Question

7. What is the yardstick method?

a. How does it work in general?

b. Why is this method not practical? Historically how have yardsticks worked?

Answer 1

Yardstick method-
The yardstick method is generally used in court cases, especially in cases of contract breaches, patent infringements, claims for damages and so on. It is based on the comparison with similar businesses.
In cases where the court is trying to determine the damages or loss of revenue, the court hires financial experts to estimate the value of damage or revenue lost by the plaintiff if the wrongdoings (contract breaches, patent infringements etc.) by the defendant were not there.
This method uses data for similar companies or industry average as a guideline. The lost revenue or damage is then calculated as per this guideline company or industry standard. In other words, the experts compare the plaintiff’s actual performance with the results it could have reasonably anticipated 'but for' the defendant’s wrongdoing, based on the performance of other companies in the same industry.
There are two important points to be notes in this method- first, the expert should establish the guideline companies which have performed very similar to the company being compared in the past. The guideline companies and the plaintiff's company need to be similar enough to use the yardstick method.
There are some shortcomings of this method. This method can not be used in the case of smaller companies, start ups, niche companies and as well as very large companies. These are basically the companies that do not have a comparable company in the market because of their size and/ or business model.
This methods is used frequently in court cases. One such case is the Under Armor case. In this case, the court allowed the revenue lost by a relatively new company Under Armor with a guideline company- MTV under the yardstick method.