent company, iValue Group (IVG), considered sale or liquidation.
M&A Technology, a computer-networking company, hired the iValue founder to raise equity investment. In return, M&A would house the IVG servers and web assets and use the Explore.com name to attract web-hosting clients. Capital markets were still tight, however, and in June 2001 the iValue founder wrote a letter to inform former Explore.com shareholders that despite having failed to procure financing, he still hoped to launch in time for the 2001 holiday season. By August 2001, the site still had no products available for sale.
That same month, M&A traced several forged checks to the iValue founder, who was summarily terminated before he could recover the IVG servers. IVG sued M&A for breach of contract and conversion of property, and the defendants counterclaimed for theft. Each party retained forensic computer experts, who determined that the IVG servers had been shut down and their hard drives wiped clean the same day the founder was fired. Whether this was a deliberate act or a power failure remained in dispute.
Expert projects average annual growth rate to top 75%. At trial, the plaintiff (IVG) presented an accredited forensic, accounting, and valuation expert to prove its damages claim. But for the defendant’s destruction of the servers, IVG would have become a highly profitable e-commerce business. The expert used the income, market, and cost approaches to come up with values of between $2.2 million and $7.1 million.
It’s all speculation. After the jury returned its $10 million verdict, the defendant appealed, claiming that the plaintiff’s expert relied on assumptions that were “pure speculation,” especially given IVG’s status as a new, unproven business. The plaintiff countered that lost value is a restitution-based remedy based on market value; thus its proof did not have to meet the same evidentiary standard as a lost profits claim. The court agreed with the first assertion, but “just as in a market-value analysis, lost profits of a business would be a factor to consider in determining its value.” Moreover, a historically unprofitable or untried business must produce “some other objective data, such as future contracts, from which lost profits can be calculated with reasonable certainty.”
The court found none and reversed the judgment.
