The "With and Without" Method in Damages: A Legal Guide

Every damages calculation in commercial litigation rests on a single animating question: what would the plaintiff's financial position have looked like if the defendant had never done anything wrong? That hypothetical — the world that might have been — must be compared against the world that actually is. The gap between them is the measure of recovery.

This is the core logic of the "with and without" method, sometimes called the "but-for" method, one of the most important frameworks in modern damages law. It appears, under various names and in various forms, across antitrust, patent, contract, and tort litigation.

This article explains what the method is, how it relates to similar approaches, which cases have accepted it, and where courts draw the line when expert analyses overreach.

What Is the "With and Without" Method?

The method constructs two parallel scenarios and measures the distance between them:

The "but-for" world — what the plaintiff's financial performance would have looked like if the defendant had not committed the wrongful act (the world "without" the breach, infringement, or anticompetitive conduct).

The "actual" world — what happened to the plaintiff's financial performance as a result of the wrongful conduct (the world "with" the harm).

The damages figure is the difference between the two. Where the damages reflect future losses, that resulting amount is typically discounted to present value, though not every analysis requires discounting — historical past losses, for instance, are often not discounted.

The method operates across multiple causes of action, including antitrust violations, patent infringement, breach of contract, and tort, though courts apply it with different degrees of rigor and scrutiny depending on the practice area.

Relationship to the "Before and After" Method

The with and without method is conceptually linked to — but analytically distinct from — the before and after method, one of the most commonly recognized approaches in lost profits litigation.

The before-and-after method reconstructs the but-for world by looking at how the plaintiff performed during a period prior to (or after) the harmful conduct, then comparing that benchmark period to the period during which the defendant's conduct caused harm. The "before" period serves as a stand-in for the world without the wrongdoing; the "during" or "after" period reflects the world with it.

A pure with and without analysis is broader: rather than relying solely on the plaintiff's own historical data, it may use economic modeling, industry projections, or regression analysis to construct a hypothetical but-for world. This makes it especially valuable when no clean benchmark period exists — for example, when a new business has no meaningful financial history prior to the harm, or when the defendant's conduct pervaded the entire period for which records exist.

In practice, the two approaches often overlap. Damages experts commonly construct a two-scenario comparison — estimating the plaintiff's expected economic performance in the but-for world and comparing it to actual performance — drawing on pre-harm history, comparable company data, or market modeling as the situation requires.

The Legal Foundation: But-For Causation

The with and without method is grounded in the law's fundamental causation framework. In many commercial damages cases, causation is analyzed through the familiar but-for test: the defendant's wrongful act was a cause of the plaintiff's injury if, absent that act, the injury would not have occurred. That inquiry gives rise to the but-for world that sits at the center of nearly every lost profits analysis.

It is worth noting that the but-for test is not the only causation standard available to courts. Depending on the jurisdiction and the type of claim, courts may apply a substantial factor test, a proximate cause analysis, or, in some contexts, a motivating factor standard. But in commercial damages litigation, the but-for framework is by far the most commonly applied.

In contract cases, the goal is expectation damages: restoring the non-breaching party to the economic position it would have occupied had the agreement been honored. This "benefit of the bargain" principle requires a direct comparison between the but-for position (what the plaintiff would have earned under the contract) and the actual position (what the plaintiff earned after the breach).

In patent infringement, the Federal Circuit has confirmed that the same logic applies. As the court explained in Mentor Graphics Corp. v. EVE-USA Inc. (discussed below), compensatory damages under the Patent Act share a common objective with damages in contract and tort: putting the injured party in the position it would have occupied absent the wrongful conduct.

Key Cases Accepting the "With and Without" Method

Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251 (1946)

The Supreme Court's decision in Bigelow remains the foundational American authority on the comparative damages approach. The plaintiffs operated an independent movie theater in Chicago and claimed that a distribution conspiracy — orchestrated by the defendant studios — denied them access to first-run films, depressing their revenues for five years.

At trial, the plaintiffs introduced two damages estimates. The first compared their theater's earnings during the conspiracy period against those of a rival theater that benefited from the conspiracy (the yardstick method). The second compared the plaintiffs' own pre-conspiracy revenues to their revenues during the conspiracy period (the before-and-after method). The jury returned a verdict for approximately $120,000, trebled under the Clayton Act.

The Seventh Circuit threw out the verdict as too speculative, reasoning that no one could know what the plaintiffs' earnings would have been absent the conspiracy. The US Supreme Court reversed. The Court endorsed the principle, long established in American law, that uncertainty created by a defendant's wrongful conduct should not relieve that defendant of liability — the risk of imprecision falls on the wrongdoer, not the victim. The damages award did not need to be mathematically exact; a just and reasonable estimate grounded in the evidence was sufficient.

Bigelow confirmed that plaintiffs may use yardstick or before-and-after estimates, and that courts should not demand impossible precision in reconstructing the but-for world when the defendant's own conduct is what made precision impossible.

Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555 (1931)

Fifteen years before Bigelow, the Supreme Court confronted a similar issue in a Sherman Act case involving the alleged monopolization of the vegetable parchment market. The district court accepted a jury verdict of $65,000 based on lost profits; the circuit court reversed. The Supreme Court reinstated the award, emphasizing that uncertainty about the precise amount of damages should not bar recovery where the defendant's misconduct made that uncertainty inevitable. The decision established an important policy rationale underlying the with and without method: defendants who create evidentiary uncertainty through their own wrongdoing cannot exploit that uncertainty as a shield against damages.

Mentor Graphics Corp. v. EVE-USA Inc., No. 15-1470 (Fed. Cir. 2017)

In this patent infringement case, the Federal Circuit articulated the compensatory damages standard with notable clarity. The court explained that the goal of lost profit damages is to place the patentee in the same position it would have occupied had the infringement never occurred — a direct expression of the with and without principle applied to patent law. The court further noted that this standard is consistent across areas of law, including torts and contract disputes, reflecting the broader coherence of the but-for framework.

The case also addressed a proposed apportionment framework that would have required patentees to isolate damages to the specific inventive contribution of the patented features. The Federal Circuit rejected that approach, finding that the existing Panduit framework (discussed next) already ensures that lost profit damages are appropriately tied to the infringing conduct.

Panduit Corp. v. Stahlin Bros. Fibre Works, 575 F.2d 1152 (6th Cir. 1978)

Panduit established the four-factor test that operationalizes but-for causation in patent lost-profits cases. To recover lost profits, a patentee must demonstrate: (1) demand for the patented product; (2) absence of acceptable non-infringing alternatives; (3) the patentee's manufacturing and marketing capacity to exploit that demand; and (4) the amount of profit the patentee would have made. A showing under all four factors permits a court to infer that the claimed lost profits were in fact caused by the infringement.

The Panduit framework is not the with and without method itself — it is a structured evidentiary test for establishing the causation element that underpins the method. By requiring proof that there were no acceptable substitutes and that the patentee had the capacity to make the disputed sales, Panduit disciplines the hypothetical that the but-for analysis must construct.

Texas Instruments, Inc. v. Teletron Energy Mgmt., Inc., 877 S.W.2d 276 (Tex. 1994)

State courts have applied the same principles in contract and tort contexts. In Texas Instruments, the Texas Supreme Court held that the reasonable certainty standard for lost profits should focus on the nature of the commercial activity at issue, not merely on whether the business was established or new. When a plaintiff can demonstrate a reasonable basis for expecting profits — through the experience of those running the enterprise, the characteristics of the relevant market, and the nature of the business — a damages award is permissible even without a lengthy operating history. The decision pushed back against rigid rules that would categorically deny recovery to new ventures simply because they lacked a pre-harm track record.

Where Courts Reject or Limit the Method

Courts regularly accept the with and without framework in principle while rejecting particular applications of it. The most common grounds for rejection fall into four categories.

Speculative Projections

Lost profits that are remote, speculative, or hypothetical — and therefore incapable of being established with reasonable certainty — are not recoverable. Courts have repeatedly rejected expert analyses that treat optimistic assumptions as established facts.

In one frequently cited example, an appellate court reversed a lost profits award, finding that the expert had used a single year of sales growth to project a multi-year upward trend, had measured damages on gross rather than net profits by failing to deduct officer compensation, and had applied a recovery period tied to the length of the plaintiff's lease rather than to any demonstrated likelihood of future profits. The court characterized this as speculation dressed in the language of financial analysis — a fundamental failure of the with and without method.

Similarly, courts have cautioned that lost profits damages must be limited to actual losses. Damage awards that would place a plaintiff in a dramatically better position than the evidence supports — often described in judicial opinions as transforming an ordinary enterprise into an implausibly flourishing one through unsupported modeling assumptions — will not survive appeal.

Failure to Control for External Factors

Perhaps the most significant technical vulnerability in a with and without analysis is the failure to isolate the defendant's conduct as the cause of the financial gap between the two worlds. An expert who attributes the entire difference between the but-for and actual scenarios to the defendant's wrongdoing, without examining whether other forces — recession, new competition, changes in consumer demand, management decisions — contributed to the plaintiff's losses, will face serious challenge.

Courts and opposing experts frequently argue that a comparative analysis can support a finding of damages "only if other possible causes are examined and eliminated." Where an expert's model attributes all of a plaintiff's financial decline to the defendant without accounting for market-wide trends or independent business decisions, courts have excluded the testimony or substantially reduced the award.

The Daubert Standard and Expert Exclusion

U.S. Federal courts evaluate the admissibility of expert damages testimony under the framework established by the Supreme Court in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), and codified in Federal Rule of Evidence 702. To be admissible, expert testimony must be (1) offered by a qualified expert, (2) based on sufficient facts or data, (3) the product of reliable principles and methods, and (4) the result of a reliable application of those principles and methods to the facts of the case.

The Daubert framework has become a primary battleground for challenging with and without analyses. Courts have excluded expert testimony where the expert named a recognized methodology but applied it inconsistently, relied on unverified assumptions, ignored contrary evidence without explanation, or offered conclusions that were not connected to the record by any traceable reasoning. Courts are particularly alert to what might be called methodological drift — an expert who invokes the with and without or before-and-after method by name but whose actual analysis does not follow the discipline that those methods require.

(Click here to read my post on the admissibility of expert opinion evidence.)

New Businesses and Missing Benchmark Data

The with and without method functions best when the plaintiff has an established financial track record that can serve as the foundation for the but-for world. Where that history is absent — as with startup companies or businesses that were disrupted before achieving stability — the method faces inherent constraints.

Courts have traditionally been skeptical of lost profits claims from new ventures, on the theory that future profits are too speculative when the enterprise has not yet demonstrated sustained commercial viability. While courts in many jurisdictions have moved away from a categorical prohibition on new-business lost profits, the required showing remains demanding. The focus shifts to whether there is an independent, reliable basis — such as executed contracts, confirmed orders, or a demonstrable market — from which to construct the but-for world without relying primarily on hope.

RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., [2004] B.C.J. No. 2337

This Canadian case illustrates a related pitfall: a with and without analysis that ignores inconvenient post-breach realities. After nearly all of the investment advisers at one of RBC's branch offices defected to Merrill Lynch, RBC's damages expert estimated the decline in branch value as of the date of the breach — effectively freezing the analysis at that point. The problem was that financial markets deteriorated sharply in the months following the breach due to the collapse of technology sector valuations. The court rejected the expert's methodology because ignoring those market conditions produced a result that bore little relationship to what RBC would actually have earned had the advisers stayed.

The lesson the case teaches is not limited to business valuation methodology. Any with and without analysis must engage honestly with real-world conditions that would have existed in both the actual and the but-for world. Selectively modeling the but-for world to exclude unfavorable market forces will not survive judicial scrutiny.

The Method Across Practice Areas

Antitrust

Antitrust litigation gave birth to much of the American case law on comparative damages analysis. Courts have long recognized the before-and-after and yardstick methods as the principal tools for establishing what the relevant market would have looked like absent anticompetitive conduct. Because antitrust defendants often suppress the very evidence needed to reconstruct the but-for world, courts are relatively forgiving of imprecision — Bigelow established that the defendant bears the risk of the uncertainty its own conduct created.

Where data permit, courts and economists have increasingly moved toward regression analysis, which can isolate the effect of the anticompetitive conduct by controlling for other variables. Courts in some jurisdictions have suggested that experts are expected to use regression analysis when the data support it, as it is considered a more rigorous implementation of the comparative approach than simple before-and-after comparisons.

Patent Infringement

In patent cases, the lost profits inquiry is structured around the Panduit framework, which is explicitly designed to test whether the but-for causal link between infringement and lost sales is credibly established. When a patentee cannot satisfy Panduit's requirements, courts award at least a reasonable royalty as a floor. The reasonable royalty analysis uses a hypothetical negotiation framework — asking what license fee the parties would have agreed upon, just before infringement began, in a willing-licensor/willing-licensee negotiation — rather than a traditional lost-profits comparison. While the hypothetical negotiation shares certain conceptual features with the with and without method, it is a distinct methodology with its own evidentiary requirements.

Breach of Contract

Contract damages law has long recognized that where a breach has caused provable harm, courts should not deny recovery merely because the precise amount cannot be determined with exactness. The policy principle is straightforward: a party who violates a contract should not escape liability simply because its breach made it difficult or impossible to quantify the resulting loss. The with and without framework translates this principle into a working methodology by requiring the expert to model what performance under the contract would have produced and compare it to what the plaintiff actually received.

Courts apply foreseeability constraints in this context: consequential or indirect damages, including lost profits, are recoverable only if they were within the reasonable contemplation of the parties at the time of contracting. This limits how far the but-for world can be extended.

Tort

Tort cases present a more demanding evidentiary environment for the with and without method. Because lost profits in tort are viewed as potentially disproportionate to the harm caused by the defendant's conduct, courts generally require a stricter showing of reasonable certainty. The economic loss rule — which bars recovery for purely economic losses in negligence claims absent accompanying physical harm or property damage — further constrains the available remedies in many jurisdictions.

Practical Guidance for Litigators

A well-executed with and without analysis must satisfy several requirements to survive judicial scrutiny:

1. Isolate the defendant's conduct. The model must credibly attribute the difference between the two worlds to the wrongful act. Attributing all of a plaintiff's financial decline to the defendant, without examining whether independent causes contributed, is the single most common error in expert damages testimony.

2. Build on reliable data. The but-for world must be grounded in verifiable facts — confirmed contracts, actual market data, audited financial records. Projections built on unsupported assumptions will not survive a Daubert challenge.

3. Control for external variables. The analysis should account for macroeconomic conditions, competitive dynamics, and industry-level trends that would have affected the plaintiff's performance regardless of the defendant's conduct. Regression techniques are increasingly expected where the data permit.

4. Stay within the scope of the claim. Lost profits are recoverable only when they are directly and proximately caused by the defendant's wrongful act. Overreaching beyond what causation can support is both legally impermissible and strategically dangerous.

5. Engage qualified, disciplined experts. Expert testimony must satisfy the applicable admissibility standard such as Daubert in US federal court, or Frye in US state courts. Experts who stray outside their area of expertise, apply methods inconsistently, or fail to account for contradictory evidence risk exclusion at a critical moment in the litigation. My firm, Boschan Corp., offers especially deep expertise in intellectual property, media, and entertainment damages.

Conclusion

The "with and without" method is not a formula but a principle: that damages should equal the difference between the economic reality a plaintiff actually experienced and the economic reality it would have experienced had the defendant not acted wrongly. Courts from the Supreme Court in Bigelow to federal circuit courts to state tribunals across the country have affirmed this approach as the proper foundation for measuring compensatory damages.

The method's strength is also its vulnerability. Constructing a credible but-for world requires rigorous data, disciplined assumptions, and an honest accounting of all the forces — not just the defendant's wrongdoing — that shaped what actually happened. When those requirements are met, the with and without method provides a principled and defensible path to a damages figure. When they are not, courts are well-equipped to say so.

The lesson of decades of litigation is straightforward: the but-for world must earn its credibility through evidence, not assumption. Courts will not accept a hypothetical future built on wish rather than proof — no matter how sophisticated the model used to dress it up.

Juneteenth, Black Music Rights, and the Gap Between Rights and Reality

As we celebrate Juneteenth, we commemorate a milestone in American history: the day when freedom, long delayed, finally reached enslaved people in Texas more than two years after the Emancipation Proclamation had been issued.

Juneteenth reminds us of a difficult truth. Rights on paper and rights in practice are not always the same thing.

That lesson extends beyond history. It remains relevant today in industries where creators, entrepreneurs, and professionals must navigate complex systems in order to fully realize the benefits of the rights they possess.

Recently, my accounting firm, Boschan Corp., hosted a panel discussion on Black Music Rights featuring leaders from the music industry, entertainment law, and academia. The conversation explored how Black creators have shaped American music while often facing unique challenges in protecting, understanding, and monetizing their creative work.

One theme emerged repeatedly throughout the discussion: knowledge, representation, and access matter.

When Rights Exist But Understanding Does Not

Music rights are complex. Copyright and trademark ownership, registration, royalty splits, advances, budgets, work exploitation, legislation, and contractual provisions can all affect how creators are compensated.

A creator may possess legal rights. A contract may provide certain protections. Yet if those rights are not properly negotiated in the first place and thereafter understood, enforced, or accurately accounted for and audited, the practical outcome may vastly differ significantly from the expectation. 

"When a deal is offered...its about the opportunity [for the artist] to be heard.... to take care of their families, and create a legacy. That's usually what's told to the artist. But on paper it's something that's totally different." said top talent attorney Ms. Bernie Lawrence-Watkins, Esq. during the Black Music Rights panel discussion.

She continued, "Unfortunately, a lot of Black artists are still signing deals without representation, so they are exploited."

See this and more from Ms. Lawrence-Watkins as she discusses with Southwestern Law School Professor Kevin J. Greene, Esq. why Black artists have been exploited the most in the music industry:

The Importance of Representation and Advocacy

The panel also addressed whether current music industry contracts are fair to Black creators.

The answer was nuanced.

Contracts themselves are tools. Their impact often depends on the negotiating leverage, information, and advocacy available to the parties involved. Several panelists discussed the importance of having knowledgeable professionals at the table - attorneys, accountants, managers, and advisors who can help creators understand both the opportunities and risks embedded in an agreement.

The conversation highlighted a broader reality: outcomes are rarely determined by documents alone. They are shaped by the people who negotiate, interpret, and enforce them.

Watch Ms. Lawrence-Watkins, Universal Music Group's head of legal, Mr. Jeffrey Harleston, Esq., and Professor Greene discuss their differing respective views as to whether current contracts and intellectual property protections are fair to Black creators and who is making money.

Looking Forward

Juneteenth is a celebration of progress, resilience, and opportunity. It is also a reminder that meaningful rights require more than recognition. They require access, understanding, and the ability to benefit from what those rights promise.

The music industry has made significant progress, but the conversation continues.

We are grateful to our panelists for sharing their perspectives and helping advance an important discussion about ownership, compensation, representation, and the future of Black music rights.

Watch the full panel discussion here:

The “But-For” Method Isn’t Controversial — It’s the Law

As an expert in damages disputes, I frequently see opposing counsel attack the “but-for method” as if it were novel, unreliable, or optional.

It’s not.

If you read the case law, you’ll see that the “but-for” framework is not just an economic tool; it is the default legal standard of causation in U.S. law. Courts rely on it to separate recoverable damages from speculation across copyright, patent, and commercial disputes.

With the caveat that I am not a law practitioner and this is not legal advice, below is a refresher for practitioners working in damages, IP, and complex financial analysis:

1. Start with First Principles: The Supreme Court

The Supreme Court has made clear that “but-for” causation is the baseline rule—not a specialized doctrine.

In Comcast Corp. v. National Association of African American-Owned Media, 589 U.S. (2020), the Court held that a plaintiff must show their injury would not have occurred “but for” the challenged conduct. See https://supreme.justia.com/cases/federal/us/589/18-1171/.

The Court emphasized that this burden applies throughout the case, not just at trial. This reflects a fundamental principle: 

If the result would have occurred anyway, it is not legally attributable to the alleged misconduct.

2. In Copyright: Courts Require a Causal Nexus (Not Speculation)

The “but-for” principle is embedded in copyright damages through 17 U.S.C. § 504(b), which allows recovery only of profits “attributable to the infringement.”

The Ninth Circuit’s decision in Mackie v. Rieser, 296 F.3d 909 (9th Cir. 2002), is particularly instructive. Full opinion: https://cdn.ca9.uscourts.gov/datastore/opinions/2002/07/25/0035839.pdf

There, the court rejected a claim for indirect profits - even though infringement was undisputed - because the plaintiff failed to demonstrate a non-speculative causal connection between the infringement and the defendant’s revenues. The court held that damages must be grounded in a “tangible nexus,” not conjecture.

In practical terms: No causal link = no damages.

This is simply the “but-for” framework applied rigorously.

3. The Same Rule Applies Across IP (Patent and Beyond)

The same causation principle governs damages across intellectual property law.

In Aro Manufacturing Co. v. Convertible Top Replacement Co., 377 U.S. 476 (1964), the Supreme Court defined compensatory damages as the difference between:

• the plaintiff’s actual condition, and
• the condition that would have existed absent the infringement

See https://supreme.justia.com/cases/federal/us/377/476/.

Similarly, in Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538 (Fed. Cir. 1995), the Federal Circuit explained that lost profits require proof that the patentee would have made the sales “but for” the infringement. See https://law.justia.com/cases/federal/appellate-courts/F3/56/1538/624381/.

These cases reinforce a consistent rule: Damages must reflect the delta between reality and a properly constructed “but-for world.”

4. Daubert Confirms the Method’s Admissibility

Challenges to the “but-for method” often collapse under basic expert admissibility standards.

Under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), courts admit expert testimony based on reliable, testable, and widely accepted methodologies. See https://supreme.justia.com/cases/federal/us/509/579/.

The “but-for” framework easily satisfies this test:

• It is testable (through counterfactual modeling)
• It is widely accepted in economics and law
• It aligns damages analysis with causation requirements

In practice, courts do not exclude “but-for” reasoning. They exclude unsupported assumptions mischaracterized as causation.

5. Federal vs. State Courts: Different Labels, Same Inquiry

Although terminology varies, federal and state courts apply materially the same causation analysis.

Federal courts explicitly use “but-for causation,” particularly in statutory and IP contexts.

State courts may use terms like “proximate cause” or “substantial factor,” especially in tort and contract cases. 

Regardless of jurisdiction, the operative question generally remains identical: Would the claimed loss exist absent the defendant’s conduct?

If yes, it is not recoverable.

6. Where Damages Models Fail

The real issue in litigation is not whether the “but-for” framework is valid but whether it has been properly applied.

Courts routinely reject damages models that:

• Treat correlation as causation
• Attribute all revenue during a period to the alleged misconduct
• Ignore independent drivers (brand value, marketing, other IP, macro trends)
• Fail to isolate the incremental contribution of the alleged infringement

That last point is critical.

The law does not award total revenue. It awards only the portion of profit that would not exist in the “but-for world.”

7. Why This Matters

For litigators and experts, the implications are straightforward:

1. The “but-for” framework is not optional
2. It is embedded in statutory damages regimes (including § 504(b))
3. It is necessary to survive Daubert scrutiny
4. It is essential to avoid speculative damages

When applied correctly, it provides a disciplined, legally grounded method to isolate compensable value, test causation assumptions, and align expert testimony with the applicable law.

Final Thought

The debate over the “but-for method” is often misplaced.

The real question is not whether it should be used, because it *must* be used.

The real question is whether the analysis faithfully answers the only issue that matters: What would have happened in the absence of the alleged wrongful conduct?

Everything else is just narrative, and courts tend to see through that.

VoyageLA Interview with a Damages Expert

Select quote:

Do you remember a time someone truly listened to you?

"Yes – every day. Litigators and other clients hire Boschan Corp. because they want clarity, truth and expert opinions. Listening – on both sides – is part of the value of hiring us and is essential to delivering expert opinions that stand up in litigation."

Click to read the full article:

Or copy and paste this link: https://voyagela.com/interview/life-values-legacy-our-chat-with-cedar-boschan-of-culver-city-highlight/

Patent Damages Are Won or Lost on Apportionment

Trial attorneys searching for a patent damages expert often discover that apportionment - not infringement - determines the outcome.

Apportionment is where many patent damages analyses quietly fail. Not because the math is difficult, but because the expert misunderstands what courts actually expect when value must be separated, justified, and defended under pressure.

Apportionment is not a mechanical exercise. It is a legal, economic, and evidentiary discipline. When done poorly, it collapses damages. When done correctly, it survives Daubert and gives counsel leverage.

Apportionment Is Not a Formula. It Is a Theory of Value.

Too many analyses treat apportionment as a plug-in adjustment.

A percentage applied late.

A heuristic borrowed from comparables.

A shortcut disguised as rigor.

Courts reject this approach for a reason.

Apportionment requires a coherent value narrative that explains why the patented technology - and not the surrounding ecosystem, distribution, branding, or unrelated features - drives the claimed economic benefit.

That narrative must be grounded in:

• technical contribution
• economic substitution
• customer demand drivers
• real-world revenue mechanics

If the expert cannot explain apportionment clearly, simply, and persuasively, the damages number will not stand.

Why Apportionment Fails Under Cross-Examination

In depositions and at trial, weak apportionment collapses quickly. Typical pressure points include:

• reliance on industry rules of thumb
• circular reasoning between royalty base and rate
• failure to isolate incremental value
• unsupported reliance on licenses that do not reflect comparable technology

Once credibility cracks, the entire damages model becomes suspect.

Trial attorneys know this. Opposing experts exploit it relentlessly.

What Sophisticated Courts Expect From a Patent Damages Expert

Courts are not hostile to damages. They are hostile to unsupported damages.

A defensible apportionment analysis demonstrates:

• disciplined separation of patented and unpatented value
• consistency between technical evidence and economic conclusions
• transparency in assumptions
• restraint rather than overreach

The strongest damages opinions often appear conservative at first glance - until the opposing expert is dismantled.

That is how cases are won.

Why Apportionment Determines Settlement Leverage

Damages do not just affect verdicts. They affect settlement dynamics.

When opposing counsel knows your damages theory is internally consistent, well-supported, and trial-ready, negotiations change tone. Risk becomes asymmetric.

Apportionment is leverage.

Choosing the Right Patent Damages Expert

Not every financial expert is equipped to handle patent damages. And not every patent damages expert is equipped to handle apportionment.

Look for someone like yours truly who:

• understands how judges actually analyze damages opinions
• has defended apportionment under deposition and cross
• can explain complex valuation concepts without losing authority
• treats damages as litigation strategy, not just calculation

This is not about producing a large number. It is about producing a number that survives.

Final Thought

In patent litigation, infringement opens the door.

Apportionment decides the outcome.

Trial attorneys searching for a patent damages expert are not looking for spreadsheets. They are looking for a patent damages expert whose work holds up under Daubert, cross-examination, and real courtroom conditions.

What an Economic Damages Expert Actually Does — And Why It Matters in Court

Every litigator knows the moment a case stops being about facts and starts being about numbers. Revenue. Costs. Profits. Causation. Apportionment. Reasonable certainty. Every-dollar-counts territory.

And when that happens, the strongest weapon in the trial toolkit is an economic damages expert who can turn financial complexity into something a trier of fact can actually use.

Most jurors don’t connect with spreadsheets. They connect with clarity – with a narrative rooted in logic, supported by data, and consistent with how real businesses operate. A seasoned economic damages expert doesn’t just calculate losses. They decode the financial mechanics of the dispute and explain them in a way that feels inevitable, not theoretical.

That matters far more than most people realize.

Because in high-stakes litigation, the damages story is the case.

Was revenue recognized properly? Were deductions reasonable? Did the defendant’s conduct actually cause the economic impact claimed? How do industry norms shape what’s “reasonable”? And what assumptions will collapse under cross?

These are the questions that shape settlement posture, discovery priorities, deposition outlines, trial themes, and even the confidence level in the courtroom.

An effective economic damages expert helps the trial team see the case through a financial lens that aligns with how judges and juries process information. We identify what matters, what doesn’t, and what will withstand pressure from opposing experts. And we do it early enough that the analysis becomes part of the trial strategy rather than a reaction to it.

At my forensic accounting firm Boschan Corp., this is the work we do every day: translating complex financial records – royalty statements, IP participation contracts, licensing data, entertainment revenue models, and industry-specific deal structures – into damages analyses that make sense in real-world terms.

If your case touches profits, royalties, licensing, intellectual property, revenue sharing, or the economics of entertainment and media, partnering with an economic damages expert who understands how money actually moves can change the trajectory of the entire matter.

Not because we “sell” the numbers.

Because we make the numbers make sense.

Audit Committees and the Entertainment Business: Why IP-Heavy Companies Need a Different Kind of Oversight

In most industries, the audit committee is a quiet workhorse - diligent, disciplined, and comfortably predictable. In entertainment, however, the audit committee sits at the edge of a tectonic plate. When a company’s value is built on intellectual property, participation deals, AI licensing, and increasingly fragmented monetization channels, traditional oversight frameworks simply don't go far enough.

Entertainment accounting is not “Hollywood math.” It’s corporate finance with a high-voltage cable running through it. And for board members, the failure to understand how IP is monetized - and how it is misreported - can expose the company to outsized legal, strategic, and reputational risks.

IP-Driven Revenue Is Different - and So Are Its Risks

In an IP-heavy enterprise, assets don’t sit neatly on a truck or a balance sheet. They multiply, fragment, get licensed, get sublicensed, and get repurposed across platforms that didn’t exist when the deal was signed.

Streaming, FAST channels, global distribution partnerships, interactive game skins, derivative works, AI models trained on licensed libraries - these revenue streams overlap and cascade.

Every point of monetization is a point of leakage.

Audit committees that rely on traditional oversight of cash, capex, and inventory miss the very places where value is created and lost.

The risk profile for IP-heavy companies tends to include:

• Royalty underpayments or overpayments
• Misreported participation statements
• Missing or improperly tracked sublicenses
• Ambiguous allocation of bundled revenues
• Weak controls around emerging platforms
• Metadata failures that disrupt rights reporting
• AI-related use that outpaces contractual language

These issues impact valuation, investor confidence, and litigation risk. Yet many audit committees are still calibrated for a manufacturing economy rather than a creative one.

Participation Accounting Is a Governance Issue, Not a Back-Office Problem

One of the great misunderstandings in entertainment is the belief that royalty accounting is merely a technical or operational task. In reality, participation accuracy is a governance matter.

Creators, producers, financiers, licensors, guilds, and co-production partners all rely on accurate reporting to trust the company. When statements are late, opaque, or obviously incorrect, the dispute does not stay in accounting - it moves to litigation, press, regulators, and shareholders.

A single misreported participation statement can quickly become:

• A multi-million-dollar claim
• A PR crisis
• A strained strategic partnership
• A drag on EBITDA
• A signal to investors that controls are weak

Audit committees must adopt oversight mechanisms that respect the strategic importance of participation accuracy, not treat it as an isolated technical obligation.

Why IP-Heavy Companies Need Enhanced Audit Committee Expertise

Most audit committees are staffed with competent financial experts - but financial expertise alone is not enough in entertainment. What is needed is IP intelligence: an understanding of how revenue flows under complex rights structures.

An effective audit committee for an IP-centric company should be able to answer questions like:

• How is the company valuing its IP, and are those methodologies defensible?
• What percentage of revenues is subject to royalties or participations?
• What controls exist around reporting those revenues?
• Where are the known leakage points in the company’s monetization chain?
• How does new technology (AI, streaming bundling, FAST distribution) affect the company’s contractual obligations?
• What disputes are emerging across the sector, and how might similar issues be prevented internally?

If these questions cannot be answered confidently, the audit committee is not protecting the company’s value - it is merely observing it.

Disputes Reveal the Weak Points of Oversight

Most entertainment disputes are not about artistic differences - they’re about data differences. As a damages and royalty auditor, I’ve seen disputes arise from:

• Misallocated revenues across windows and platforms
• Breakdowns in rights-tracking systems
• Outdated contracts applied to new distribution models
• Unreconciled metadata
• Incomplete or missing backup to statements
• Systems integration failures post-acquisition

Each of these is, fundamentally, an internal controls failure. Audit committees should treat them as symptoms of systemic issues that can be corrected before they become public disputes.

Litigation is always more expensive than prevention.

A Modern Audit Committee Framework for Entertainment

IP-heavy companies should adopt an enhanced oversight model:

1. IP-Savvy Audit Committee Members

At least one committee member should understand IP monetization, royalty frameworks, and participation accounting. This is no longer optional.

2. Regular Review of Royalty and Participation Reporting Controls

Not just annual financial statements - the actual mechanics of IP revenue reporting.

3. Governance Around Metadata and Rights Tracking Systems

Audit committees must understand the systems that track the company’s most valuable assets.

4. Forward-Looking Risk Assessments

Especially around emerging technologies such as AI, machine learning, virtual production, and new licensing models.

5. Transparent Communication With Key Stakeholders

Creators, partners, licensors, and investors respond well to clear explanations of oversight and controls.

6. Independent Royalty Audits as a Governance Tool

These are not adversarial. They are an early-warning system.

Conclusion: The Boardroom Must Evolve as Fast as the Business

Entertainment companies compete on creativity, but they succeed on governance. In an industry where revenue can travel from a theatrical window to a streamer to a theme park to an AI training dataset, oversight must be as sophisticated as the monetization chain.

Boards that continue to rely on traditional audit committee structures will find themselves unprepared for the next wave of disputes, regulations, and technological shifts.

Those that elevate IP literacy, strengthen controls, and modernize oversight will not only avoid risk - they will unlock strategic advantage.

Because in entertainment, governance is not just compliance.

It is a competitive weapon.

About Cedar Boschan

Cedar Boschan is a forensic accountant and intellectual-property valuation expert with more than two decades of experience guiding entertainment, media, technology, and gaming companies through complex royalty audits, high-stakes damages matters, and IP-driven financial disputes.

As founder of Boschan Corp., she is known for translating intricate revenue streams and participation structures into clear, defensible conclusions that withstand scrutiny from counterparties, arbitrators, and courts.

Her work sits at the intersection of governance, risk oversight, and the creative economy. She advises C-suites and counsel on internal controls, rights-tracking, IP valuation, and emerging risks from AI and evolving distribution models.

Cedar brings a creator-centric yet investor-minded perspective to board service, combining analytical rigor with deep insight into how intellectual property generates, leaks, and preserves long-term enterprise value.

Sample Audit Provision that is Unfavorable to a Songwriter and Favorable to a Music Publisher

Below is an example of an audit provision that is rather poor for a songwriter, and quite favorable to a music publisher:

The Streaming Evolution: Lessons in Monetization, Opportunities, and Myths

The entertainment industry’s transformation over the last decade, driven by the rise of streaming, has illuminated three critical areas attorneys and their clients should monitor: advertising, licensing models, and content strategies. These areas represent immense opportunities for those who understand the shifting landscape.

Advertising Renaissance

Streaming platforms once touted ad-free content as their premium offering. But in recent years, the introduction of ad-supported tiers by platforms like Netflix and Disney+ has reshaped revenue models. Certain insiders claim that, contrary to early fears, ad-supported subscriptions often generate higher Average Revenue Per User (ARPU) than their ad-free counterparts, premium subscription services. This trend, combined with the advent of sophisticated targeting tools, marks the beginning of a new advertising golden age.

However, as a profit participation auditor, I am skeptical. While industry leaders point to higher Average Revenue Per User (ARPU) for ad-supported tiers than for premium subscriptions, I’ve yet to see a single case where this holds true. Premium subscriptions consistently outpace ad-supported ARPU when all factors are accounted for.

In any case, despite insider optimism, ad-supported tiers are not a guaranteed financial boon. ARPU from ad-supported services relies on robust targeting technology, a consistent influx of high-quality ads (i.e., ad inventory quality) and on advertisers paying market rates (currently Amazon is charging below-market rates as a loss leader, making it difficult for video streamers to sell advertising at market rates). 

Further, for clients producing content, ad-supported models can represent a double-edged sword. While they expand audience reach, they often necessitate stricter content guidelines to ensure “brand safety.” Navigating these constraints requires careful contract negotiations to protect creative integrity while maximizing revenue opportunities.

This and the discrepancy between insider optimism and real-world evidence demands scrutiny. Attorneys representing creators should be prepared to question ad revenue forecasts and insist on transparency in revenue-sharing agreements and prepare to negotiate both for:

1. Ad revenue shares, ensuring equitable participation in this growing segment
2. Detailed audits and data-sharing provisions to verify claims (a subject best addressed by a consultant at my firm, Boschan Corp., as there are many considerations)

The Case for Windowing

Exclusivity defined streaming’s first decade, but the pendulum is swinging back toward the traditional windowing model. Licensing content to multiple platforms has proven its value, as demonstrated by recent success stories like Suits, which found a massive new audience years after its original release.

Clients with legacy content libraries should explore licensing opportunities with ad-supported platforms or free streaming services. These platforms are hungry for proven content that can attract viewers without the development costs of original programming. Moreover, content that has outlived its exclusivity period on one platform can enjoy a second (or third) life elsewhere, creating new revenue streams.

Attorneys advising studios and production companies should prioritize flexibility in contracts, ensuring that exclusive rights revert to their clients after a reasonable time. This allows studios to pursue licensing deals that benefit from the growing appetite for library content.

Cost Control and Strategic Incentives

One of the most pressing issues in streaming today is the unchecked rise of production costs. Expensive, sprawling productions were standard when the likes of Netflix was competing to gain market share. But now that Netflix is established and the industry is going through consolidation on its path in the direction of an oligopolistic marketplace, the industry is waking up to the reality that financial sustainability requires moderation.

Attorneys should ensure that contracts reward clients who produce high-quality content within reasonable budgets. For instance, performance-based incentives tied to efficient production could foster a healthier balance between artistry and fiscal responsibility.

Moreover, the return of contingent/performance-based compensation models aligns incentives between platforms and creators. Attorneys must advocate for transparent success metrics and fair back-end deals that reward efficiency and audience impact, rather than sheer budget size.

Embracing Opportunity

The entertainment industry stands at a crossroads. Advertising is making a comeback, the windowing model is ripe for revival, and cost control is no longer optional. Attorneys have a pivotal role to play in shaping these trends, ensuring their clients navigate this evolving landscape with clarity and confidence.

By asking tough questions, negotiating strategic terms, and leveraging data-driven insights, attorneys can turn challenges into opportunities for their clients—and themselves.

Royalty Audit Notice Due Dates: 2025

  

If your client's accountings are due 90 days following the end of the semiannual period ended December 31, 2024, in most cases, your client will need to issue notices of both audit and objection prior to March 31, 2025 in order to reserve your client's right to audit his/her/its 2021 H2 statement.  Confusing? Yes, it is very confusing!

Likewise, notices specific objections to statements issued for the period ended June 30, 2022 must be issued by September 28, 2025.

Call my firm Boschan Corp. for help at (424) 248-8866 or learn more about our royalty audits by clicking here. Please do not wait until March, not least because your client's rights could expire sooner, depending on the relevant contractual language and statutes.

Cedar Boschan in the Wall Street Journal

I commented in The Wall Street Journal on accounting messes and other blowback when employees at Meta and other companies 'slice the salami' of employer perks.

The court of public opinion is divided.

Read the article by Callum Borchers here: https://www.wsj.com/lifestyle/careers/the-little-sins-we-commit-at-workand-the-bosses-who-are-cracking-down-74929770?st

Food & Beverage Litigator? Four Damages Claims that are Trending

1. Sustainability and Environmental Claims: A New Frontier for Litigation in Food & Beverage

As sustainability becomes central to brand identity, food and beverage companies are increasingly promoting green initiatives and eco-friendly practices. However, claims about environmental impact, such as recyclability, carbon neutrality, or zero waste, are now under the microscope. False or exaggerated environmental claims, known as "greenwashing," could lead to substantial damages.

Litigation on this front often involves claims about the recyclability or biodegradability of packaging, which in reality may not be feasible in many regions due to limited recycling capabilities. The stakes are high as brands can face class actions if consumers feel misled about a product’s ecological footprint. Expect heightened scrutiny of sustainability marketing, particularly in states with strong environmental protection laws like California.

2. All-Natural and Health Claims: A Growing Challenge for Compliance

"All-natural" and "organic" have become popular selling points, but with consumers paying more attention to labels, these claims carry greater risk. Many cases have focused on whether products labeled "natural" contain synthetic ingredients or additives that might be considered misleading. Litigation on health-oriented labels is expected to surge, as ambiguous or loosely regulated terms like "all-natural" can lead to lawsuits if the product does not meet consumer expectations.

Attorneys specializing in food litigation should prepare for more disputes over product labeling, especially as brands introduce novel ingredients or formulations that might conflict with these health-focused claims. Companies must be cautious in their language or risk significant damages for failing to meet consumers' understanding of "natural" or "organic."

3. Deceptive Pricing: An Overlooked Risk for Premium Brands

In the competitive food and beverage market, brands often use discounts to attract customers. However, FTC guidelines specify that discounted prices must follow a period where products were genuinely offered at the regular price, a practice not consistently followed. Brands that advertise perpetual discounts without honoring regular pricing could face deceptive pricing lawsuits, especially in the premium product space.

Litigation attorneys should keep an eye on this area as regulatory bodies intensify enforcement. Such cases carry financial penalties and reputational risks, particularly as consumers become more aware of and sensitive to pricing transparency.

4. Charitable and ESG Claims: Brand Responsibility

Brands have increasingly incorporated charitable commitments and ESG (Environmental, Social, and Governance) promises into their marketing. However, claims about social responsibility or contributions to sustainability projects could backfire if deemed exaggerated or misleading. Cases focused on these representations—whether made on a website, social media, or product packaging—could generate major damages claims.

For instance, if a brand claims a portion of sales is donated to a specific cause, yet the contribution is minimal or misrepresented, this can lead to legal action. Lawyers should advise clients to align closely with their ESG messaging to avoid potential misrepresentation claims in the coming years.

Conclusion

At my damages consulting firm, Boschan Corp., we help attorneys analyze the complexities and potential defenses for your clients' unique matters. To explore whether we can strengthen your clients’ claims or defense with our thorough, defensible damages analysis, start with a conflict check by calling me at (424) 248-8866. 

NIL Valuation in Pre-Nuptial Agreements - Name, Image, and Likeness Can Be Key Assets

When an athlete or entertainer's personal brand has substantial economic value, it’s no surprise that name, image, and likeness (NIL) rights are key financial assets in pre-nuptial - and post nuptial - discussions. At my boutique firm, Boschan Corp., we conduct discreet yet rigorous NIL valuations that assist family law attorneys in representing celebrities with notable public profiles - or their future spouses - ensuring accurate and equitable outcomes in their clients' pre-nuptial agreements.

Why Is an NIL Valuation Important for a Pre-Nup?

The role of NIL rights in building wealth is only growing, and accurately appraising these rights can provide clarity and confidence for couples entering marriage. By including NIL valuations in a pre-nuptial agreement, both parties can agree on the intrinsic cash flow potential of these rights from the start, creating transparency and helping mitigate potential disputes down the road. Although the parties' respective CPAs may be able to provide a preliminary balance sheet to support your pre-nup negotiations, it is unlikely that such CPA will have the ability to include a full valuation of name, image, and likeness rights on the balance sheet. That is where we come in.

How We Value NIL Rights

Our approach at Boschan Corp. centers on assessing the projected cash flows that NIL rights can generate. By focusing on intrinsic value, we quantify the actual earning potential tied to a person’s likeness and reputation. This provides clients and their attorneys with a grounded estimate based on real financial metrics, offering a sound basis for negotiating financial agreements.

Practical Considerations for Family Law Attorneys

As NIL rights become more prominent in family law matters, integrating an accurate NIL valuation into pre-nuptial agreements can be a game-changer. For family law attorneys, NIL valuation adds an essential financial dimension to client representation, offering:

• Transparency: Clear, data-driven insights into NIL value set a foundation for mutual understanding.
  
  
• Protection: For clients whose income largely depends on their public image, knowing the intrinsic cash flow potential of their NIL rights is invaluable.
  
  
• Future-proofing: A well-constructed valuation ensures that both parties have a realistic understanding of how NIL rights fit into their financial picture.

Ultimately, our goal at Boschan Corp. is to empower family law attorneys with NIL valuations that reflect both the present and potential future value of NIL rights, ensuring your clients can confidently navigate pre-nuptial agreements. Read mire about our name, image, and likeness valuation services here: https://www.boschan.com/nil-valuation or call us today to clear conflicts at (424) 248-8866.

The Importance of Damages in Civil Litigation

Introduction: Why Damages Are at the Heart of Civil Litigation

In civil litigation, damages aren't just numbers—they represent a plaintiff's losses, their potential recovery, a defendant's potential liability, and sometimes, both parties' path to justice. For litigators, understanding the importance of damages is crucial. It influences everything from case strategy to client relations and courtroom tactics. Whether you're working to restore or rebut claims to a business's lost profits, compensate an injury victim, or deter future misconduct, damages are the key financial stake in your case. Let’s dive into why damages play such a central role in civil litigation.

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1. Understanding the Function of Damages

Damages are awarded to restore plaintiffs to their pre-harm condition or, in some cases, to punish and deter wrongful behavior. These monetary awards serve various purposes in civil litigation, including compensating for physical or emotional injuries, lost wages, or even future harm. Damages fall broadly into several categories:

• Compensatory Damages: These cover quantifiable losses, like medical bills or repair costs, and non-economic losses, such as pain and suffering.
  
  
• Punitive Damages: Reserved for cases of particularly egregious misconduct, punitive damages serve to punish and deter similar future actions.
  
  
• Special Damages: These are economic damages that can be attributed directly to the defendant's conduct, like loss of business opportunities.

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2. Damages Shape Litigation Strategy

For trial attorneys, damages often shape the entire litigation strategy. The potential award can determine whether a case goes to trial or settles, influences the scope of discovery, and impacts negotiations. Calculating damages requires a deep dive into the client's losses, including expert assessments, especially in cases involving future earnings or complex business losses. Attorneys need to be ready to defend their damages calculations, counter the opposing side's valuations, and present a clear, compelling case for the desired outcome.

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3. The Role of Experts in Proving Damages

Expert testimony is often essential in substantiating and rebutting damage claims. Economic experts, forensic accountants, and industry specialists can provide the precise calculations and insights that make damages claims credible. An experienced expert can explain complex financial models to judges and juries, quantifying losses in a way that’s both understandable and compelling. Litigators who understand how to leverage expert testimony are better positioned to win substantial awards for their clients.

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4. Communicating Damages to the Court and Jury

Effectively communicating damages to a jury requires more than just numbers on a page. It demands a narrative that connects the figures to the plaintiff's actual experience. Jurors may be more likely to side with a plaintiff when they understand how the damages impact their day-to-day life or business. Whether representing a plaintiff, a petitioner, a defendant, or a respondent, skillful litigators know how to use demonstrative aids—like charts, timelines, and visualizations—to clarify the story behind the numbers and make a powerful impression.

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5. Conclusion: Why Damages Are the Litigator’s Foundation

In the world of civil litigation, damages are not just an endpoint—they are the foundation upon which cases are built. For plaintiffs, a well-argued damages case can bring financial relief, justice, or even peace of mind. For defense attorneys, limiting damages can mean protecting clients from excessive payouts. Either way, damages are a crucial element of case strategy, making them one of the most important areas of expertise for any litigator.

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Visit our website here: https://www.boschan.com/damages-expert or call (424) 248-8866 to clear conflicts and discuss how we can empower your client's case.

Fiduciary Duties of Non-Profit Board Directors: What You Need to Know

When you join the board of directors for a nonprofit organization, you take on significant fiduciary responsibilities. These duties are essential to the effective oversight and governance of the organization, ensuring its lawful and ethical operation.

Board directors must wear many hats, often balancing roles as directors and officers. The distinction between these positions is crucial because each role carries specific legal obligations. The core fiduciary duties of a director include:

1. Duty of Care: Directors must act in good faith, with the care an ordinarily prudent person would use in similar circumstances. This includes attending meetings regularly, reviewing financial reports, and being prepared for discussions and votes.

2. Duty of Loyalty: Directors must prioritize the interests of the organization over personal or third-party interests. This duty is critical when conflicts of interest arise, such as contracts between the organization and a director’s business.

3. Duty of Inquiry: When something seems off, directors are required to ask questions and, if necessary, hire experts to investigate. Ignoring red flags can result in serious legal consequences.

4. Duty to Follow Investment Standards: Nonprofits often hold charitable funds that must be invested conservatively. Risky investments like placing all assets into one volatile stock could violate this duty.

As I explained in an educational presentation to a nonprofit to educate them in their fiduciary duties, board members must also understand the organization’s bylaws, financials, and compliance obligations, including tax filings and conflict of interest policies. Fulfilling these duties is not just about avoiding legal trouble - it ensures the nonprofit remains aligned with its mission and continues to serve its community effectively.

For prospective board members, it's critical to do your homework: review the nonprofit’s legal standing, financial health, and bylaws before accepting a role. And remember, attending meetings and reviewing materials thoroughly is not just a recommendation - it’s your legal obligation.

If your non-profit or corporate board members could benefit from fiduciary duty training, please contact me - I provide this service. I can be reached at my accounting firm at (424) 248-8866.

Are Royalties a Good Investment?

Royalties—those often-overlooked cash flow machines—are starting to catch the eye of savvy investors. Why? They offer something increasingly rare in a world of volatile stocks and trendy crypto: predictability. Yes, royalties, whether from natural resources, music, film, patents, or literary works, provide a steady, measurable income stream that can outlast market swings and economic uncertainty. But before you dive headfirst into the world of intellectual property (IP) investments, let’s have a look at what makes these earnings tick and, more importantly, how to ensure you’re getting your money’s worth.

The Allure of Predictability

What sets royalties apart from your typical high-risk, high-reward investments? Stability. You’re not guessing which tech stock might moon next year; you’re buying into a pre-existing revenue stream. For example, if you purchase the rights to a well-established song or a blockbuster movie, you’re effectively buying a forecastable flow of income based on historical data. There’s no speculative frenzy here, just cold, hard numbers.

Sounds great, right? But the key is not just in buying any royalty stream; it’s in buying the right one. That’s where a bit of accounting magic comes into play—evaluating the quality of earnings and ensuring that what looks predictable on paper holds up under scrutiny.

Quality of Earnings: No Rose-Colored Glasses Allowed

You don’t want to end up owning the rights to some obscure garage band’s forgotten track, right? What you’re looking for is a revenue stream with staying power. This means evaluating earnings quality with a fine-tooth comb. Are the earnings from this royalty stream recurring, and if so, for how long? Are there any licensing agreements in place that guarantee future payments? How does the IP perform across various platforms—streaming, digital purchases, physical sales? What are the risks and liabilities associated with the rights to be acquired (e.g., copyright grant termination claims, AI reducing demand for original works).

If the royalty stream depends too heavily on one platform or licensing agreement, you might be setting yourself up for a dip in income when trends shift. Diversification matters even in this niche corner of finance.

How to Price a Royalty Stream: It’s All About the Numbers

So, you’ve got your eye on a royalty stream. How do you know if it’s worth the price tag? Enter: discounted cash flow (DCF) analysis. This isn’t the part where we get romantic; it’s where we get real. The value of a royalty is in its future cash flows, and we can calculate its intrinsic value based on those cash flows over time.

DCF methodology involves estimating the future income from royalties and discounting it back to its present value. In layman’s terms, you’re asking: “How much is this steady income worth to me today, considering future inflation and risks?” Sure, it’s a bit of financial alchemy, but with the right approach, it’s surprisingly straightforward. And the beauty of royalties is that, in many cases, these future income streams are more predictable than other assets.

Comparing Royalty Investments to Other Passive Income Streams

When stacked against other passive income opportunities—like dividend-paying stocks or real estate investments—royalties have their distinct advantages. First, they tend to be uncorrelated with the stock market. That means your royalty income isn’t going to take a nosedive just because the S&P 500 does. Second, they can be relatively low-maintenance. You’re not dealing with tenants, property taxes, or quarterly reports; you’re collecting checks from IP that’s already in use.

The key difference is that royalties aren’t a gamble—they’re an investment in a stream of predictable, recurring earnings. But that doesn’t mean they’re risk-free. You still need to evaluate their longevity and ensure that you’re not overpaying for a stream that’s past its prime.

So, Are Royalties a Good Investment?

In a word: yes—but only if you’re willing to do the homework. The predictability of royalties is their biggest asset, but it’s your job to ensure that predictability holds up. You’ll want to dig into the quality of earnings and evaluate the intrinsic value using sound methodologies like discounted cash flow.

Royalties can offer a stable, passive income stream that outperforms other investments in times of uncertainty, but as with anything in life, success depends on selecting the right ones. Do that, and you might just find yourself with a long-term investment that pays out like clockwork, no crown required.

At our firm, Boschan Corp., we can help you ascertain quality of earnings and intrinsic values during the due diligence process. Call us today at 424-248-8866 to run a conflict check and see if we can provide you with clarity and certainty in your royalty investment strategy.

Understanding Native American Royalty Rights: An Audit Perspective on Natural Resource Revenues

Native American and Indian tribes hold a unique position in the United States, both as sovereign entities and as major stakeholders in the use and development of natural resources, including gas, oil, and land-use agreements. These rights are often governed by federal laws, treaties, and contracts, and one of the most significant economic benefits available to tribes is the ability to collect royalties from companies that extract resources from tribal lands. This blog post explores the types of royalties tribes are entitled to, whether there is a statutory audit right to ensure accurate payments, and how audits can ensure that royalties from these resources are correctly reported and paid.

Types of Royalties Tribes Are Entitled to Collect

Tribes often own substantial land and mineral resources, and they are entitled to various types of royalties based on their land's use for resource extraction, particularly oil, gas, and minerals. The types of royalties may vary depending on the nature of the resource and the specific agreements in place:

• Oil and Gas Royalties: Tribes can lease their lands for oil and gas production, and in return, they receive royalties from the revenue generated. These royalties are typically calculated as a percentage of the gross value of the extracted resources, usually ranging from 12.5% to 20%, depending on the agreement.
  
  
• Mineral Royalties: Similar to oil and gas royalties, tribes can receive payments for the extraction of minerals like coal, uranium, and precious metals. Mineral royalties can vary based on the resource, the method of extraction, and the negotiated lease terms.
  
  
• Land Use Royalties: Tribes may receive compensation for land use, such as grazing, forestry, and other surface activities. These royalties may be less substantial than those derived from mineral extraction but can still form an important revenue source.
  
  
• Renewable Energy Royalties: With the rise of renewable energy, some tribes are entering into agreements for wind, solar, and geothermal projects. These arrangements also typically include royalty payments based on the energy produced.

Federal Laws Governing Tribal Royalties

Tribal royalty rights are shaped by a complex framework of federal laws, regulations, and treaties, including:

• The Indian Mineral Leasing Act of 1938 (IMLA): IMLA gives tribes the right to lease their lands for mineral extraction, including oil and gas. The Act ensures that tribes benefit financially from their land and mineral resources. See link here for details.
  
  
• The Indian Tribal Energy Development and Self-Determination Act: This legislation allows tribes more control over energy projects on their lands, enabling them to negotiate royalty rates and terms directly. See link here for details.
  
  
• The Federal Oil and Gas Royalty Management Act (FOGRMA): FOGRMA ensures that accurate payments are made to tribes for oil and gas extracted from their lands. Under FOGRMA, the Department of the Interior oversees the collection and distribution of royalties owed to tribes. See link here for details.

Statutory Audit Rights for Tribes

FOGRMA also grants tribes the right to audit companies that lease their lands for resource extraction. Click here for a summary. This statutory audit right is critical for ensuring that royalty payments are accurate and fully reflect the terms of the lease. The act provides tribes with access to the records of lessees, enabling them to conduct audits and ensure compliance with the terms of the lease.

In addition to FOGRMA, many contracts between tribes and resource extraction companies include specific audit clauses, which give tribes the right to verify the accuracy of royalty payments. These clauses often specify the time frames, frequency, and scope of audits, allowing tribes to ensure that all production is accounted for.

How Audits Can Identify Amounts Owed to Tribes

Audits are an essential tool for tribes to claim royalty underpayments owed for the value of the resources extracted from their lands. See an example of public claims by clicking here. Forensic auditors with expertise in royalty, profit participation, and contract compliance can review a variety of records, including:

1. Production Reports: Auditors verify that the volume of oil, gas, or minerals extracted matches the reported figures used to calculate royalty payments.
   
   
2. Revenue Records: Auditors check whether the revenue reported by the lessee accurately reflects the sales price of the extracted resources.
   
   
3. Deductions and Allowances: Some leases permit companies to deduct certain costs (such as transportation and processing) before calculating royalties. Auditors review these deductions to ensure they are appropriate and comply with the contract terms.
   
   
4. Payments: Auditors compare payment records to the royalty statements provided to tribes, ensuring that payments are timely, accurate, and in accordance with the agreed-upon rates and/or minimums.

Conclusion

Native American and Indian tribes have significant rights to royalties derived from the use of their lands for resource extraction. Through federal laws like FOGRMA and contract-based audit rights, tribes can ensure that the companies extracting these resources pay what is owed. Forensic audits play a key role in verifying the accuracy of reported production and revenue, helping tribes protect their valuable resources and secure their economic interests.

A proactive approach, including regular audits, can help tribes assert their rights and ensure they receive full and accurate royalty payments. My firm Boschan Corp. provides this service. To clear conflicts and discuss your matter - please click here or call (424) 248-8866. 

How to Effectively Depose a Financial Expert: A Guide for Attorneys

Depositions can make or break a case, especially when it comes to financial experts who may provide critical testimony. For attorneys dealing with intellectual property, royalty disputes, or damages claims, a strong deposition of an opposing expert is key to uncovering flaws in their analysis, challenging their damages conclusions, or shoring up your own case. Here's how to prepare and execute an effective deposition of a financial expert according to me, your expert.

Forensic Accountant Cedar Boschan

Involve Your Financial Expert Early

Retaining your own financial expert before discovery begins is crucial, especially in complex cases. Early involvement allows your expert to advise on discovery requests, such as interrogatories and document production, that will provide the data necessary for a thorough analysis. This proactive approach can lead to a more accurate understanding of the case’s financial aspects, allowing your expert to better rebut opposing testimony.

Involving your expert early also helps you anticipate weaknesses in the opposing expert's report, giving you a strategic advantage in depositions​

Understand the Opposing Expert’s Background and Qualifications

Review the expert’s qualifications, including their education, certifications, and professional experience. A financial expert with less relevant experience may struggle to explain complex valuation or auditing principles under pressure. Look for gaps in their credentials or areas where they may be overreaching.

Know the Opposing Expert's Report Inside Out

Start by thoroughly reviewing the expert's report and any supporting materials. Identify the key points of their analysis, especially any assumptions or methodologies that seem questionable. Make sure you understand the subject matter enough to spot inconsistencies or potential errors. Collaborating with your own financial expert during this stage can provide deeper insights into the opposing expert's weaknesses.

Decide Your Deposition Approach: Tie Them Down or Impeach?

When cross-examining a financial expert during deposition, it’s tempting to go after them aggressively. However, this can backfire.

Before you start, consider your goal for the deposition. Do you want to tie the expert to their opinions so they can’t modify them later, or are you aiming to impeach their credibility and methodology?  These two approaches require different strategies:

1. Tie them down: Focus on obtaining the expert’s opinions and gathering information underlying and locking them into a position that limits their flexibility at trial. Use this strategy when the expert seems sound but could be vulnerable under scrutiny. By getting clear answers, you can later work with your own financial expert to identify areas of weakness to address during trial. Leaving the hard-hitting cross-examination for trial ensures you won’t accidentally educate the expert on your strategies.
   
   
2. Impeach: Alternatively, if you aim to discredit the expert, look for opportunities to expose flaws in their methodology, challenge assumptions, or highlight bias. This approach can be risky as it may inadvertently "show your hand." In other words, it may cause the opposing expert to prepare by strengthening their testimony at trial, especially if they can correct their mistakes or clarify their testimony before then. To avoid this, it’s important to carefully plan your cross-examination with your financial expert early-on.

Tip: In many cases, a hybrid strategy can be employed - locking down the expert’s opinions while subtly probing for impeachment opportunities without showing your hand. 

Leverage Your Expert to Assist with Drafting Deposition and Cross-Examination Questions

Ask your expert to identify credibility weaknesses questions using tactics such as:

• Challenge their expertise if it appears they are not specialized in the relevant area (e.g., royalty audits vs. damages calculations)
• Ask about their track record in court or deposition to see if they have any vulnerabilities as a witness
• Establish bias or conflicts of interest including financial incentives, such as compensation structure

Sample questions:

• How many times have you testified for the opposing party or similar clients?
• What percentage of your income comes from working as an expert witness?
• Are there any professional or personal relationships with the party that could affect your impartiality?

An expert’s credibility can be damaged if you can show they selectively included or ignored data that doesn’t support their conclusions.  Therefore, ask your expert to highlight inconsistencies or omissions in the opposing expert's report or record. You can use the deposition to further uncover inconsistencies in the expert’s testimony, either with their report, other testimony, or known facts of the case. 

Ask the opposing expert to clarify:

• Why they chose certain data points while ignoring others
• If any alternative methods were considered and why they were rejected
• If there is any academic or industry criticism of the approach they used

A financial expert’s methodology is a crucial point of attack. Ask your expert to look closely at the processes the opposing experts used to arrive at their conclusions and ask detailed questions designed to disclose the following:

• Were industry standards followed? 
• Did they selectively ignore data? 
• Did they combine nominal and real rates —an error that skews projections and can be a major vulnerability during trial?
• Are they using current or historical data inconsistently?
• Did they overlook important factors, like work-life expectancy or inflation projections?
• What generally accepted specific methods did you rely on for your analysis?
• How do those standards apply to the facts of this case?
• Have you ever used a different method in similar cases? Why or why not?
• What assumptions did they base their analysis on?
• Are the expert's assumptions well-supported by the evidence?
• Has the expert made any mathematical or interpretive errors?

Have the opposing expert explain complex calculations in layman’s terms. Their inability to articulate their process clearly could cast doubt on the reliability of their analysis.

Test Their Limits: Push Beyond the Opposing Expert's Comfort Zone

Experts, no matter how experienced, have limits. Use the deposition to find those limits by probing deeply into their knowledge of specific accounting principles, economic theories, or valuation techniques. This can reveal overconfidence or expose gaps in their expertise, especially if the expert is more generalist than specialist.

Explore their depth of knowledge by asking:

• Can you explain the basis for [specific financial principle] in this context?
• How would this approach differ if the facts were [adjusted scenario]?
• Have you ever been criticized for this methodology in past cases?
  
  

Stay Focused: Avoid Tangential Debates with the Opposing Expert

While it may be tempting to engage in deep financial debates, remember that your goal is to collect information and expose weaknesses. Avoid getting bogged down in overly technical details that distract from your strategy. Keep the deposition focused on the big picture: undermining the expert’s credibility and methodology while gathering useful admissions.

Prepare for Trial Using the Opposing Expert's Key Admissions

Finally, try to lock the opposition's expert into key admissions that will support your case or undermine theirs. These admissions can be used during trial to cast doubt on the expert’s analysis or reliability. Aim for clear, concise statements on points where the opposing expert’s opinion is weakest or most vulnerable. 

During trial, your financial expert can then highlight these weaknesses, helping to undermine the opposing expert’s credibility in front of the jury.

Key admissions to target:

• Concessions about the limits of their analysis
• Acknowledgment of alternative approaches they could have taken
• Agreement that certain assumptions were subjective or speculative
  
  

Final Thoughts

Deposing a financial expert requires careful preparation and an understanding of both legal and financial principles. By asking the right questions and maintaining focus, you can reveal flaws in the expert's analysis, highlight biases, and make their testimony less compelling at trial.

Attorneys handling cases involving forensic accounting or intellectual property rights should be well-versed in these techniques to ensure a successful deposition. With the right approach, you can turn a financial expert from a strong adversary into a liability for the opposing side.