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Last Updated: 31 July 2009
Quantitative Proof of Reputational Harm
Meiring de Villiers, University of New South Wales
Citation
This paper is forthcoming in the Fordham Journal of Financial and Corporate Law (2009).
Abstract
Economists have advocated, and courts have accepted a decline in the stock price of a defamed corporation as an economic measure of its reputational harm. Although the economic rationale for this approach is sound and widely accepted, its legal foundations and consistency with the damages doctrines of defamation law have remained unexplored. This article presents an analysis of its legal basis. The analysis shows that the logic of common law precedent, supported by statutes and academic commentary, points to a measure of special damages for reputational harm based on stock market data.
1. INTRODUCTION
The law of defamation aims to protect a plaintiff's
reputation and provide compensation where it has been harmed. Most defamation
actions are brought by
individuals,[1] but
courts have extended the protection of defamation law to the reputational
interests of corporations. A corporation has no reputation
in a personal sense,
but it has standing in the business in which it operates. It can therefore sue
for defamatory statements related
to matters affecting its business reputation,
such as financial soundness and managerial
integrity.[2]
The
category of damages known as special damages, compensates the defamation
plaintiff for financial loss flowing directly from reputational
injury caused by
a defamatory
publication.[3]
Economists have advocated, and courts have accepted a decline in the stock price
of a publicly traded defamed corporation as evidence
of special
damages.[4] Although the
economic rationale for this approach is sound and widely accepted, its legal
foundations and consistency with the damages
doctrines of defamation law have
remained unexplored. This article presents an analysis of its legal basis. It
shows that the logic
of common law precedent, supported by statutes and academic
commentary, points to a measure of special damages for reputational harm
based
on stock market data.
An analysis of the legal concept of corporate
reputation and its relation to the intangible corporate asset known as goodwill,
shows
that the law recognizes (i) a systematic causal relationship between
reputational harm and loss of goodwill, and (ii) that loss of
goodwill is
reflected in a decline in the value of the shares of the corporation. The
decline in the value of the securities of a
defamed corporation, adjusted for
factors unrelated to the defamation, therefore constitutes legally valid
evidence of special damages
for its reputational injury. The adjustment for
extraneous factors is necessary to satisfy the proximate cause doctrine of tort
law.[5]
The article
is organized as follows. Section 2 reviews the principles of defamation,
including damages. Section 3 analyzes the legal
definition of corporate
reputation and its relation to goodwill. Section 4 reviews the legal,
accounting, and economic definitions
of goodwill. It concludes that the modern
legal view of goodwill has adopted the accounting and economic meanings. Section
5 combines
the results from preceding sections and argues the legal validity of
a capital market approach to proving and quantifying special
damages in
corporate defamation. A final section concludes.
2. PRINCIPLES OF DEFAMATION
The tort of defamation is an invasion of the interest
of a person or corporation in its reputation and good
name.[6] Defamation law
allows a plaintiff to restore her reputation and obtain compensation for harm
caused by defamatory
statements.[7] A
defamatory statement is a statement of fact about a person or business entity
that tends to diminish the plaintiff's
reputation.[8] It has,
for instance, been held to be defamatory to say that a person is a credit
risk,[9] that a kosher
meat dealer has sold
bacon,[10] and that a
physician has
advertised.[11]
A
person or corporation can be defamed by more than written or spoken
words.[12] Defamation
may occur by means of a picture, a gesture, a loaded question, or an
insinuation.[13] The
defamatory imputation may be indirect. Signing the plaintiff's name to
false[14] or bad
authorship,[15] for
instance, has been held to be defamatory. Modern technology occasionally
generates false alarms, such as a false positive mammogram,
sobriety test or HIV
test, which may cause emotional distress, and in some cases actionable
reputational harm.[16]
A false positive drug test, for instance, may wrongly imply that the test
subject is a drug
abuser.[17]
Courts
have extended the protection of defamation law to the reputational interests of
corporations.[18]
Although a corporation has no reputation in the personal sense of an
individual,[19] it has
standing in the business in which it
operates.[20] It can
therefore sue and recover damages for defamatory statements related to matters
affecting its business reputation and practices,
such as financial soundness,
management and
efficiency.[21]
ELEMENTS
The complexity of the tort of defamation is illustrated by the elements that have to be satisfied to establish a cause of action. One author has identified nine elements,[22] while another lists twenty three,[23] each crucial to a defamation action. The defamation plaintiff must plead and prove the following elements:[24]
DAMAGES
A corporate plaintiff may recover presumed damages
and special
damages.[30] Under the
presumed damages rule, no proof of reputational harm is required. Harm is
presumed and the fact finder may assess an amount
it deems
appropriate.[31] The
plaintiff may augment its damages recovery by providing evidence of special
damages, but is not required to do
so.[32]
Courts
often award substantial amounts in presumed damages, even in the absence of
proof of actual reputational harm. In Brown & Williamson Tobacco Corp. v.
Jacobson,[33] the
jury awarded the plaintiff $3 million in presumed damages (reduced to $1 million
on appeal), without proof of economic loss resulting
from the defamatory
falsehood. In Dun & Bradstreet, Inc. v. Greenmoss Builders,
Inc.,[34] the U.S.
Supreme Court upheld a $350,000 award of presumed and punitive damages to
plaintiff Greenmoss Builders, even though it had
not proven actual reputational
harm.
Special damages compensate the plaintiff for proven financial loss
flowing directly from the reputational injury caused by the
defamation.[35]
Special damages compensate the plaintiff for "the loss of something having
economic or pecuniary
value."[36] Courts
have allowed special damages for harm such as loss of
business,[37] loss of
earnings,[38] and loss
of credit.[39] Special
damages must be pleaded with specificity and proven with reasonable
certainty.[40]
Economists have advocated, and courts have accepted a decline in the stock
price of a defamed corporation as an economic measure
of its reputational
harm.[41] Dean Norman
Redlich comments, "[o]f particular importance to a publicly held corporation is
a defamation's impact upon financial
markets. A defamation may lead to a
dramatic drop in the market value of a company's stock. Moreover, since
corporate transactions
are often directly dependent on stock values, the
consequential impact of a drop in share values can be enormous. ... A defamation
may also lead to a drop in a company's credit rating or other impairment in
corporate access to the debt markets, similarly damaging
a company's economic
performance."[42] The
analysis in this article establishes the legal validity of this
approach.
3. CORPORATE REPUTATION
A tort remedy must match the substantive right at
issue.[43] The
substantive right guarded by defamation law is the integrity of a plaintiff's
reputation.[44]
Special damages for defamation must therefore be based on a financial measure of
reputational harm. In order to quantify reputational
harm, a concept of
corporate reputation must be defined that is capable of
valuation.[45] This is
the topic of this section.
Reputation is a complex and multidisciplinary
concept. The academic literatures on reputation in fields such as
economics,[46]
accounting,[47]
strategy,[48]
marketing[49] and
sociology,[50] tend to
focus on reputation in the context of the respective disciplinary perspectives,
but have not produced a unique and universally
applicable definition of
corporate
reputation.[51]
Reputation scholars have nevertheless identified conceptual commonalities across
disciplines.[52]
Professors Charles Fombrun and Cees Van Riel, for instance, synthesized an
integrative definition of corporate reputation in terms
of perceptions of
stakeholders of the firm: "A corporate reputation is a collective representation
of a firm's past actions and results
that describes the firm's ability to
deliver valued outcomes to multiple stakeholders. It gauges a firm's relative
standing both
internally with employees and externally with its stakeholders, in
both its competitive and institutional
environments."[53]
The common law has not settled on a unique definition of
reputation,[54] in
part because the diversity of legal contexts in which it is commonly encountered
makes a universal definition
impracticable.[55]
Professor Robert Post describes three concepts of reputation that have been most
influential in defamation, namely reputation as
property, as honor, and as
dignity.[56] Honor and
dignity are appropriate characterizations of personal reputation, but not of
corporate reputation. A corporation has no
personality, and cannot experience
human emotions such as pride or
shame.[57] Its
reputational interest is purely
economic.[58]
Companies with sound reputations enjoy economic benefits such as premium prices
for their products, loyal patronage, and sound relations
with labor, suppliers
and customers.[59] The
value provided by these benefits is diminished when a company is
defamed.[60]
The
legal concept of corporate reputation most appropriate to the economic nature of
the interest protected by defamation law is
that of
property.[61] A
consensus view has emerged in the common
law,[62]
statutes,[63]
treatises,[64] and
academic
commentary[65] of
corporate reputation as a core element of the constellation of intangible assets
that collectively comprise a corporation's goodwill.
The next section explores
the legal, economic and accounting meanings of goodwill.
4. GOODWILL
An ongoing, functioning business is worth more than the sum of its parts. The residual value represents the goodwill of the business.[66] The accounting definition of goodwill focuses on its measurement, while the economic view explains its existence and value.[67] The analysis in this section shows that the modern legal view of goodwill has adopted the accounting and economic meanings.
ACCOUNTING VIEW OF GOODWILL
Accountants define goodwill as a constellation of
intangible assets which give rise to supranormal earnings and excess
value.[68] Supranormal
earnings is defined as earnings in excess of a normal return on the tangible and
identifiable intangible assets of a
business.[69]
Accountants measure the value of goodwill as the difference between the total
value of a company and the aggregate value of its tangible
and identifiable
intangible assets.[70]
This amount equals the present value of the supranormal earnings stream
generated by the company's
goodwill.[71] The Coca
Cola company is a prime example of a corporation that has been able to
capitalize on its reputation and brand name to realize
substantial goodwill
value and excess earnings, evidenced by a higher profit margin than a typical
generic
competitor.[72]
The term "goodwill" does not refer to specific assets. Rather, it is "a
catch-all residual category, a label given to the going concern
value of assets
... over and above those that can be kicked or counted, or weighed, or valued
with some
precision."[73]
Goodwill includes items such as reputation, a favorable location and
technological
efficiency.[74]
Because it is so subjective, goodwill does not usually appear on a firm's
balance sheet.[75] It
is nevertheless a significant and valuable corporate asset. By one estimate,
goodwill comprises at least 80 percent of the market
capitalization of firms
listed on the S&P
500.[76]
Accountants
usually recognize goodwill on the balance sheet only when the firm is
acquired.[77]
Professors Margaret Blair and Steven Wallman explain, "[w]hen company A acquires
company B, A adds B's net assets (assets minus liabilities)
to the net assets on
its own balance sheet. If B has $500 million worth of property, plant and
equipment, financial and other identifiable
assets and zero liabilities on its
books, those assets will be added to the books of A. But suppose that A has paid
$750 million
for B. How does it account for the additional $250 million that are
not reflected in B's book value? If possible, A would first 'write
up', or
assign a higher value - based on appraisals - to the acquired hard assets. Then
it would assign a value to any specific intangibles
that could be identified and
valued. Finally, A would add the remaining amount (say $200 million) to its
books as
goodwill."[78]
ECONOMIC VIEW OF GOODWILL
Accountants define goodwill in terms of supranormal
earnings and the excess value they represent. Economists explain the excess
earnings
and value in terms of productive synergies between goodwill and the
firm's other assets. A synergy is created when two or more elements
combine to
produce a result that is more valuable than the individual elements acting
alone.[79]
Technological synergies, for instance, allow the combined capacity of two plants
to produce a single product more efficiently than
either plant by itself. The
resulting cost savings are known as economies of
scale.[80]
Goodwill combines with the firm's tangible and separately identifiable
intangible assets to create synergies that increase the value
of the firm beyond
the value of these assets individually. A corporation relies on its reputation,
for instance, to charge premium
prices,[81] to obtain
credit,[82]
customers[83] and
business partners;[84]
and to reduce the mobility of industry
rivals,[85] all of
which contribute to profit and
value.[86] The present
value of the incremental revenue produced by these synergies represents the
value of the corporation's
goodwill.[87]
Empirical studies confirm the value-relevance of a positive reputation.
Professors Mary Barth et al. for instance, conducted an empirical
study
examining the association between the brand value of a firm and its stock
price.[88] Barth et
al. conclude that "brand value estimates capture information that is relevant to
investors and are sufficiently reliable
to be reflected in share prices and
returns."[89] The
authors also find that annual changes in brand values are correlated with stock
returns, controlling for factors such as net
income.[90] Other
economic studies on the value-relevance of reputation report similar
results.[91]
A
positive reputation adds value, but the converse is also true. Empirical studies
show that reputational harm may impair goodwill.
Studies report evidence of
reputational penalties imposed by the stock market on firms accused of
misconduct, or whose reputations
were tainted in other ways. Professors Karpoff,
Lee and Martin, for instance, examined the penalties imposed on firms that were
targeted
by SEC enforcement actions for financial fraud during the period 1978 -
2002.[92] Although
civil settlements and penalties imposed on these firms through the legal system
were significant, the authors report that
reputational penalties imposed by the
stock market were much larger. The authors define a "reputational penalty" as
the present value
of losses due to lower future sales and higher contracting and
financing costs.[93]
They estimate the reputational penalty imposed on firms in their sample as more
than 7.5 times the sum of all penalties imposed through
the legal and regulatory
system.[94]
Karpoff
et al. explain the reputational effect as follows: "for each dollar that a firm
misleadingly inflates its market value when
its books are cooked, on average, it
loses this dollar when its misconduct is revealed, plus an additional $3.07. Of
this additional
loss, $0.36 is due to expected legal penalties and $2.71 is due
to lost reputation. In firms that survive the enforcement process
as independent
entities, lost reputation is even greater at $3.83 per dollar of artificially
inflated value."[95]
The study concludes that the stock market imposes substantial reputational
penalties for accounting
fraud.[96]
Empirical studies report evidence of reputational losses for various types
of corporate misconduct, including false
advertising,[97]
product recalls,[98]
air safety
disasters,[99] frauds
of private
parties,[100]
investigations of IPO
underwriters,[101]
product
tampering,[102] and
defense procurement
fraud.[103]
LEGAL VIEW OF GOODWILL
The common law has often struggled to understand and define goodwill.[104] Courts and commentators captured essential elements of goodwill, but their definitions were often inadequate. The legal definition of goodwill has evolved over time, and the modern view has converged towards the accounting and economic meanings. Although modern courts tend to emphasize different aspects of goodwill in different legal contexts, their diverse viewpoints are generally substantively consistent.[105] The occasional emergence of definitions contradicting the accounting and economic meanings has been attributed to "economic ignorance of courts and legal commentators," rather than a fundamental disconnect between law and economics.[106]
Early view
The earliest legal definition of goodwill appeared
in Cruttwell v.
Lye,[107] an
English case from 1810. Cruttwell defined goodwill simply as "the
probability that the old customers will resort to the old
place."[108]
Commentators and courts have generally viewed this definition as narrow and
incomplete.[109] Its
exclusive focus on favorable customer relations ignores other synergies, such as
those arising from economies of scale and favorable
relations with suppliers and
creditors.[110]
Also, significant custom by itself does not necessarily result in the sustained
profitability necessary to establish the supranormal
returns and value that
characterize
goodwill.[111] In
Christian v.
Douglass,[112]
the court acknowledged the limitations of Crutwell, and articulated a
more expansive view of goodwill, as "every positive advantage acquired, arising
out of the business of the old
firm, whether connected with the premises where
it was carried on, with the name of the late firm, or with any other matter
carrying
with it the benefit of the business of the old
firm."[113]
A
(now-classic) definition of goodwill subsequently appeared in 1841, in a
treatise on partnership written by Justice Joseph
Story.[114] Justice
Story defines goodwill as "an advantage of benefit which is acquired by an
establishment, beyond the mere value of the capital,
stock, funds or property
employed therein, in consequence of the general public patronage and
encouragement which it receives from
constant or habitual customers, on account
of its local position, or common celebrity, or reputation for skill or
affluence, or punctuality,
or from other accidental circumstances or
necessities, or even from ancient partialities or
prejudices."[115]
This definition resembles elements of the modern accounting view, and is still
widely cited in the common
law.[116]
A
third classic definition of goodwill was articulated by Judge Cardozo in In
re Brown,[117] a
case that challenged the method by which the surviving partners of a brokerage
firm accounted for its goodwill. Judge Cardozo focused
on the role of location
and customer loyalty in the valuation of goodwill, observing that "[m]en will
pay for any privilege that
gives a reasonable expectancy of preference in the
race of competition ... Such expectancy may come from succession in place or
name
or otherwise to a business that has won the favor of its customers. It is
then known as good
will."[118]
Modern view
The legal definition of goodwill has evolved from its narrow origins and converged towards its accounting and economic meanings.[119]
Law has adopted accounting definition and measurement
The modern accounting view of goodwill as a
constellation of intangible assets which generate supranormal earnings and
excess value,
has been adopted by the common law, statutory law, treatises and
academic commentators, in diverse legal
disciplines.[120]
The California Civil Procedure Code for instance, states that "goodwill
consists of the benefits that accrue to a business as a result of its location,
reputation for
dependability, skill or quality, and any other circumstances
resulting in probable retention of old or acquisition of new
patronage."[121]
Definitions which emphasize individual goodwill constituents have been codified
in state and federal
statutes,[122] and
articulated in legal
treatises,[123]
academic
commentary,[124]
practitioner
journals,[125] as
well as the common
law.[126] Professor
Grace Ganz Blumberg cautions that any attempt to list the assets that constitute
goodwill is necessarily incomplete. Professor
Blumberg explains that "[b]ecause
goodwill is a residuum of assets we are otherwise unable to quantify
individually, any listing
of goodwill constituents is necessarily illustrative
rather than
exhaustive."[127]
The modern legal approach to goodwill is illustrated by the decision of the
Supreme Court of New Jersey, in Dugan v.
Dugan.[128] In
Dugan, the plaintiff, James P. Dugan, and defendant, Rosaleen M. Dugan,
were married for twenty years, until the marriage ended in divorce.
The
plaintiff maintained a law practice as a professional corporation, and the
defendant worked as a secretary in the law office.
The plaintiff's law practice
was a major asset in the joint estate, and most of its value consisted of
goodwill.[129] The
main issue in the case was the valuation and equitable distribution of the
goodwill in the law
practice.[130] The
opinion presents a perceptive discussion of the economics and accounting of
goodwill in a legal context.
The Court described goodwill as "the most
intangible of the intangibles," but emphasized its importance as a "legally
protected
interest"[131] and
economic proxy for the reputation of a
business.[132] The
Court acknowledged that "[w]hen goodwill exists, it has value and may well be
the most lucrative asset of some
enterprises."[133]
It conceded the difficulty of valuing goodwill, but insisted that "difficulty in
fixing its value does not justify ignoring its
existence,"[134] and
that "[g]oodwill should be valued with great care
..."[135]
After
a brief nod to the classic
definitions,[136]
the Court acknowledged the modern accounting view, stating that "[t]he
accounting profession has further expanded the concept of
goodwill to encompass
other advantages of an established business that contribute to its
profitability,"[137]
including items not otherwise identifiable, such as "a good name, capable staff
and personnel, high credit standing, reputation for
superior products and
services, and favorable
location."[138] The
opinion recognized the supranormal earnings and excess value view of goodwill,
observing that "[g]oodwill can be translated into
prospective earnings" over and
above "the normal return on the
investment."[139] It
also recognized the role of specific reputational synergies that create
supranormal earnings and value, stating that goodwill
comes into existence and
assumes value when earning capacity has been enhanced because "reputation leads
to probable future patronage
from potential and existing
clients."[140] The
Court observed that the financial value of goodwill equals the present value of
the excess earnings attributable to
it,[141] and that
the value of the goodwill of a publicly traded corporation is reflected in its
stock
price.[142]
Although
the Dugan opinion focused narrowly on the existence and value of goodwill
in a professional practice as a matrimonial asset, the Court emphasized
that its
legal and accounting analysis is
universal.[143]
Other courts and commentators have agreed that "[the existence and valuation of]
[g]oodwill is not dependent on the form of business
organization,"[144]
since it represents universal economic concepts, namely excess earnings and
value, whether in "a partnership, corporation, joint venture, or
individual
proprietorship."[145]
Goodwill valuation must be based on accepted accounting methods
Courts require that goodwill be valued according to
accepted accounting
methods.[146]
Appellate courts have held that lower courts must stipulate on the record the
factors and accounting method on which it based its
valuation. Failure to do so
will render the valuation unsupported by evidence, resulting in reversal and
remand for proper
findings.[147]
The common law recognizes a variety of goodwill valuation
methods,[148]
including the so-called straight capitalization and excess earnings methods.
According to the straight capitalization method, the
total value of a business
is first obtained by discounting the free cash flows to the firm at its weighted
average cost of
capital.[149] The
value of the goodwill of the business is then determined by subtracting the
aggregate value of the business' tangible and identifiable
intangible assets
from the total value of the business. The straight capitalization method is
established in
accounting,[150] and
recognized in the common
law.[151]
The
excess earnings method estimates the value of goodwill as the present value of
the supranormal earnings stream attributed to
it.[152] The method
defines excess earnings as earnings above a normal return on tangible and
identifiable intangible
assets.[153] The
excess earnings method is widely used by accountants in business
valuation,[154] and
has been endorsed by the American Institute of Certified Public Accountants
(AICPA) as a valid approach to business
valuation.[155] The
excess earnings method is widely accepted in the common
law,[156] and the
IRS frequently employs this method to value businesses for tax
purposes.[157]
Acceptance by the common law of goodwill valuation methods based on
straight capitalization and excess earnings constitutes an implicit
legal
endorsement of accountants' supranormal earnings and excess value
characterization of goodwill.
Law has adopted economic view of goodwill
The law has adopted the economic view of goodwill,
which defines goodwill as a rent-generating financial asset, and explains its
value
in terms of productive synergies. This subsection establishes the
following:
(1) The law recognizes goodwill as a value-relevant corporate
asset.
(2) The law recognizes specific synergies through which goodwill
creates value. It also recognizes the converse, namely that reputational
harm
impairs the synergies, leading to loss of goodwill. The resulting loss of
goodwill is reflected in the value of the securities
of a publicly traded
corporation.
(3) Common and statutory law allow recovery for lost
goodwill.
Goodwill is a value-relevant asset
The common law views goodwill as a valuable economic
asset,[158] which
generates supranormal earnings in combination with the other assets of a
business,[159] and
creates value equal to the present value of the supranormal
earnings.[160] In
Spayd v. Turner et
al.,[161] a case
involving measurement and distribution of goodwill in a partnership dissolution,
the court explained that "[f]uture earning
capacity per se is not goodwill.
However, when that future earning capacity has been enhanced because
reputation leads to probable future patronage from existing and potential
clients, goodwill may exist and have
value."[162] The
court concluded that when the supranormal earnings have been translated into
excess value, "the resulting goodwill [would be]
property subject to equitable
distribution."[163]
Courts
have assigned a value to goodwill in a variety of legal contexts, including
partnership,[164]
bankruptcy,[165]
corporate law,[166]
antitrust,[167]
condemnation,[168]
family law,[169]
probate,[170]
partnership,[171]
taxation,[172] and
tort.[173]
Law recognizes specific synergies
The common law, supported by statutes and academic commentary, recognizes
specific synergies through which goodwill creates value.
These synergies include
items related to reputation, such as
patronage,[174] a
sound credit
rating,[175]
favorable
location,[176]
public
confidence,[177] and
sound relations with regulatory authorities, employees and
suppliers.[178] Law
& Economics scholars, Professors William M. Landes and Richard A. Posner,
describe synergies related to sales and patronage,
observing that "once the
reputation [of a brand] is created, the [owner of the brand name] will obtain
greater profits because repeat
purchases and word-of-mouth references will
generate higher sales and because consumers will be willing to pay higher prices
for
lower search costs and greater assurance of consistent
quality."[179] The
common law also recognizes the converse, namely that reputational harm may
impair the synergies that create supranormal earnings
and value, resulting in
loss of
goodwill.[180]
Courts have allowed plaintiffs to recover damages for lost
goodwill.[181] In
National Association For The Advancement of Colored People v.
Overstreet,[182]
the Georgia Supreme Court affirmed a jury verdict awarding the respondent
damages for goodwill lost due to unlawful picketing of
his business. The
respondent, Haldred Overstreet, had owned and operated a retail grocery store in
Savannah for 16 years, and had
built up considerable goodwill in his
business.[183] In
May 1962, a 14-year-old African American youth complained to the local police
that he had been abused by the
respondent.[184] The
youth's mother contacted the Savannah Branch of the National Association For The
Advancement of Colored People, who responded
by organizing a campaign to picket
Overstreet's
store.[185] The
picketing attracted substantial crowds, and there were incidents involving the
intimidation of customers, obstruction of public
sidewalks and streets, and some
violence.[186]
Overstreet filed suit against the national NAACP, the Savannah Branch of
the NAACP, The Georgia State Conference of Branches of the
NAACP, and one W. W.
Law, the president of both the Savannah Branch of the NAACP and the Georgia
State Conference of Branches of
the NAACP. The petition alleged loss of goodwill
in the amount of forty thousand
dollars.[187] The
plaintiff also claimed an additional forty thousand dollars in punitive
damages.[188] The
jury awarded the plaintiff compensatory damages of $35,793 and punitive damages
of $50,000.
Defendants appealed to the Georgia Supreme Court, which
reversed the lower court's decision against the Georgia State Conference
of
Branches of the NAACP, but affirmed as to all other defendants. The Court
observed that goodwill is uniformly recognized as property
and a valuable
business asset.[189]
It stated that harm to business goodwill constitutes a cause of action for the
resulting damages, and that the plaintiff had provided
evidence of his pecuniary
loss.[190] The Court
held that evidence of lost earnings proximately caused by the defendant's
illegal picketing "[supported] a finding that
[plaintiff] suffered more than the
$40,000 in actual damages." It upheld the lower court's award of $35,793.05 as
compensatory damages
for lost goodwill, concluding that it was consistent with
the
evidence.[191]
Recovery of damages for lost goodwill has statutory
support.[192]
Section 1016 of the Uniform Eminent Domain Code, for instance, provides for
compensation for lost goodwill to businesses displaced
by eminent
domain.[193]
Although California courts historically denied recovery for goodwill in
condemnation
actions,[194] the
State was an early adopter of the language of the Uniform Eminent Domain Code.
The California Code of Civil Procedure now provides for compensation for
loss of goodwill in takings occurring in California after July 1,
1976.[195] The
provision defines goodwill in terms of value realized from
patronage.[196] In
People ex rel. Department of Transportation v.
Muller,[197] the
Court confronted, and resolved the issue whether the statutory definition of
goodwill should be interpreted narrowly as relating
only to patronage.
In Muller, the Department of Transportation took the land on which
Dr. Muller's veterinary clinic was located. Muller relocated his practice
without loss of patronage or gross income, but his expenses, including his rent,
increased, resulting in a loss in net income and
goodwill. The Department of
Transportation argued that the statute should be interpreted narrowly as
allowing compensation only for
goodwill losses due to loss of
patronage.[198] The
government contended that it therefore owed no compensation for goodwill, since
Muller's loss was due to an increase in business
expenses unrelated to
patronage.[199] The
Court rejected the Department's limited interpretation of the statute and
endorsed an expansive definition of
goodwill.[200] It
interpreted the statute as authorizing compensation for lost benefits associated
with location, but stressed that patronage is
not the only benefit associated
with a favorable location. In the present case the plaintiff retained patronage,
but lost certain
cost advantages associated with his prior
location.[201] The
Court's broadened interpretation of goodwill entitled the plaintiff to recover
this loss.
Value of goodwill reflected in stock price
The common law,[202] including opinions by the United States Supreme Court,[203] has recognized that the value of the goodwill of a business is included in its equity. In Dugan v. Dugan,[204] the New Jersey Supreme Court stated explicitly that the value of goodwill is reflected in the stock price of a publicly traded company.[205] In Diamond v. Oreamuno,[206] a case involving allegations of insider trading, the court cautioned in dicta that the public reputation of a corporation may directly affect the market value of its securities. The court stated that corporate misconduct may injure a corporation's reputation for integrity and probity, and undermine the value of its securities.[207] It explained that public perception of managerial integrity is essential to ensure sound investor relations and marketability of the shares of a company.[208] These factors are related to investor perceptions of risk and liquidity, which are important determinants of the market value of a company's securities.[209]
The economic view of goodwill supports proximate causality
The tort doctrine of proximate cause limits a
plaintiff's recovery to harm reasonably related to, or "proximately caused by,"
the
defendant's
wrongdoing.[210]
Foreseeability plays a central role in proximate
cause.[211]
Commenting on the role of foreseeability, Professor Jonathan Cardi states: "a
plaintiff may fail to survive the proximate cause inquiry
where the defendant's
actions resulted in (1) an unforeseeable type of injury, (2) an injury occurring
in an unforeseeable manner,
or (3) injury to an unforeseeable
plaintiff."[212] An
event is considered the foreseeable result of an action if the action ex ante
systematically increased the likelihood of the event.
This would be the case if
the action either created the risk of the event or increased the likelihood of
its
materialization.[213]
The basic test of foreseeability can also be described as "whether one can see a
systematic relationship between the type of [harm]
that the plaintiff suffered
and the defendant's
[action]."[214]
Coincidental harm would therefore not be considered
foreseeable.[215]
The proximate cause doctrine, including its foreseeability inquiry, applies
to the tort of
defamation.[216] A
defendant in a defamation case is therefore liable only for reputational harm
proximately caused by its defamatory publication.
The common law's adoption of
the economic view of goodwill implies legal recognition of a proximate causal
relationship between reputational
harm and loss of goodwill. Reputation and
goodwill are systematically connected through the economic synergies by which
reputation
adds value to goodwill, and which are harmed when the company is
defamed. A defamation plaintiff may therefore recover damages for
lost goodwill,
but any recovery must be adjusted to exclude goodwill losses due to factors
unrelated to the defendant's wrongdoing.
5. EVIDENCE OF SPECIAL DAMAGES: THE LEGAL BASIS FOR A CAPITAL MARKET APPROACH
This section draws on the analysis of corporate reputation and its relation to goodwill, as well as the legal, accounting, and economic meanings of goodwill, developed in previous sections, to construct a legal basis for a capital market approach to proving and measuring special damages. The results of the analysis can be summarized as follows.
Results (1) - (6) imply that the law recognizes (1) a systematic
causal relationship between reputational harm and loss of goodwill,
and (2) that
loss of goodwill is reflected in a decline in the value of the shares of a
defamed corporation. A decline in the share
price of a defamed corporation,
adjusted for factors unrelated to the defamation, therefore constitutes legally
valid evidence of
special damages for the plaintiff's reputational harm. The
adjustment for unrelated factors is necessary to satisfy proximate
cause.
Economists and statisticians have developed a powerful statistical
methodology, known as an "event study," that can be applied to
assess special
damages.[218] An
event study measures the impact of an economic "event" on the share price of a
corporation.[219]
Researchers have, for instance, used event studies to measure the impact of the
announcement of a criminal investigation on the share
price of the target of the
investigation.[220]
Measurement of the impact of an event on a share price is complicated when
the share price moves not only in response to the event,
but also in response to
simultaneous unrelated factors. A defamatory publication may, for instance,
coincide with an unanticipated
increase in interest rates. The interest rate
increase and the defamation may both contribute to a decline in the share price
of
the corporation. The mathematical principles underlying the event study
methodology enable it to distinguish between the event of
interest and unrelated
confounding
events.[221] A
well-designed event study can therefore isolate the effect of a defamatory
publication from the effects of other factors, in order
to provide an estimate
of the portion of the defamed company's share price change solely due to the
defamation.[222]
Such an estimate, if properly executed, would provide a measure of a plaintiff's
reputational harm proximately caused by the
defamation.[223]
The
event study methodology, and its application in various legal contexts, have
been widely accepted in the common
law.[224]
6. CONCLUSION
This article has established that a decline in the
value of the securities of a defamed corporation, adjusted for factors unrelated
to the defamation, constitutes legally valid evidence of special damages for
reputational harm. This approach has a sound theoretical
and empirical economic
basis. Economic theory predicts that a defamatory publication may harm a
company's earnings, leading to a
decline in the value of its goodwill and stock
price. Empirical studies confirm that the stock market imposes reputational
penalties
on defamed corporations. This article establishes the legal basis and
validity of a capital market approach to damages. It starts
from first
principles, by considering the substantive right protected by defamation law,
namely the integrity of a plaintiff's reputation,
and proceeds with an analysis
of its legal concept as a core element of goodwill. The analysis shows that the
logic of common law
precedent, supported by statutes and academic commentary,
points to a measure of special damages for reputational harm based on stock
market data.
The result is helpful to a corporate plaintiff whose shares are
publicly traded in an efficient market. A plaintiff who has to prove
special
damages typically faces a complex task. Proof of special damages is
difficult,[225] and
special damages must be pleaded with specificity and proven with reasonable
certainty.[226] In
some jurisdictions a plaintiff may not recover damages for defamation without
proof of special
damages.[227] This
article paves the way for an approach to proving and measuring special damages
which significantly lightens a plaintiff's burden.
The method can be implemented
routinely by financial economists, applying standard statistical techniques to
publicly available data.
[1] See e.g. Marc
Franklin, Winners and Losers and Why: A Study of Defamation Litigation, 3
A.B.F. RESEARCH J. 455, 459-60, 478
(1980).
[2] See
§ 2,
infra.
[3] See
e.g. Robert D. Sack, SACK ON DEFAMATION LIBEL, SLANDER AND RELATED PROBLEMS (3d
ed. 2008), § 10.3.2 ("Special damages are
damages awarded to compensate the
plaintiff for actual pecuniary loss. ... The pecuniary loss comprising special
damages must flow
directly from the injury to reputation caused by the
defamation.")
[4]
See n. xxx,
infra.
[5] See
infra xx.
[6] See
e.g. See e.g. Robert D. Sack, SACK ON DEFAMATION LIBEL, SLANDER AND RELATED
PROBLEMS (3d ed. 2008), § 2.4.1 ("Defamation
deals with expression ... that
injures reputation."), citing Smith v. Maldonado, 72 Cal. App. 4th 637, 645, 85
Cal. Rptr. 2d 397, 402 (1999) ("Defamation is an invasion of the interest in
reputation."); RESTATEMENT (SECOND) OF TORTS, § 559 (1977). Defamation
is
the broader term for libel and slander. Libel is concerned with written or
printed words, or more generally, embodiment of the
defamatory message in
tangible or permanent form. Slander constitutes oral defamation. See e.g.
PROSSER AND KEETON ON THE LAW OF
TORTS, §112, at 785-88 (1984).
[7] See Milkovich v.
Lorain Journal Co. et al.[1990] USSC 117; , 497 U.S. 1, 12 ("Defamation law developed not only as
a means of allowing an individual to vindicate his good name, but also for the
purpose
of obtaining redress for harm caused by such statements."); Gertz v.
Robert Welch, Inc., [1974] USSC 144; 418 U.S. 323, 348-49 (1974) ("[T]here is a "strong and
legitimate interest in compensating private individuals for injury to
reputation."); Arlen
Langvardt, A Principled Approach to Compensatory Damages
in Corporate Defamation Cases, 27 AMERICAN BUSINESS LAW JOURNAL 491, 494
(1990) ("[The definition of the tort of defamation] reflects the major concern
underlying the development of the defamation
cause of action: The protection and
vindication of the plaintiff's
reputation.")
[8]
See e.g. Jessica R. Friedman, Defamation, 64 FORDHAM L. REV. 794 (1995);
Restatement (Second) of Torts § 558, 559 (1977) ("A communication is
defamatory if it tends so to harm the reputation
of another as to lower him in
the estimation of the community or to deter third persons from associating or
dealing with him.").
See also Restatement (Third) of Torts § 559;
Queensland (Australia) Code, § 366 (Defining "defamation" as "[a]ny
imputation
concerning any person, or any member of his family, whether living or
dead, by which the reputation of that person is likely to be
injured, or by
which he is likely to be injured in his profession or trade, or by which other
persons are likely to be induced to
shun or avoid or ridicule or despise
him.")
[9] See
e.g. Dun & Bradstreet, Inc. v. Greenmoss Builders, Inc., [1985] USSC 173; 472 U.S. 749;
Neaton v. Lewis Apparel Stores, 1944, 267 App. Div. 728, 48 N.Y.S.2d
492.
[10] See
e.g. Braun v. Armour & Co., 1939, N.Y. 514, 173 N.E.
845.
[11] See
e.g. Gershwin v. Ethical Publishing Co., 1937, 166 Misc. 39, 1 N.Y.S.2d
904.
[12] See
e.g. Restatement (Second) of Torts § 565, Comment b at 170 ("To be
defamatory ... it is not necessary that the accusation
or other statement be by
words. It is enough that the communication is reasonably capable of being
understood as charging something
defamatory.") See also English Defamation Act
1996, s 17(1) (Stating that a defamatory statement means "words, pictures,
visual images,
gestures or any other method signifying
meaning.")
[13]
See e.g. R. Smolla, THE LAW OF DEFAMATION (2d ed., 2007), §§ 4:1,
4:4.
[14] See
e.g. Masson v. New Yorker Magazine, Inc., [1991] USSC 111; 501 U.S. 496, 517 (Holding that an
altered quotation may be actionable if it conveys a substantially false and
defamatory meaning.); Locke v.
Benton & Bowles, 1937, 165 Misc. 631, 1
N.Y.S.2d 240, reversed 253 A.D. 369, 2 N.Y.S.2d 150; Ben-Oliel v. Press
Publishing Co., 1929, 251 N.Y. 250, 167 N.E.
432.
[15] See
e.g. Sperry Rand Corp. v. Hill, 1st Cir.1966, 356 F.2d 181, certiorari denied
384 U.S. 973, 86 S.Ct. 1859, 16 L.Ed.2d 683; Carroll v. Paramount Pictures,
S.D.N.Y. 1943, 3 F.R.D.
47.
[16] See
e.g. Meiring de Villiers, Opinionated Software, 10 VANDERBILT ENT. &
TECH. L. J. 101 (Spring 2008) (Analysis of computer virus false alarm as
defamatory statement of
fact.)
[17] See
e.g. Lewis v. Aluminum Co. of America, 588 So2d 167, 170 (La App 1991); Nehrenz
v. Dunn, 593 So2d 915 (La App 1992); Karen Manfield, Comment: Imposing
Liability on Drug Testing Laboratories for "False Positives": Getting Around
Privity, 64 U. CHI. L. REV. 287, 299-302, n. 32; Note: Employee
Drug-Testing Legislation: Redrawing the Battlelines in the War on Drugs, 39
STAN. L. REV. 1453, 1458-59 (1987). (Discussing settlement of negligence action
against testing laboratory by two job applicants whose applications
were
rejected due to false positive tests for
marijuana.)
[18]
See e.g. Arlen Langvardt, A Principled Approach to Compensatory Damages in
Corporate Defamation Cases, 27 AMERICAN BUSINESS LAW JOURNAL 491, 496 (1990)
("[P]ermissible plaintiffs in defamation suits include corporations as well as
natural persons."), citing Brown &
Williamson Tobacco Corp. v. Jacobson,
[1987] USCA7 1018; 827 F.2d 1119, 1138, 14 Media L. Rep. (BNA) (7th Cir. 1987), cert. denied, 485
U.S. 993 (1988); Patricia Nassif Fetzer, The Corporate Defamation Plaintiff
as First Amendment "Public Figure": Nailing the Jellyfish, 68 IOWA L. REV.
35, 53 (1982); Id. n. 93, 94 (cases cited); RESTATEMENT (SECOND) OF TORTS §
561 cmt. b (1977) ("A corporation for profit has a
business reputation and may
therefore be defamed[.]") PROSSER AND KEETON ON THE LAW OF TORTS, §111, at
779; H. Henn, HANDBOOK
OF THE LAW OF CORPORATIONS § 80, at 112 (2d ed.
1970); National Refining Co. v. Benzo Gas Motor Fuel Co., 20 F.2d 763, 766 (8th
Cir.
1927).
[19] See
e.g. Arlen Langvardt, A Principled Approach to Compensatory Damages in
Corporate Defamation Cases, 27 AMERICAN BUSINESS LAW JOURNAL 491, 496
(1990), citing PROSSER AND KEETON ON THE LAW OF TORTS, §112, at 779
("Corporations long have been considered proper plaintiffs
even though they
cannot experience the humiliation, emotional distress, and personal indignities
that may be endured by a natural
person.") See also Perry Herzfeld,
Corporations, Defamation and General Damages: Back To First Principles,
(2005) 10 MEDIA & ARTS L. REV 135, 139 ("[A] corporation cannot recover
damages for injury to feelings as a 'company cannot
be injured in its
feelings'."), citing Lewis v. Daily telegraph Ltd. (1964) A.C. 234, 262 (Lord
Reid); Dreschel & Moon, Corporate Libel Plaintiffs and the News Media: An
Analysis of the Public-Private Distinction After Gertz, 21 AM. BUS. L. J.
127, 138 (1983); Golden Palace, Inc. v. NBC, 386 F.Supp. 107, 109 (D.D.C. 1974);
Reporters' Association of America v. Sun Printing & Publishing Association,
1906, 186 N.Y. 437, 79 N.E. 710; Di Giorgio Fruit Corp. v. AFL-CIO, 215 Cal.
App. 2d 560, 570-72, 30 Cal. Rptr. 350, 355-56
(1963).
[20]
See e.g. Di Giorgio Fruit Corp. v. AFL-CIO, 215 Cal. App. 2d 560, 570-72, 30
Cal. Rptr. 350, 355-56 (1963); PROSSER AND KEETON ON THE LAW OF TORTS,
§111, at 779 ("A corporation is regarded as having no reputation in
any
personal sense ... [b]ut it has prestige and standing in the business in which
it is engaged, and language which casts an aspersion
upon its honesty, credit,
efficiency or other business characteristic may be
actionable.")
[21]
See RESTATEMENT (SECOND) OF TORTS §§ 561 cmt. b, ill. 3 (A publication
which reflects negatively on the credit or business
methods of a corporation has
defamed the corporation.); GTP Leisure Products v. B-W Footwear Co., Inc., 55
A.D.2d 1009, 391 N.Y.S.2d 489 (1977) (Defamation of corporation by reflection
upon its credit); Axton-Fisher Tobacco Co. v. Evening Post Co., 169 Ky. 64, 183
S.W. 269 (1916) (Defamation of corporation by reflection upon its business
methods); Brown & Williamson Tobacco Corp. v.
Jacobson, [1987] USCA7 1018; 827 F.2d 1119, 1138,
14 Media L. Rep. (BNA) (7th Cir. 1987), cert. denied, 485 U.S. 993 (1988)
(Corporation has protectable business reputation centering around notions of
integrity); Dun & Bradstreet, Inc. v. Greenmoss
Builders, Inc., [1985] USSC 173; 472 U.S. 749
(1985) (false credit report reflected negatively on firm's solvency). See also
Diplomat Elec., Inc. v. Westinghouse Elec. Supply
Co., [1967] USCA5 449; 378 F.2d 377, 382-83 (5th
Cir. 1967); Aetna Life Ins. Co. v. Mutual Benefit Health & Accident Ass'n.,
82 F.2d 115, 120 (8th Cir. 1936); Maytag Co. v. Meadows Mfg. Co., 45 F.2d 299,
302 (7th Cir 1930); Di Giorgio Fruit Corp. v. AFL-CIO, 215 Cal. App. 2d 560,
570-72, 30 Cal. Rptr. 350, 355-56 (1963); 3 RESTATEMENT OF TORTS § 561
(1976); Milo Geyelin, Corporate Mudslinging Gets Expensive, WALL ST. J.,
Aug. 4, 1989, at B1.
[22] See Robert D.
Nelon, Media Defamation in Oklahoma: A Modest Proposal and New Perspectives -
Part I, 34 OKLA. L. REV. 478, 488 (1981) ("[N]ine discrete but interrelated
elements accurately describe the constitutional boundaries of the tort and place
the
remaining common law aspects of libel in their proper
perspective.")
[23]
Keeton, Defamation and Freedom of the Press, 54 TEX. L. REV. 1221,
1233-35
(1976).
[24]
See R. Smolla, THE LAW OF DEFAMATION (2d ed.), § 1:34; Jessica R. Friedman,
Defamation, 64 FORDHAM L. REV. 794, 794
(1995).
[25]
PROSSER & KEETON ON TORTS § 111, at 774 (5th ed. 1984) ("[I]t is enough
that the communication would tend to prejudice the
plaintiff in the eyes of a
substantial and respectable minority, but in such a case it must be shown that
the communication did reach
one or more persons of that minority
group.")
[26]
"Public plaintiff" includes a public official, New York Times v. Sullivan, [1964] USSC 40; 376
U.S. 254 (1964); a public figure, Curtis Publishing Co. v. Butts; Associated
Press v. Walker, [1967] USSC 200; 388 U.S. 130 (1967); and a limited purpose public figure.
Limited purpose public figures are people who "have thrust themselves to the
forefront
of particular public controversies in order to influence the
resolution of the issues involved." Gertz v. Robert Welch, Inc., [1974] USSC 144; 418 U.S. 323,
345 (1974). The "public official" category is fairly wide, and includes, for
instance, government employees. See 1 Slade R. Metcalf
& Leonard M. Niehoff,
Rights and Responsibilities of Publishers, Broadcasters and Reporters 1.50, at
1-109.
[27]
New York Times v. Sullivan, [1964] USSC 40; 376 U.S. 254, 279-80
(1964).
[28]
Under the constitutional standard articulated by the Supreme Court in Milkovich
v. Lorain Journal Co., [1990] USSC 117; 497 U.S. 1 (1990), statements that are not objectively
verifiable, or that do not contain a provably false connotation, are entitled to
full
First Amendment protection. Id., at 19.
[29] See e.g.
Robert D. Sack, SACK ON DEFAMATION LIBEL, SLANDER AND RELATED PROBLEMS (3d ed.
2008), §§ 8.2.1.2, 8.2.1.3, 8.2.1.5,
8.2.2.
[30] See
e.g. R. Smolla, THE LAW OF DEFAMATION (2d ed., 2007), §§ 9:16, 9:35;
Norman Redlich, Corporate Defamation Symposium:
The Publicly Held Corporation
as Defamation Plaintiff, 39 ST. LOUIS L.J. 1167, 1173-74; Arlen Langvardt,
A Principled Approach to Compensatory Damages in Corporate Defamation
Cases, 27 AMERICAN BUSINESS LAW JOURNAL 491, 497-98
(1990).
[31]
See e.g. Norman Redlich, Corporate Defamation Symposium: The Publicly Held
Corporation as Defamation Plaintiff, 39 ST. LOUIS L.J. 1167, 1174. For a
discussion of the types of cases which allow presumed damages, see Arlen
Langvardt, A Principled Approach to Compensatory Damages in Corporate
Defamation Cases, 27 AMERICAN BUSINESS LAW JOURNAL 491, 498-99
(1990).
[32]
See R. Smolla, THE LAW OF DEFAMATION (2d ed. 2006), § 9:35 ("Special
damages may be used to enhance recovery of general damages.")
Professor Smolla
defines "general damages" as "all forms of compensatory damages other than ...
special damages.") See also id. at
§
9:13.
[33] [1987] USCA7 1018; 827
F.2d 1119, 1139 (7th Cir. 1987), cert. denied, 485 U.S. 993
(1988).
[34]
[1985] USSC 173; 472 U.S. 749
(1985).
[35]
See e.g. Robert D. Sack, SACK ON DEFAMATION LIBEL, SLANDER AND RELATED PROBLEMS
(3d ed. 2008), § 10.3.2 ("Special damages are
damages awarded to compensate
the plaintiff for actual pecuniary loss. ... The pecuniary loss comprising
special damages must flow
directly from the injury to reputation caused by the
defamation."), citing Brown & Williamson Tobacco Corp. v. Jacobson, [1987] USCA7 1018; 827 F.2d
1119, 1138, 14 Media L. Rep. (BNA) (7th Cir. 1987), cert. denied, 485 U.S. 993
(1988); Nunez v. A-T Fin. Info., Inc., 957 F.Supp.438, 441 (S.D.N.Y. 1997);
Robertson v. McLoskey, 680 F.Supp. 414, 415-16 (D.D.C.
1988).
[36]
Robert D. Sack, SACK ON DEFAMATION LIBEL, SLANDER AND RELATED PROBLEMS (3d ed.
2008), § 10.3.2, citing RESTATEMENT (SECOND)
OF TORTS § 575 cmt. b
(1977); Liberman v. Gelstein, 80 N.Y.2d 429, 434-35, 605 N.E.2d 344, 590
N.Y.S.2d 857, 21 Media L. Rep. (BNA) 1079
(1992).
[37]
See e.g. WDM Planning, Inc. v. United Credit Corporation, 62 A.D.2d 940, 404
N.Y.S.2d 5 (Holding that complaint alleging loss of business due to defendant's
defamatory statements relating to plaintiff's business practices "constitutes
an
allegation of special damages, sufficient to withstand a motion to dismiss the
complaint.") 62 A.D.2d at 941, 404 N.Y.S.2d at
6; Morasse v. Brochu, 151 Mass.
567, 572-74, 25 N.E. 74, 76 (1890) (holding that physician's loss of patients
constitutes special
damages.)
[38]
See e.g. Century Material Art Supply, Inc. v. National Ass'n of Professional
Martial Artists, 129 Fed. Appx. 421 (10th Cir.
2005).
[39] See
e.g. Dun & Bradstreet, Inc. v. Greenmoss Builders, Inc., [1985] USSC 173; 472 U.S. 749,
783-84, 11 Media L. Rep. [BNA] 2417 (1985); Prettyman v. Shockley, 4 Del. (4
Harr.) 112 (1844); Norman Redlich, Corporate Defamation
Symposium: The
Publicly Held Corporation as Defamation Plaintiff, 39 ST. LOUIS L.J. 1167,
1169 ("A defamation may also lead to a drop in a company's credit rating or
other impairment in corporate
access to the debt markets, similarly damaging a
company's economic performance.")
[40] See e.g.
Robertson v. McCloskey, 680 F.Supp. 414 (D.D.C. 1988) ("Specific evidence
demonstrating the financial harm resulting from the libel is required before
compensation for economic
harm can be awarded."); Erick Bowman Co. v. Jensen
Salsbury Laboratories, 8 Cir., 1926, 17 F.2d 255, 261 ("It was therefore
necessary for the plaintiff to allege either the loss of particular customers by
name, or a general diminution
in its business, and extrinsic facts showing that
such special damages were the natural and direct result of the false
publication.
If the plaintiff desired to predicate its right to recover damages
upon general loss of custom, it should have alleged facts showing
an established
business, the amount of sales for a substantial period preceding the
publication, the amount of sales subsequent to
the publication, facts showing
that such loss in sales were the natural and probable result of such publication
..."), quoted with
approval in Fowler v. Curtis Publishing Co., [1950] USCADC 171; 1949, 86
U.S.App.D.C. 349, 351[1950] USCADC 171; , 182 F.2d 377, 379. See also Jones v. W. & S. Life
Ins. Co., [1996] USCA7 876; 91 F.3d 1032 (7th Cir. 1996); Christopher Lisa Policano, Inc. v. N.
Am. Precis Syndicate, Inc., 129 A.D.2d 488, 514 N.Y.S.2d 239, 13 Media L. Rep.
(BNA) 2243 (1st Dep't 1987); Dan B. Dobbs, THE LAW OF TORTS 1143 (2001)
(Describing special harm as "specifically
identified pecuniary harm resulting
from the slander."); FED. R. CIV. PROC. 9(g) ("When items of special damage are
claimed, they
shall be specifically
stated.")
[41]
See e.g. R. Smolla, THE LAW OF DEFAMATION (2d ed. 2006), § 9:30 ("Lost
business opportunities in the forms of lost revenue,
lost customers, and
diminishment of the value of publicly traded stock are all forms of quantifiable
loss that can be put into evidence.");
Sterling Savings Association v. Ryan, 751
F. Supp. 871, 876 (finding that the plaintiff had "already suffered immeasurable
injury in the form of damage to its reputation and the accompanying
loss of
business. Strong evidence of this is the fact that the value of Sterling's
common stock has dropped in recent months from
$9.00 per share to $4.00 per
share."); Langdon v. Hillside Coal & Iron Co., Circuit Court, S.D. New York,
Feb. 13, 1890 (Stating
that defamation of a corporation may lead to depreciation
of the value of its shares.); Diamond v. Oreamuno, 24 N.Y. 2d 494, 499, 248 N.E.
2d 910, 912, 301 N.Y.S. 2d 78, 81-82 (Stating that corporate misconduct, such as
insider trading, may injure a corporation's reputation for integrity and probity
and undermine the value of its securities.); Julie A. Scott-Bayfield,
DEFAMATION: LAW AND PRACTICE, FT Law and Tax Practitioner Series,
1st ed., at
118 ("[I]f a plaintiff company can show that its share price has been affected
by the alleged libel ... that could form
the basis of a claim for special
damages."); Perry Herzfeld, Corporations, Defamation and General Damages:
Back To First Principles, (2005) 10 MEDIA & ARTS L. REV 135, 138
("Injury to a corporation's business reputation may be indirect and of varying
nature.
It could include ... a decrease in the market value of the corporation's
stock."); Charles Fombrun, REPUTATION (1996), 94-96 ("For
public companies,
changes in the market value of a firm provide a reasonable estimate of the
anticipated losses to a company from
attacks on its integrity and credibility;
they also provide a gauge of how much of a company's reputational capital is put
at risk
from such events."); Lyrissa Barnett Lidsky, Silencing John Doe:
Defamation & Discourse in Cyberspace, 49 DUKE L.J. 855, 877 ("Corporate
plaintiffs are at least partially motivated by the fear that negative statements
on financial bulletin boards will
drive down their stock price. The stock market
trades on information, and negative information shifts stock prices very
quickly."),
citing William A. Klein & John C. Coffee, BUSINESS ORGANIZATION
AND FINANCE: LEGAL AND ECONOMIC PRINCIPLES 392 (1996); Jacqueline
A. Egr,
COMMENT: Closing the Back Door on Damages: Extrending the Actual Malice
Standard to Publication-Related Damages Resulting from Newsgathering
Torts,
49 KAN. L. REV. 693, 718 (Stating that economic losses "such as reduced stock
value and lower profits ... are directly related to
the plaintiff's loss of
reputation ..."); Aswath Damodaran, INVESTMENT VALUATION (2d ed., 2002), at 555
("One of the benefits of
having a well-known and respected brand name is that
firms can charge higher prices for the same products, leading to higher profit
margins and hence to higher price-sales ratios and firm value.")
[42] Norman
Redlich, Corporate Defamation Symposium: The Publicly Held Corporation as
Defamation Plaintiff, 39 ST. LOUIS L.J. 1167, 1169.
[43] See Dan B.
Dobbs, LAW OF REMEDIES DAMAGES - EQUITY - RESTITUTION (2d ed., 1993), at
9.
[44] See
e.g. David Rolph, REPUTATION, CELEBRITY AND DEFAMATION LAW 19 (2008) (Describing
reputation as "the central interest directly
protected by defamation law");
Themo v. New England Newspaper Pub. Co., 306 Mass. 54, 57, 27 N.E.2d 753, 755
(1936) ("[The] right to freedom from defamation ... concerns primarily one's
reputation.")
[45]
Robert C. Post, The Social foundations of Defamation Law: Reputation and the
Constitution, 74 Calif. Law Rev. 691, 719-20 (1986) (It is necessary, "if
defamation law is to serve a coherent purpose, to define and articulate
concepts
of reputation that more narrowly define the specific forms of social
apprehension to be legally protected.")
[46] See e.g. Paul
Milgrom and John Roberts, ECONOMICS, ORGANIZATION & MANAGEMENT 603 (1992)
(Defining reputation as "[t]he view formed
of an individual or organization by
another based on past experience, especially as a basis for forecasting future
behavior."); J.E.
Stiglitz, Imperfect Information in the Product Market,
in R. Schmalensee and R. Willig (eds.) HANDBOOK OF INDUSTRIAL ORGANIZATION, CH.
13 (1989); Charles Fombrun and Cees Van Riel, The Reputational Landscape,
1 CORPORATE REPUTATION REVIEW 5, 5-6 (1997) ("Economists view reputations as
either traits or signals. Game theorists describe reputation
as character traits
that distinguish among 'types' of firms and can explain their strategic
behavior. Signalling theorists call our
attention to the informational content
of reputations. Both acknowledge that reputations are actually perceptions of
firms held by
external
observers.")
[47]
See e.g. K.E. Sveiby, THE NEW ORGANIZATIONAL WEALTH: MANAGING AND MEASURING
KNOWLEDGE-BASED ASSETS
(1997).
[48]
See e.g. R.E. Caves and M.E. Porter, From Entry Barriers to Mobility
Barriers, 91 Q. J. ECON. 421 (1977); Weigelt, K. & Camerer, C.,
Reputation and Corporate Strategy: A Review of recent Theory and
Applications, 9 STRATEGIC MANAGEMENT JOURNAL 443, 443 (1988) ("[I]n game
theory the reputation of a player is the perception others have of the
player's
values ... which determine his/her choice of strategies."); Irene Devine and
Paul Halpern, Implicit Claims: The Role of Corporate Reputation in Value
Creation, 4 CORPORATE REPUTATION REVIEW 42, 42 (2001) ("Reputation signals
publics about how a firm's product quality, service, employment
characteristics,
strategies, and prospects compare to those of competing firms.")
[49] See e.g. Manto Gotsi and Alan M. Wilson, Corporate Reputation: Seeking a Definition, 6 CORPORATE COMMUNICATIONS: AN INTERNATIONAL JOURNAL, 24 (2001).
[50] See e.g. S.P.
Shapiro, The Social Control of Impersonal Trust, 93 AMERICAN J. SOC. 623
(1987); Charles Fombrun and Cees Van Riel, The Reputational Landscape, 1
CORPORATE REPUTATION REVIEW 5 (1997) (Discussing economic, organizational,
sociological, and accounting views of corporate
reputation.)
[51]
See e.g. Rosa Chun, Corporate Reputation: Meaning and Measurement, 7 INT.
J. MGT. REV. 91, 92 ("Within the reputation paradigm, there is arguably no one
source as yet which captures the entirety
of the concept of reputation."); Manto
Gotsi and Alan M. Wilson, Corporate Reputation: Seeking a Definition, 6
CORPORATE COMMUNICATIONS: AN INTERNATIONAL JOURNAL 24, 24 (2001) ("[D]espite the
increasing number of studies published in the
area, there is no unambiguous,
generally accepted definition for the term corporate reputation and the value of
being seen as a good
company.")
[52] See e.g. Michael L. Barnett, John M. Jermier, and Barbara A. Lafferty, Corporate Reputation: The Definitional Landscape. (Literature survey of the concept of corporate reputation, finding that "although terminology does differ across sources, there is more than a little underlying similarity."); Michael L. Barnett, Elizabeth Boyle and Naomi Gardberg, Towards One Vision, One Voice: A Review Essay of the Third International Conference on Corporate Reputation, Image and Competitiveness, 3 CORPORATE REPUTATION REVIEW 101.
[53] Charles
Fombrun and Cees Van Riel, The Reputational Landscape, 1 CORPORATE
REPUTATION REVIEW 6, 10 (1997).
[54] Robert
C. Post, The Social foundations of Defamation Law: Reputation and the
Constitution, 74 Calif. Law Rev. 691, 692 (1986) (" Reputation ... is a
mysterious thing. The common law, as a rule, has 'not attempted to define
reputation.'"), citing Developments in Law - Defamation, 69 HARV. L. REV.
875, 877
(1956).
[55]
See e.g. Robert C. Post, The Social foundations of Defamation Law: Reputation
and the Constitution, 74 Calif. Law Rev. 691, 719 (1986) ("[T]he field of
reputation is vast and encompassing, virtually coextensive with society itself.
It makes little sense in such a context to speak of defamation law as
'protecting reputation,' for such a task would be at once too
enormous and too
diffuse."); David Rolph, REPUTATION, CELEBRITY AND DEFAMATION LAW 1 (2008)
(There are many competing and often contradictory
discourses surrounding the
concept of reputation in
defamation.")
[56]
Robert C. Post, The Social foundations of Defamation Law: Reputation and the
Constitution, 74 Calif. Law Rev. 691, 693 (1986) (Explaining that these
three concepts are "not the only possible concepts of reputation, but
[that]
they have had by far the most important impact on the development of the common
law of defamation.")
[57] See e.g.
Patricia Nassif Fetzer, The Corporate Defamation Plaintiff as First Amendment
"Public Figure": Nailing the Jellyfish, 68 IOWA L. REV. 35, 53 (1982),
citing Reporters Assoc. of Am. v. Sun Printing & Publishing Assoc., 186 N.Y.
437, 440, 79 N.E. 710, 711 (1906) ("The corporation's impersonal character has
resulted in certain limitations on corporate defamation actions. ... [The
corporation as] an artificial entity does not share the human emotions or social
relationships that suffer from others' opinions.");
RESTATEMENT (SECOND) OF
TORTS § 561 cmt. d on Second Caveat (1977) ("A corporation is regarded as
having no reputation in a
personal sense, so that it cannot be defamed by words,
such as those ... that would affect the personal repute of an individual.");
National Ref. Co. v. Benzo Gas Motor Fuel Co., 20 F.2d 763, 766 (8th Cir. 1927)
("[T]he legal principles constituting the law of libel are the same whether
corporations or individuals are
involved. But there are recognized distinctions
between the application of those principles to individuals and their application
to corporation, growing largely out of differences between natural and
artificial persons. For example, a corporation is incapable
of committing
certain acts, especially some crimes, which an individual would be capable of
committing; and again, a corporation
has no merely personal reputation in the
sense that an individual has."); Julie A. Scott-Bayfield, Defamation: Law and
Practice,
FT Law and Tax Practitioner Series, 1st ed. at 25 (The law recognizes
that "[a] company, as well as an individual, has a reputation
which can be
damaged, and although it cannot be awarded damages for hurt feelings or
distress, it can be awarded damages for injury
to its goodwill."); R. Phelps
& E. Hamilton, LIBEL: RIGHTS, RISKS, RESPONSIBILITIES 80 (rev. ed. 1978)
("The business corporation
has no personality, no dignity that can be assailed,
no feelings that can be touched. Since it cannot suffer physical pain, worry
or
distress, it cannot lie awake nights brooding about a defamatory article.");
PROSSER AND KEETON ON THE LAW OF TORTS, §111,
at 779 ("A corporation is
regarded as having no reputation in any personal sense ... [b]ut it has prestige
and standing in the business
in which it is engaged, and language which casts an
aspersion upon its honesty, credit, efficiency or other business characteristic
may be
actionable.")
[58]
See e.g. Martin Marietta Corp. v. The Evening Star Newspaper Co., 417 F.Supp.
947, 955, citing Golden Palace, Inc. v. NBC, 386 F.Supp. 107, 109 (D.D.C. 1974)
("Although a corporation may maintain an action for libel, it has no personal
reputation and may be libeled only
by imputation about its financial soundness
or business ethics."); Lewis v. Daily Telegraph Ltd [1964] AC 234, 262 "[a]
company cannot be injured in its feelings, it can only be injured in its
pockets. Its reputation can be injured by a libel
but that injury must sound in
money. The injury need not necessarily be confined to loss of income. Its
goodwill may be injured.");
Norman Redlich, Corporate Defamation Symposium:
The Publicly Held Corporation as Defamation Plaintiff, 39 ST. LOUIS L.J.
1167, 1167 ("[A] publicly held corporation is not an emotional being; it exists
essentially to economically benefit
its shareholders."); Nessa E. Moll, Note:
In Search of the Corporate Private Figure: Defamation of the Corporation,
6 HOFSTRA L. REV. 339, 339
(1977-78).
[59]
See e.g. Charles J. Fombrun, REPUTATION 73 (1996) ("If being perceived by
constituents as credible, reliable, trustworthy, and responsible
is the hallmark
of a good reputation, it pays off because well-regarded companies generally (1)
command premium prices for their
products; (2) pay lower prices for purchases;
(3) entice top recruits to apply for positions; (4) experience greater loyalty
from
consumers and employees; (5) have more stable revenues; (6) face fewer
risks of crisis; and (7) are given greater latitude to act
by their
constituents.") See also nn. xx and associated text, infra.
[60] See e.g.
Charles Fombrun, REPUTATION (1996), 94-96 ("For public companies, changes in the
market value of a firm provide a reasonable
estimate of the anticipated losses
to a company from attacks on its integrity and credibility; they also provide a
gauge of how much
of a company's reputational capital is put at risk from such
events.") See also infra at xxx (discussing empirical evidence of the
economic
impact of reputational
harm.)
[61] See
e.g. Robert C. Post, The Social foundations of Defamation Law: Reputation and
the Constitution, 74 Calif. Law Rev. 691, 696 (1986) ("There are aspects of
modern defamation law that can be understood only by reference to the
concept of
reputation as property, as, for example, the fact that corporations and other
inanimate entities can sue for defamation.");
Eric Barendt, What is the Point
of Libel Law?, 52 CURRENT LEGAL PROBLEMS 110, 115 (1999) ("The concept of
reputation as property may explain ... why corporations can sue to protect their
good name, an entitlement
which is much harder to justify if reputation is
considered in terms of personal honour or dignity."); Perry Herzfeld,
Corporations, Defamation and General Damages: Back To First Principles,
(2005) 10 MEDIA & ARTS L. REV 135, 140. Robert C. Post, The Social
foundations of Defamation Law: Reputation and the Constitution, 74 Calif.
Law Rev. 691, 727 (1986) ("From the constitutional view, the concept of
reputation as property is the least problematic
of all justifications for
defamation law.")
[62] See e.g. Dugan
v. Dugan, 92 N.J. 423, 433, 457 A.2d 1, 6 ("Though other elements may contribute
to goodwill ... reputation is at the core."), cited with approval in Spayd v.
Turner et
al., 482 N.E.2d 1232, 1239; State Dept. of Transportation v. Cowan,
120 Nev. 851, 856-57 (Nev., 2004) ("While different jurisdictions vary slightly
in their definitions of goodwill, the term generally is used to
describe that
component of value attributed to a business' reputation in the community, loyal
customer base and ability to attract
new customers.); Allen Parkman, The
Treatment of Professional Goodwill in Divorce Proceedings, 18 FAM. L. Q.
213, 216 (1984), citing Mueller v. Mueller, 144 Cal. App.2d 245, 301 P.2d 90
(1956) ("[P]rofessional goodwill is just another word for reputation," and "[a]
number of courts, such as California, Washington,
New Mexico, and New Jersey,
have taken the position that 'reputation' is 'goodwill'."); Warnink v. Townend
& Sons (Hull), 1 App.
Cas. 731, 741 (1979) (Defining goodwill as "the
benefit and advantage of the good name, reputation and connection of a business,
the attractive force which brings in custom."); In re the Marriage of Lukens, 16
Wash. App. 481, 481, 558 P.2d 279, 281 (1976) (Finding that the value of the
goodwill in a medical practice depended on factors such as the practitioner's
reputation
in the community for judgment, skill and knowledge.); Food Lion,
Inc., v. Capital Cities/ABC, Inc., 194 F.3d 505, 523 (4th Cir. 1999)
(Concluding
that "Food Lion, in seeking compensation for matters such as loss of good will
and lost sales, [was] claiming reputational
damages from publications ...");
Holbrook v. Holbrook, 309 N.W.2d 343, 350 (Wis. Ct. App. 1981) (Stating that a
business' goodwill is essentially its reputation.)
[63] See e.g.
CAL. CIV. PROC. CODE § 1263.510(b) (West 1982) (Definition of goodwill
acknowledges benefits accruing to a business
from "reputation for dependability,
skill or
quality.")
[64]
See e.g. 38 AM. JUR. 2d Good Will § 1 ("Good will ... basically
consists of the positive reputation that a particular business enjoys.");
NICHOLS ON EMINENT DOMAIN,
4-13 § 13.18 ("'Goodwill' in the legal sense has
come to mean the advantage that a business has over competitors as a result
of
its name, location, and owner's reputation."); J. Thomas McCarthy, MCCARTHY ON
TRADEMARKS AND UNFAIR COMPETITION § 2:17 (4th
ed. 2003) (The "favorable
consideration shown by the purchasing public to goods known to emanate from a
particular source" establishes
goodwill.); Robert W. Levis, Valuation of
Businesses in Colorado Divorces, COLO. LAW., June 2003, at 73, citing THE
INTERNATIONAL GLOSSARY OF BUSINESS VALUATION TERMS (Describing goodwill as "that
intangible
asset arising as a result of name, reputation, customer loyalty,
location, products, and similar factors not separately identified.");
BLACK'S
LAW DICTIONARY 1587 (8th ed. 2004) (Defining goodwill as "[a] business'
reputation, patronage, and other intangible assets
that are considered when
appraising the business, especially for purchase ... "); Morgan v. Perhamus, 36
Ohio St. 517, 522 (Ohio, 1881), quoting Lindley, A TREATISE ON THE LAW OF
PARTNERSHIP (1860) (Stating that the term goodwill generally denotes
"the
benefit arising from connection and reputation ... ")
[65] See e.g.
Robert C. Post, The Social foundations of Defamation Law: Reputation and the
Constitution, 74 CALIF. LAW REV. 691, 693 (1986) ("The concept of reputation
that is most easily available to contemporary observers is that of
reputation in
the marketplace. This concept of reputation can be understood as a form of
intangible property akin to goodwill.");
Randall B. Wilhite, The Effect of
Goodwill in Determining the Value of a Business in a Divorce, 35 FAM. L. Q.
351, 352 (2001) ("A consistent thread running through the several different
definitions of goodwill is the company's reputation. If the
company's reputation
gives it a competitive advantage over other businesses, the existence of
goodwill is almost always present.");
Allen Parkman, The Treatment of
Professional Goodwill in Divorce Proceedings, 18 FAM. L. Q. 213, 219 (1984)
("[P]rofessional goodwill is just another word for reputation."); Oded Shenkar
and Ephraim Yuchtman-Yaar, Reputation, Image, Prestige, and Goodwill: An
Interdisciplinary Approach to Organizational Standing, 50 HUMAN RELATIONS
1361, 1361 (1997) ("Various terms are used to describe the relative standing of
organizations. In sociology,
prestige is the preferred term, in economics it is
reputation, in marketing, image, and in accountancy and law, goodwill."); Julie
A. Scott-Bayfield, Defamation: Law and Practice, FT Law and Tax Practitioner
Series, 1st ed. at 25 (The law recognizes that "[a]
company, as well as an
individual, has a reputation which can be damaged, and although it cannot be
awarded damages for hurt feelings
or distress, it can be awarded damages for
injury to its goodwill."); Carmen Valle Patel, NOTE: Treating Professional
Goodwill as Marital Property in Equitable Distribution States, 58 N.Y.U.L.
REV. 554, 554 ("Goodwill, broadly defined, is the intangible value of a business
derived from its reputation and established clientele.");
Reorganizing in a
Fish Bowl: Public Access vs. Protecting Confidential Information, 73 AM.
BANKR. L.J. 775, 776 (Describing celebrity O.J. Simpson's reputation as
"undoubtedly the most significant aspect of his business
goodwill.")
[66]
See e.g. James H. Snelson, Financial Statements, 12 AM. BANKR. INST. J.,
Dec.-Jan. 1994 13, 13 (To accountants, goodwill is an acknowledgement that an
operating, ongoing business
is "greater than the sum of its parts."); Andrew F.
Halaby, COMMENT: Treatment of Goodwill By the Seller Under I.R.C. Section
197, 43 KAN. L. REV. 903, 905 ("An operating business with an existing
customer base is worth more than the mere aggregate value of its tangible
and
identifiable intangible assets because the purchaser may expect customers of the
purchased business to continue their
patronage.")
[67]
Allen Parkman, The Treatment of Professional Goodwill in Divorce
Proceedings, 18 FAM. L. Q. 213, 213 (1984) ("Generally, accounting has been
interested in measuring [the] value [of goodwill], while economics has been
interested
in explaining its basis.")
[68] Keith W. Chauvin and Mark Hirschey, Goodwill, Profitability, and the Market Value of the Firm, 13 J. ACCOUNTING & PUBLIC POLICY 159, 162 (1994), citing Accounting Principles Board (APB) Intangible Assets, APB Opinion No. 17 (August 1970) ("[A]ccounting goodwill is described as among those intangible assets and conditions which give rise to above-average strength in terms of technical skill and knowledge, management, marketing research and promotion which cannot be separately identified and valued. Alternatively, goodwill represents the value derived from a firm's ability to generate above-normal earnings."); Glenn A. Walsh et al., INTERMEDIATE ACCOUNTING 438 (6th ed. 1982) (Defining goodwill as "an economic advantage which exists when the total value of a business is more than the value of all its identifiable net assets. This economic advantage arises because the expected earnings of the business exceed the level of earnings on only its identifiable net assets ...")
[69] See Allen
Parkman, The Treatment of Professional Goodwill in Divorce Proceedings,
18 FAM. L. Q. 213, 214 (1984). See also Jay M. Smith et al., INTERMEDIATE
ACCOUNTING 437 (12th ed. 1995) (Defining goodwill as "the intangible resources,
factors, and conditions that allow a business to earn above-normal income with
the identifiable assets employed in the business.");
Randall B. Wilhite, The
Effect of Goodwill in Determining the Value of a Business in a Divorce, 35
FAM. L. Q. 351, 353 (2001), citing Shannon Pratt et al., VALUING SMALL
BUSINESSES AND PROFESSIONAL PRACTICES 726 (3d ed. 1998) ("Goodwill has also
been
defined as 'the ability to earn a rate of return in excess of a normal rate of
return on the net assets of the business.'";
BLACK'S LAW DICTIONARY 703 (7th ed.
1999) (Defining goodwill as "the ability of a business to generate income in
excess of a normal
rate on assets due to superior managerial skills, market
position, new product technology, etc. In the purchase of a business, goodwill
represents the difference between the purchase price and the value of the net
assets.")
[70]
See e.g. Baruch Lev, INTANGIBLES: MANAGEMENT, MEASUREMENT, AND REPORTING 137
(2001) ("Goodwill is defined as the excess of the cost
of an acquired company
over the sum of identifiable net assets."); Glenn A. Walsh et al., INTERMEDIATE
ACCOUNTING 438 (6th ed. 1982)
(defining goodwill as "an economic advantage which
exists when the total value of a business is more than the value of all its
identifiable
net assets."); Larry R. Ribstein, A Theoretical Analysis of
Professional Partnership Goodwill, 70 NEB. L. REV. 38, 40 ("Accountants
define goodwill as 'excess' value that cannot be attributed to specific tangible
and intangible assets. This value
can be determined by assigning values to
specific assets and subtracting these from the actual value of the firm, perhaps
based on
capitalizing the firm's earnings."); Rev. Rul. 59-60, 1959-1 C.B. 237,
241; DISCUSSION MEMORANDUM ON ACCOUNTING FOR BUSINESS COMBINATIONS AND PURCHASED
INTANGIBLES 47-51 (Fin. Accounting Standards Bd.
1976).
[71] See
e.g. Allen Parkman, The Treatment of Professional Goodwill in Divorce
Proceedings, 18 FAM. L. Q. 213, 214 (1984) ("The capitalized value of the
supranormal profits stream is the asset value of goodwill."); Glenn A. Walsh et
al., INTERMEDIATE
ACCOUNTING 438 (6th ed. 1982) ("The economic advantage arises
because the expected earnings of the business exceed the level of earnings
on
only its identifiable net assets
...")
[72] See
e.g. Aswath Damodaran, INVESTMENT VALUATION (2d ed., 2002), at 555 ("One of the
benefits of having a well-known and respected
brand name is that firms can
charge higher prices for the same products, leading to higher profit margins and
hence to higher price-sales
ratios and firm value. The larger the price premium
that a firm can charge, the greater is the value of the brand name.") See also
id., at 556-57 (Estimating the year 2000 after-tax operating margin of Coca Cola
as 16.31 percent. Cott, a less well-known Canadian
beverage manufacturer in
contrast, has an operating margin of 4.82 percent.); Id., at 849 ("Consider the
extra-ordinary success that
Coca-Cola has had in increasing its market value
over the past two decades. Some attribute its success to its high return on
equity
or capital, yet these returns are not the cause of its success but the
consequence of it. The high returns can be traced to the company's
relentless
focus on making its brand name more valuable globally.")
[73] Margaret Blair and Steven Wallman, The Growing Intangibles Reporting Discrepancy, in John Hand and Baruch Lev (eds.), INTANGIBLE ASSETS: VALUES, MEASURES, AND RISKS 455 (2003). See also Robert Reilly, SFAS Nos. 141 and 142 Implications for Goodwill Acquired by M&A, 25-1 AMERICAN BANKRUPTCY INSTITUTE J. 48, 49-50 (Feb. 2006) (Explaining that the assets of a business typically consist of financial assets such as (1) cash and marketable securities; (2) tangible or physical assets, such as property, plant and equipment; (3) intangible assets that can be valued discretely, such as patents, trademarks and proprietary software; and (4) goodwill.); An Inquiry Into the Nature of Goodwill, 53 COL. L. REV. 660, 678 (1953) (Goodwill does not include intangible assets which are specifically enumerated, such as leases, licences, patents, copyrights, trademarks, trade secrets, and subscription lists.)
[74] See e.g. H. Finney & H. Miller, PRINCIPLES OF ACCOUNTING 216-17 (6th ed. 1963) ("[S]ince good will is dependent upon earnings, and since many things other than customer satisfaction contribute to earnings, there are many sources of goodwill. Some of these sources are: location; manufacturing efficiency; satisfactory relations between the employees and the management ...; adequate sources of capital and a credit standing ...; advertising; monopolistic privileges; and, in general, good business management."); An Inquiry Into the Nature of Goodwill, 53 COL. L. REV. 660, 678-79 (1953) ("[G]oodwill is meant to embrace a residue, to include all those advantages possessed by a firm which cannot be subjected to a definitive valuation. ... As the embodiment of unassignable advantages, it includes all those factors of economic significance which, in a particular enterprise, have not been specifically accounted for." ); Keith W. Chauvin and Mark Hirschey, Goodwill, Profitability, and the Market Value of the Firm, 13 J. ACCOUNTING & PUBLIC POLICY 159, 165 (1994) ("Other pecuniary sources of goodwill might include special access to government subsidies, market power derived from licenses or other barriers to entry, and unexpected benefits derived from contracts based on terms which later prove to be highly favorable."); H. Finney and H. Miller, PRINCIPLES OF ACCOUNTING 216-17 (6th. ed. 1963) ([S]ince good will is dependent upon earnings, and since many things other than customer satisfaction contribute to earnings, there are many sources of goodwill. Some of these sources are: location; manufacturing efficiency; satisfactory relations between the employees and the management ...; adequate sources of capital and a credit standing ,,,; advertising; monopolistic privileges; and, in general, good business management."); Grace Ganz Blumberg, Identifying and Valuing Goodwill at Divorce, 56 LAW AND CONTEMPORARY PROBLEMS 217, 221-22 (1993) ("In addition to reputation and continuing patronage, goodwill may include, inter alia, strategic location, effective advertising, the value of a skilled, trained, efficient work force, assemblage of property, plant, and equipment in a productive unit, and systems, controls, and methods developed as part of the operation.")
[75] Larry R. Ribstein, A Theoretical Analysis of Professional Partnership Goodwill, 70 NEB. L. REV. 38, 40 (1991) ("Largely because of its highly subjective nature, goodwill is not accounted for on a company's balance sheet unless the company has established its value by purchasing it."), citing See S. Davidson & R. Weil, HANDBOOK OF MODERN ACCOUNTING 21-25 (2d ed. 1977); R. Kay & G. Searfoss, HANDBOOK OF ACCOUNTING AND AUDITING23-33 (1988); Keith W. Chauvin and Mark Hirschey, Goodwill, Profitability, and the Market Value of the Firm, 13 J. ACCOUNTING & PUBLIC POLICY 159, 160 (1994) ("In terms of intangibles, the accounting profession restricts valuation and asset recognition to items which are clearly identifiable such as copyrights, licensing agreements, patents, trademarks, trade names, and so on. Other intangible assets, such as an honorable business reputation, good customer relations, unique market position, a well-trained work force, or the value of brand names have generally been deemed too ethereal to warrant recognition.) Haim Falk and L. A. Gordon, Imperfect Markets and the Nature of Goodwill, 4 J. BUS. FIN. & ACCTG. 443, 443 (1977) ("Many have argued that the nature of goodwill is such that it is neither 'fowl nor fish' and accordingly should not be included on financial statements.") See however, Robert Reilly, SFAS Nos. 141 and 142 Implications for Goodwill Acquired by M&A, 25-1 AMERICAN BANKR. INST. J. 48, 49 (2006) ("There are a few instances when internally created goodwill is recorded on a company's financial statements, such as under the push-down accounting rules related to corporate reorganization. But the instances in which a company's internally developed goodwill (as opposed to its purchased goodwill) is recognized for accounting purposes are rare.")
[76] See George P.
Roach, A Business Appraiser's Model for Separating Professional and Personal
Goodwill, 18 FAIR$HARE No. 8, 13 (Aug.
1998).
[77] See
e.g. S. Davidson & R. Weil, HANDBOOK OF MODERN ACCOUNTING, 21-15 (2d ed.
1977) ("Goodwill is not accounted for on a firm's
balance sheet unless the
company has established its value by purchasing it."); Dugan v. Dugan, 92 N.J.
423, 432, 457 A.2d 1, 5 ("Accountants will usually not reflect goodwill on a
balance sheet until after a business has been sold and then state goodwill
in
terms of the excess paid for the net assets over book value."), citing George R.
Catlett & Norman O. Olson, ACCOUNTING FOR
GOODWILL 17 (1968); Barry Elliott
and Jamie Elliott, FINANCIAL ACCOUNTING AND REPORTING 208 (4th ed. 2000)
("Goodwill arising on
the acquisition of a subsidiary or business is the
difference between the consideration paid and the fair value of the assets and
liabilities acquired.")
[78] Margaret Blair and Steven Wallman, The Growing Intangibles Reporting Discrepancy, in John Hand and Baruch Lev (eds.), INTANGIBLE ASSETS: VALUES, MEASURES, AND RISKS 455 (2003). See also Aswath Damodaran, INVESTMENT VALUATION (2d ed., 2002), at 33.
[79] See e.g. THE AMERICAN HERITAGE DICTIONARY OF THE ENGLISH LANGUAGE (3d ed. 1996) (Defining synergy as "the interaction of two or more agents or forces so that their combined effect is greater than the sum of their individual effects."); Randall B. Wilhite, The Effect of Goodwill in Determining the Value of a Business in a Divorce, 35 FAM. L. Q. 351, 351 (2001) ("[A] synergy develops when a number of elements come together, and the result of the union is that the collective output exceeds a yield that could have been rendered by the same elements acting alone.") See also Fred Waitzkin, MORTAL GAMES THE TURBULENT GENIUS OF GARRY KASPAROV (1993), at 108 (Chess world champion, Garry Kasparov, reflecting upon his 1983 match against Lajos Portisch, describes a strategic synergy: "A knight away from the action is worth less than a knight poised to attack. When pieces are working in harmony, they are worth more than the same pieces in disunity.")
[80] See Paul
Milgrom and John Roberts, ECONOMICS, ORGANIZATION & MANAGEMENT 598 (1992)
(Defining economies of scale as "[t]he reduction
in average cost that is
achievable when a single product is made in large
quantities.")
[81]
See e.g. P. Milgrom and J. Roberts, Relying on the Information of Interested
Parties, 17 RAND J. ECON., 18 (1986) (Positive reputation allows firm to
charge premium prices.); Benjamin Klein and Keith B. Leffler, The Role of
Market Forces in Assuring Contractual Performance, 89 J. POLITICAL ECON. 615
(1981). (Theorizing that companies invest in brand names as an implicit
guarantee of the quality of their
products, for which consumers are willing to
pay a premium: Firms signal their commitment to quality by investing in a brand
name.
Consumers are willing to pay high prices for products bearing the quality
name. If the firm fails to maintain consistent quality,
consumers abandon its
product and the company loses its investment in the brand name.); C. Shapiro,
Premiums for High Quality Products as Returns to Reputations, 98
QUARTERLY J. ECON. 659 (1983); F. Allen, Reputation and Product Quality,
15 RAND J. ECON. 311 (1984); John Hand and Baruch Lev (eds.), INTANGIBLE ASSETS:
VALUES, MEASURES, AND RISKS 233-34 (2003) ("One
of the most obvious effects of a
trademark is that it might permit the owner to charge more than others for a
product or service
that is very similar to others in the market place. This is
caused by enhanced market demand for the subject product or service.
If this
enhanced market demand for the product or service is brought about by the
magnetism of the trademark, then the income stream
represented by the premium
price can be attributed to this asset.")
[82] See e.g.
Beatty, and J.R. Ritter, Investment Banking, Reputation, and Underpricing of
Initial Public Offerings, 15 J. FIN. ECON., 213-232 (1986) (Positive
reputation enhances firm's access to capital
markets.)
[83]
See e.g. W. Rogerson, Reputation and Product Quality, 14 BELL J. ECON.
508 (1983) (Showing that a reputation for quality increases the likelihood of
retaining customers and obtaining
positive word-of-mouth advertising.); M. E.
Barth et al., Brand Values and Capital Market Valuation, in John Hand and
Baruch Lev (eds.), INTANGIBLE ASSETS: VALUES, MEASURES, AND RISKS 154 (2003)
(Stating that a distinctive name creates
willingness to pay either higher than
otherwise average prices or make higher than otherwise purchase frequency.");
Stephen L. Carter,
The Trouble With Trademark, 99 YALE L.J. 759, 763
(1990), citing Landes, W., and R. Posner, Trademark Law: An Economic
Perspective, 30 J. LAW & ECON. 265, 277-79 (1987) ("[T]he more goodwill
behind [a trademark], and the larger the number of consumers who attach a
positive association
to it, the better off the firm, which will make more sales
at a higher price.")
[84] See e.g.
Shenkar, O. and E. Yuchtman-Yaar, Reputation, Image, Prestige, and Goodwill:
An Interdisciplinary Approach to Organizational Standing, 50 HUMAN RELATIONS
1361 (1997) (Favorable reputation is crucial in obtaining partners in joint
ventures.)
[85]
See e.g. Caves, R.E. and M. E. Porter, From Entry Barriers to Mobility
Barriers, 91 QUARTERLY J. OF ECON., 421 (1977); Wilson, R., Reputations
in Games and Markets, in A.E. Roth (ed.), GAME-THEORETIC MODELS OF
BARGAINING.
[86]
See e.g. Keith W. Chauvin and Mark Hirschey, Goodwill, Profitability, and the
Market Value of the Firm, 13 J. ACCOUNTING & PUBLIC POLICY 159, 177
(1994) ("[F]irms with a high-quality reputation reduce customer search costs,
and
often enjoy rapid revenue growth and/or high profit margins."); Chauvin and
Hirschey, at 162-63 (1994) (Literature review of firm
characteristics which
contribute to goodwill.); Perry Herzfeld, Corporations, Defamation and
General Damages: Back To First Principles, (2005) 10 MEDIA & ARTS L. REV
135, 140 ("A corporation relies on its business reputation (as well as other
things) to secure
employees, customers, creditors and business partners. The
ultimate goal of this trading activity is the achievement of the corporation's
objects, most often the making of profit."); Aswath Damodaran, INVESTMENT
VALUATION (2d ed., 2002), at 555 ("One of the benefits
of having a well-known
and respected brand name is that firms can charge higher prices for the same
products, leading to higher profit
margins and hence to higher price-sales
ratios and firm value. The larger the price premium that a firm can charge, the
greater is
the value of the brand name.")
[87] See e.g. Allen Parkman, The Treatment of Professional Goodwill in Divorce Proceedings, 18 FAM. L. Q. 213, 214 (1984) ("The capitalized value of the supranormal profits stream is the asset value of goodwill."); Reg S. Gynther, Some "Conceptualizing" on Goodwill, THE ACCOUNTING REVIEW 247, 248 (April 1969) ("Goodwill would be the net present value of those assets that it has not been possible to list and value separately.") The excess earnings definition of goodwill, and its relation to excess value is illustrated by the following example provided by Professor Alan Zipp. "[C]onsider a business which invests $100,000 in a single machine. If the alternative to purchase would be to rent this machine at a cost of $10,000 per year, it is logical to assume that the first $10,000 of earnings from the business are related to the investment in the machine rather than from the operations of the business. In this regard, the business could have received $10,000 as rental income by leasing the equipment to another company. Therefore, if the net earnings of the business were $15,000, the reasonable return on the cost of assets invested would be $10,000, and the excess earnings of $5,000 would represent the profitability of the business from operations [excess return.] It is this $5,000 which represents the earnings from the intangible assets of the busines such as assembling assets, being in a good location, having a fine reputation, having satisfied customers, and providing a valuable service. The group of intangible assets which contribute to this excess $5,000 of earnings are collectively referred to as goodwill and the value of goodwill is the substantive element of business valuation." Alan S. Zipp, Divorce Valuation of Business Interests: A Capitalization of Earnings Approach, 23 FAM. L. Q. 89, 101 (1989-1990).
[88] M. E. Barth et
al., Brand Values and Capital Market Valuation, 3 REV. ACCOUNTING STUDIES
(1998) 41. The brand name or trademark of a firm is closely related to its
reputation and goodwill. See
e.g. Stephen L. Carter, The Trouble With
Trademark, 99 YALE L.J. 759, 762 (1990) ([A trademark] serves no other
function and enjoys no legal existence independent of the goodwill that it
symbolizes.
Without goodwill, marks have no meaning ..."); Id., n. 5 ("The value
of [a] trademark is proportional to the goodwill that it represents.");
William
M. Landes and Richard A. Posner, Trademark Law: An Economic Perspective,
30 J.L. & ECON. 265, 270 ("The value of a trademark is the saving in search
costs made possible by the information or reputation that the trademark conveys
or embodies about the brand or firm that produces the brand."); S. REP. No.
1333, 79th Cong., 2d Sess. (1946), reprinted in 1946
U.S. CODE CONG. SERV.
1276-77 ("[T]he protection of trade-marks is merely protection of goodwill
...")
[89] M.
E. Barth et al., Brand Values and Capital Market Valuation, 3 REV.
ACCOUNTING STUDIES (1998) 41,
42.
[90] M. E.
Barth et al., Brand Values and Capital Market Valuation, 3 REV.
ACCOUNTING STUDIES (1998) 41,
42.
[91] See
e.g. Roth, A., and F. Schoumaker, Expectations and Reputations in Bargaining:
An Experimental Study, 73 AMERICAN ECON. REV. 362 (1983) (Experimental study
reporting that players' reputations, as evidenced by past behavior, affected
bargaining outcomes.); P. Antunovich and D.S. Laster, Do Investors Mistake a
Good Company for a Good Investment?, FEDERAL RESERVE BANK OF NEW YORK STAFF
REPORTS NO. 60 (1999) (Concluding that a positive corporate reputation adds
value to the
firm, based on empirical evidence "that a portfolio of firms in the
top decile of Fortune's reputation ranking earns an abnormal
return of 3.2
percent in the year after the survey is published and 8.3 percent over the
following three years."); Carol Simon and
Mary Sullivan, The Measurement and
Determinants of Brand Equity: A Financial Approach, 12 MARKETING SCIENCE
28-52 (1993) (Finding that firms with well- known brand names have high
estimates of brand equity.); Peter
W. Roberts & Grahame R. Dowling,
Corporate Reputation and Sustained Superior Financial Performance, 23
STRAT. MGT. J. 1077, 1090 (2002) (Statistical studies suggesting that
superior-performing firms are more likely to sustain their
performance if they
also possess good reputations.); Miller, R., and C. Plott, Rents for
Reputations. Presented at Western Finance Association Meetings, 1986
(Experimental study showing that producers who achieve reputations for quality
command premium prices.)
[92] Jonathan M.
Karpoff, D. Scott Lee, and Gerald S. Martin, The Cost to Firms of Cooking the
Books, 43 J. FIN & QUANT. ANALYSIS 581 (Sept.
2008).
[93] See
id. at 581. See also Joseph K. Tanimura and Eric W. Wehrly, The Market Value
and Reputational Effects From Lost Confidential Information, Available at
http://ssrn.com/abstract=1083891 ("A firm will incur a reputational penalty if
the total costs of the breach - as measured
by the market value loss in the
company's shares - exceed the direct costs of the breach.")
[94] Id. at
581.
[95] Id.
at 581.
[96]
Id. at
581.
[97] See
e.g. Sam Peltzman, The Effects of FTC Advertising Regulation, 24 J. LAW
& ECON. 403
(1981).
[98]
See e.g. Gregg Jarrell and Sam Peltzman, The Impact of Product Recalls on the
Wealth of Sellers, 93 J. POL. ECON. 512 (1985); Mark Mitchell, The Impact
of External Parties on Brand-Name Capital: The 1982 Tylenol Poisonings and
Subsequent Cases, 27 ECONOMIC INQUIRY 601-18
(1989).
[99]
See e.g. Mark L. Mitchell and Michael T. Maloney, Crisis in the Cockpit? The
Role of Market forces in Promoting Air Travel Safety, 32 J. LAW & ECON.
329 (1989) (Reporting a statistically significant negative abnormal stock return
following crashes due to
pilot error, but no significant stock market reaction
following crashes where the carrier was not at fault.); Andrew Chalk, Market
Forces and Airline Safety: The Case of the DC-10, 24 ECON. INQUIRY 43
(1986).
[100] See e.g.
Jonathan Karpoff and John R. Lott, The Reputational Penalty Firms Bear From
Committing Criminal Fraud, 36 JOURNAL OF LAW AND ECONOMICS, 757-802;
Alexander, C.R., On the Nature of the Reputational Penalty for Corporate Crime:
Evidence, 42 J. LAW & ECON. 489 (1999); D.L.
Murphy, R.E. Shrieves, and S.L.
Tibbs, Determinants of the Stock Price Reaction to Allegations of Corporate
Misconduct: Earnings, Risk, and Firm Size Effects, J. FIN. & QUANT.
ANALYSIS, forthcoming
(2009).
[101]
See e.g. R.P. Beatty, H. Bunsis, and J.R.M. Hand, The Indirect Economic
Penalties in SEC Investigations of Underwriters, 50 J. FIN. ECON. 151
(1998).
[102]
See e.g. Mark Mitchell, The Impact of External Parties on Brand-Name Capital:
The 1982 Tylenol Poisonings and Subsequent Cases, 27 ECONOMIC INQUIRY 601-18
(1989). (Reporting a decline in the value of the brand name of Johnson &
Johnson following recall
of its Tylenol capsules after serious product
tampering.); Thomas D. Dowdell, Suresh Govindaraj, and Prem Jain, The Tylenol
Incident, Ensuing Regulation, and Stock Prices, 27 J. FIN. & QUANT.
ANALYSIS 283 (1992) (Similar results.)
[103] See e.g.
J.M. Karpof, D.S. Lee, and V.P. Vendrzyk, Defense Procurement Fraud,
Penalties, and Contractor Influence, 107 J. POL. ECON. 809
(1999).
[104]
See e.g. Alan S. Zipp, Divorce Valuation of Business Interests: A
Capitalization of Earnings Approach, 23 FAM. L. Q. 89, 95 (1989-1990),
quoted in Kelly M. Haggar, COMMENT: A Catalyst in the Cotton: The Proper
Allocation of the "Goodwill" of Closely Held Businesses and Professional
Practices in Dissolution
of Marriages, 65 LA. L. REV. 1191, 1211-12
("[G]oodwill is a mysterious possession, eluding precise defintion ... [and
although all] experts agree it exists, few experts
agree on exactly what it is
... [Many] have tried [to define and value it] but the most striking
charateristic of this immense amount
of writing is the number and variety of
disagreements reached."); Agricultural Services Assoc., Inc. v. Ferry-Morse Seed
Co., Inc.,
[1977] USCA6 187; 551 F.2d 1057, 1071 ("Defining what constitutes 'goodwill' is not
easy."); Douthart v. Logan, 86 Ill. App. 294, 309 (Ill. App. Ct. 1st Cir. 1899)
("[T]he term goodwill can hardly be said to have any precise signification.");
Larry R. Ribstein, A Theoretical Analysis of Professional Partnership
Goodwill, 70 NEB. L. REV. 38, 39 (1991) ("The existence and ownership of the
'goodwill' of professional partnerships is one of the most muddled subjects in
partnership
law. Courts employ different definitions of goodwill and reach
disparate results."); Id., at 51 ("Analysis ... is complicated by
the fact that
the courts often conclude that goodwill exists without precisely defining or
attempting to value it."); John B. Canning,
THE ECONOMICS OF ACCOUNTANCY 38
(1929) ("[A]ccountants, writers on accounting, economists, engineers, and the
courts, have all tried
their hands at defining goodwill, at discussing its
nature, and at proposing means of valuing it. The most striking characteristic
of this immense amount of writing is the number and variety of disagreements
reached.")
[105] See e.g. Andrew F. Halaby, COMMENT: Treatment of Goodwill By the Seller Under I.R.C. Section 197, 43 KAN. L. REV. 903, n. 14 (Common law definitions of goodwill differ "in flavor if not substance.")
[106] See Larry
R. Ribstein, A Theoretical Analysis of Professional Partnership Goodwill,
70 NEB. L. REV. 38, 43 (1991) ("The legal definition of goodwill may differ from
both the accounting and economic meanings. To some extent this seems
attributable simply to the economic ignorance of courts and legal
commentators."); Allen Parkman, The Treatment of Professional Goodwill in
Divorce Proceedings, 18 FAM. L. Q. 213, 216 (1984) ("The confusion in the
cases is based on the courts not focusing more closely on a clear definition of
goodwill. ...
If the courts say there is goodwill in a sole practice, when there
is none from an accounting or economic perspective, a problem
of evaluation is
created.") See also id., cases cited in n.
10.
[107] [1810] EngR 179; 34
Eng. Rep. 129 (Chan.
1810).
[108]
[1810] EngR 179; 34 Eng. Rep. 129 at
134.
[109]
See e.g. Douthart v. Logan, 86 Ill. App. 294 (Ill. App. Ct. 1st Cir. 1899),
quoting Trego v. Hunt, Law Reports, Appeal Cases, 1896, 17 ("If the language of
Lord Eldon [in Cruttwell] is to be taken as a definition of good will of
general application, I think it is far too narrow, and I am not satisfied that
it
was intended by Lord Eldon as an exhaustive defintion. Good will must mean
every advantage - every positive advantage ... that has
been acquired by the old
firm in carrying on its business ..."); Spayd v. Turner et al., 482 N.E.2d 1232,
1236 ("A much narrower definition [of goodwill] has been stated as the
probability that the old customers will resort to the old
place.")
[110]
See e.g. Larry R. Ribstein, A Theoretical Analysis of Professional
Partnership Goodwill, 70 NEB. L. REV. 38, 43
(1991).
[111]
Randall B. Wilhite, The Effect of Goodwill in Determining the Value of a
Business in a Divorce, 35 FAM. L. Q. 351, n.6 (2001) ("[T]he expectation of
continued public patronage does not always lead to a finding of excess value
because even a business
with substantial repetitive trade and fierce customer
loyalty may not have goodwill if the company's customers will not pay market
rates for goods or services. Though these customers are very loyal, the business
may actually be losing money, or making modest profits
that are incongruent with
the company's level of sales."), quoting Jerald H. Udinsky, Goodwill
Depreciation: A New Method for Valuing Professional Practices in a Marital
Dissolution, 8 COMM. PROP. J. 307, 309 (1983); Red Wing Malting Co. v.
Willcuts, Collector of Internal Revenue, 15 F.2d 626, 632 (The value of goodwill
"depends on earnings of a certain amount being
maintained.")
[112]
Johns. Eng. Ch.,
174.
[113]
Id.
[114]
Joseph Story, COMMENTARIES ON THE LAW OF PARTNERSHIP AS A BRANCH OF COMMERCIAL
AND MARITIME JURISPRUDENCE: WITH OCCASIONAL ILLUSTRATIONS
FROM THE CIVIL AND
FOREIGN LAW (1841), §
99.
[115]
Joseph Story, COMMENTARIES ON THE LAW OF PARTNERSHIP AS A BRANCH OF COMMERCIAL
AND MARITIME JURISPRUDENCE: WITH OCCASIONAL ILLUSTRATIONS
FROM THE CIVIL AND
FOREIGN LAW
(1841).
[116]
See e.g. Dugan v. Dugan, 92 N.J. 423, 429, 457 A.2d 1, 4; Dantonio v. Fontana,
636 So. 2d 218, 225; Taormina v. Culicchia, 355 S.W.2d 569, 573; In re Marriage
of McTiernan & Dubrow, 133 Cal. App. 4th 1090, 1097.
[117] In re
Brown, 150 N.E. 581 (N.Y. Ct. App.
1926).
[118]
In re Brown, at
582.
[119]
See e.g. Fine v. Lawless, 139 Tenn. 160, 201 S.W. 160, 165-66 (1917) (Noting the
evolving legal view of goodwill: "The doctrine of
goodwill has proven to be so
salutory in effecting just results that it has been constantly expanding with
the result that the definition
of the word itself has been broadened as the
doctrine has developed."); Lynda J. Oswald, Goodwill and Gong-Concern Value:
Emerging Factors in the Just Compensation Equation, 32 B.C. L. REV. 283,
287-88 (1990-91) ("In recent years, however, the definition of 'goodwill' has
evolved beyond this simple notion of patronage. For
example, for purposes of tax
law, goodwill is often defined as the excess earning power of a business, i.e.,
the value of elements
such as trade names, trade brands, market acceptance, and
established location that together create an expectancy of earnings in
excess of
the normal returns on the tangible assets."); Alan S. Zipp, Divorce Valuation
of Business Interests: A Capitalization of Earnings Approach, 23 FAM. L. Q.
89, 95 (1989-1990) ("Originally, goodwill was said to exist only in commercial
businesses and not to exist in a professional business
which depends on the
skill and reputation of a particular person. However, in recent years, courts
have taken differing views in
treating the existence and value of professional
goodwill in divorce cases."); Kelly M. Haggar, COMMENT: A Catalyst in the
Cotton: The Proper Allocation of the "Goodwill" of Closely Held Businesses and
Professional Practices in Dissolution
of Marriages, 65 LA. L. REV. 1191,
1212, citing Black's Law Dictionary 703 (7th ed. 1999) ("A leading indicator of
the sometimes very subtle but still profound shifting
in meaning of the term
'goodwill' occurring over the last few decades is found in the current
definition of goodwill in Black's Law
Dictionary. Lord Eldon [as well as Justice
Story] might have recognized the first half of this definition. Black's
initially focuses
on a "business's reputation, patronage, and other intangible
assets ... considered when appraising the business, especially for purchase"
but
then adds "the ability to earn income in excess of the income that would be
expected from the busines viewed as a mere collection
of assets. ... "[T]he
second half of Black's definition, the excess income notion, is solely based
upon economic considerations and
cannot be found in the line of cases stretching
from Cruttwell through Smith, Morgan, and Bergamini
to
Dantonio.")
[120]
See e.g. Russell v. Russell, 11 Va. App. 411, 415, citing Oldham, DIVORCE,
SEPARATION AND THE DISTRIBUTION OF PROPERTY § 10.03, at 10-20 (1989)
("Goodwill has been defined
as 'the increased value of the business, over and
above the value of its assets, that results from the expectation of continued
public
patronage.'"); State Dept. of Transportation v. Cowan, 120 Nev. 851,
856-57 (Nev., 2004) (Describing goodwill as "imbu[ing] a business with value
which cannot be accounted for by a mere examination
of its physical or tangible
assets; in short, where the whole business exceeds the sum of its tangible
parts, business goodwill accounts
for the additional value."); Revenue Ruling
59-60 4.02 ("In the final analysis, goodwill is based upon earning capacity. The
presence
of goodwill and its value, therefore, rests upon the excess of net
earnings over and above a fair return on the net tangible assets.");
38 AM. JUR.
2d Good Will § 4, citing Matter of Marriage of Adams, 121 Or. App.
187, 854 P.2d 501 (1993) ("A business ordinarily has some value above that of
its assets, known as 'good will value'."); Id. § 1, citing Gilmore
Ford,
Inc. v. Turner, 599 So.2d 29 (Ala. 1992) ("Goodwill is an advantage or benefit
acquired by a business beyond the mere value of its capital, stock, funds, or
property
employed."); In re the Marriage of Nichols, 43 Colo. App. 383, 384, 606
P.2d 1314, 1315 (Describing goodwill as "that portion by which the total value
of a dental practice exceeds the market value of the furniture,
fixtures, and
accounts receivable ..."); NICHOLS ON EMINENT DOMAIN, 2-5 § 5.03 ("Goodwill
has been defined as: A going business
has a value over and above the aggregate
value of the tangible property employed in it. Such excess value is nothing more
than the
recognition that, used in an established business that has won the
favor of its customers, the tangibles may be expected to earn
in the future as
they have in the past. Owners' privileges of so using them, and their privilege
of continuing to deal with customers
atracted by the established business, are
property of value. This privilege is known as 'goodwill'."); I.R.S. Revenue
Ruling. Rev.
Rul. 68-609, 1968-2 C.B. 327 (1968) (Requiring income from tangible
assets to be subtracted from total income. The residual is capitalized and
designated as goodwill.);
BLACK'S LAW DICTIONARY 1587 (8th ed. 2004) (Defining
goodwill as "the ability to earn income in excess of the income that would be
expected from the business viewed as a mere collection of assets."); 38 AM. JUR.
2d Good Will § 4, citing In re Bay Plastics, Inc., 187 B.R. 315
(Bankr. C.D. Cal. 1995) ("Good will is generally understood to represent the
value of intangible factors that are expected to translate into
greater than
normal earning power, and, in addition to the advantageous relationship that a
business enjoys with its customers, good
will also includes advantageous
relationships with employees, suppliers, lenders and others."); 41 Fed.Reg.
46,292 (1976) (Referring
to goodwill as "the attainment of profit in excess of a
normal rate of return.")
[121] Cal. Civ.
Proc. Code
§1263.510(b).
[122]
See e.g. UNIFORM EMINENT DOMAIN CODE, § 1016 - Loss of Goodwill:,
§ 1016 (b) ("Within the meaning of this section, 'goodwill' consists of the
benefits that accrue to a business as a result
of its location, reputation for
dependability, skill, or quality, and any other circumstances resulting in
probable retention of
old or acquisition of new patronage."); South Dakota SDCL
§ 43-35-6; Wyo. Stat. § 1-26-713(b).
[123] See e.g. R.
Callmann, UNFAIR COMPETITION, TRADEMARKS AND MONOPOLIES § 1.11, at 36
(1981) ("Good will is not to be simply equated
with reputation. It includes, but
connotes more than, good credit, honesty, fair name and reliability. It may
include technical efficiency.");
NICHOLS ON EMINENT DOMAIN, 4-13 § 13.18:
"'Goodwill' in the legal sense has come to mean the advantage that a business
has over
competitors as a result of its name, location, and owner's
reputation."); BLACK'S LAW DICTIONARY 1587 (8th ed. 2004) (Defining goodwill
as
"[a] business' reputation, patronage, and other intangible assets that are
considered when appraising the business, especially
for purchase ..."); 38 AM.
JUR. 2d Good Will § 5, citing In re Bay Plastics, Inc., 187 B.R. 315
(Bankr. C.D. Cal. 1995); Seiler v. Seiler, 308 N.J. Super. 474, 706 A.2d 249
(App. Div. 1998) ("Good will is a concept that embraces many intangible
elements, including quality of management, the ability of an organization
to
produce and market efficiently, and the existence and nature of competition.");
12B AM. JUR. PL. & PR. FORMS, Goodwill § 1 (Rev. 1999)
("Goodwill is an intangible business asset consisting of the value of the
reputation of a business ... that
is derived from the recognized quality of the
product sold or the service performed, as well as other factors calculated to
guarantee
the continued patronage of the business
...")
[124]
See e.g. Grace Ganz Blumberg, Identifying and Valuing Goodwill at
Divorce, 56 LAW AND CONTEMPORARY PROBLEMS 217, 221-22 (1993) (Describing
goodwill as "a constellation of inseparable intangible assets that inhere in a
business or practice and
enable it to realize supernormal earnings... In
addition to reputation and continuing patronage, goodwill may include, inter
alia, strategic location, effective advertising, the value of a skilled,
trained, efficient work force, assemblage of property, plant,
and equipment in a
productive unit, and systems, controls, and methods developed as part of the
operation.")
[125]
See e.g. Robert W. Levis, Valuation of Businesses in Colorado Divorces,
COLO. LAW., June 2003, at 73, citing THE INTERNATIONAL GLOSSARY OF BUSINESS
VALUATION TERMS (Describing goodwill as "that intangible
asset arising as a
result of name, reputation, customer loyalty, location, products, and similar
factors not separately
identified.")
[126]
See e.g Young v. Cooper, 300 Tenn. App. 55, 74 (1947) (Stating that many factors
contribute to the value of the goodwil of a business,
including "its reputation
for doing business, the location, the number and character of its customers, the
former success of the
business, and many other elements which would be
advantageous in the operation of the business."); Redevelopment Agency of City
of
San Diego v. Attisha, 128 Cal.App. 4th 357, 367 (Cal. App. 4 Dist., 2005)
(Stating that the goodwill of a business includes benefits resulting from its
"location, reputation
for dependability, skill or quality, and any other
circumstances resulting in probable retention of old or acquisition of new
patronage.");
Westric Battery Co. v. Standard Electric Co., [1975] USCA10 149; 522 F.2d 986, 988
(10th Cir. 1975) (per curiam) (Goodwill is an intangible property interest
"which attaches to a business on account of name,
location, reputation for
competency and the imponderables which cause buyers to return."); WMX Techs.,
Inc. v. Miller, [1999] USCA9 495; 197 F.3d 367, 374 (9th Cir. 1999) (en banc) ("Essentially, the
goodwill of a business ... is made up of many factors, such as location,
patronage
of customers, relations with suppliers, experience of employees,
effectiveness of management, and many other factors."); Banner Milling
Co. v.
State of New York, 191 N.Y.S. 143, 150 ("Goodwill has been construed to include
the value of brands, trademarks, a reputation for good product, fair and
honorable
dealing, and all those elements which contribute to the ready
merchandising of the product of the company."); In the Matter of the
Marriage of
Hall, 103 Wn.2d 236, 241; 692 P.2d 175, 178 (1984) (Describing goodwill as "a
distinct asset of a professional practice" which may exist "in the form of
established patients
or clients, referrals, trade name, location and
associations ..."); State Dept. of Transportation v. Cowan, 120 Nev. 851 (Nev.,
2004) (Observing that "[w]hile different jurisdictions vary slightly in their
definitions of goodwill, the term generally is used
to decribe that component of
value attributed to a business' reputation in the community, loyal customer base
and ability to attract
new customers.")
[127] Grace Ganz Blumberg, Identifying and Valuing Goodwill at Divorce, 56 LAW AND CONTEMPORARY PROBLEMS 217, 221 (1993). See also Metropolitan Nat'l Bank v. St. Louis Dispatch Co., [1893] USSC 176; 149 U.S. 436, 446 (1893) ("There is difficulty in deciding accurately what is included under the term goodwill."); Herbert D. Laube, Good Will in Professional Partnerships, 12 Cornell L. Q. 303, 303 (1927), quoting Metropolitan Bank v. St. Louis Dispatch Co., [1893] USSC 176; 149 U.S. 436, 446 (1893) ("[G]ood will is subtle and elusive. It is invisible and intangible. It has been variously defined. Chief Justice Fuller said that although undoubtedly in many cases goodwill is a valuable thing, there is difficulty in deciding accurately what is included in the term."); Margaret Blair and Steven Wallman, The Growing Intangibles Reporting Discrepancy, in John Hand and Baruch Lev (eds.), INTANGIBLE ASSETS: VALUES, MEASURES, AND RISKS 455 (2003) ("Goodwill, rather than referring to specific assets, is just a catch-all residual category ...")
[128] 92 N.J.
423, 457 A.2d
1.
[129] 92
N.J. 423 at
427.
[130]
Dugan, 92 N.J. 423, 431 A.2d 1, 5 ("Our limited concern involves the existence
of goodwill as property and its evaluation for purposes of equitable
distribution.")
[131] 92 N.J.
423, 429, 457 A.2d 1,
4.
[132] 92
N.J. 423, 428 ("Though other elements may contribute to goodwill in the context
of a professional service, such as locality and
specialization, reputation is at
the core."); Dugan, 92 N.J. at 431 ("Goodwill is keyed to reputation
...")
[133]
92 N.J. 423, 431, 457 A.2d 1,
5.
[134] 92
N.J. at
435.
[135] 92
N.J. at
435.
[136] 92
N.J. 423, 429, 457 A.2d 1, 3-4, citing Cruttwell v. Lye, 17 Ves. 335,
346[1810] EngR 179; , 34 Eng. Rep. 129, 134 (Ch. 1810); J. Story, COMMENTARIES ON THE LAW
OF PARTNERSHIP § 99, at 157-61 (7th ed. 1881); In re Brown, 242 N.Y. 1, 6,
150 N.E. 581, 582
(1926).
[137]
92 N.J. 423, 430, 457 A.2d 1,
4.
[138] 92
N.J. 423, 430, 457 A.2d 1, 4, citing J.M. Smith & K.F. Skousen, INTERMEDIATE
ACCOUNTING 283 (7th ed. standard vol. 1982). See also Dugan, 92 N.J. 423,
430,
457 A.2d 1, 4 ("In a broad sense goodwill includes a whole host of intangibles
including the quality of management, the ability of the organization
to produce
and market efficiently, and the existence and nature of competition.")
[139] 92 N.J. at 431, A.2d at 5, citing Walker, Why Purchased Goodwill Should be Amortized on a Systematic Basis, 95 J. ACC. 210, 213 (1953).
[140] Dugan, 92
N.J. at 433; Id. at 429 ("goodwill is essentially reputation that will generate
future business.")
[141] 92
N.J. at 431, A.2d at 5, citing Walker,Why Purchased Goodwill Should be
Amortized on a Systematic Basis, 95 J. ACC. 210, 213 (1953) ("The price paid
for goodwill then is equivalent to the excess of actual earnings over expected
earnings
based on a normal rate of return on investment.")
[142] 92 N.J.
423, 432, 457 A.2d 1, 5 ("In a publicly held corporation one can determine the
total value of a business whose stock is publicly traded and therefore
its
goodwill by the market price of the stock.")
[143] Dugan,
92 N.J. 423, 431, 457 A.2d 1, 5 ("Variances in the form of an enterprise do not
eliminate goodwill, though they may affect its
worth.")
[144]
Alan S. Zipp, Divorce Valuation of Business Interests: A Capitalization of
Earnings Approach, 23 FAM. L. Q. 89, 102 (1989-1990). Id. at 220. See also
Scherzer v. Scherzer, 136 N.J. Super. 397, 400 (App. Div. 1975) (holding that
the the equitable distribution principle as applied to goodwill applies equally
and in the same
manner to an interest in an individual business and one held in
corporate name. "The form should not control."); B. Bittker, FEDERAL
TAXATION OF
INCOME, ESTATES AND GIFTS para. 51.9.3, at 51-53 (1981) (Stating that goodwill
exists in personal service enterprises
as well as other
businesses.)
[145]
Dugan, 92 N.J. 423, 431, 457 A.2d 1, 5, citing Grayer v. Grayer, 147 N.J. Super.
513, 520 (App. Div.
1977).
[146]
See e.g. In the Matter of the Marriage of Luckey, 73 Wn. App. 201, 206; 868 P.2d
189, 193.
[147] See e.g. In
the Matter of Marriage of Crosetto, 82 Wash. App. 545, 554, 918 P.2d 954, 958
(Div. 2
1996).
[148]
See e.g. In the Matter of Marriage of Crosetto, 82 Wash. App. 545 at 554, 918
P.2d 954 at 958 (Listing five accounting methods that are generally recognized,
and stating that factors such as the practitioner's age, reputation
and skill
should be used in conjunction with the valuation formula to calculate
professional goodwill.); See also In the Matter of
the Marriage of Luckey, 73
Wn. App. 201, 206; 868 P.2d 189, 193.; In the Matter of the Marriage of Hall,
103 Wn.2d 236, 243; 692 P.2d 175, 178 (1984) (Acknowledging three recognized
accounting formulas for valuing goodwill.)
[149] A firm's free cash flows represent the amount available for distribution to the firm's claimholders after taxes and reinvestment. A firm's claimholders include stockholders, bondholders, and preferred stockholders. See e.g. Aswath Damodaran, INVESTMENT VALUATION (2d ed., 2002) at 382. A firm's weighted average cost of capital is a value-weighted average of its cost of equity and after-tax cost of debt. The weights are the market values of equity and debt as a fraction of the total value of the firm. See e.g. Zvi Bodie et al., FINANCIAL ECONOMICS (2d ed., 2009) at 489.
[150] See e.g. Comment, Identifying, Valuing, and Dividing Professional Goodwill as Community Property at Dissolution of the Marital Community, 56 TUL. L. REV. 313, 332-33 (1981); Comment, The Recognition and Valuation of Professional Goodwill in the Marital Estate, 66 MARQ. L. REV. 697 (1983); Aswath Damodaran, INVESTMENT VALUATION (2d ed., 2002), chapter 15.
[151] See e.g. In the Matter of the Marriage of Hall, 103 Wn.2d 236, 243-44; 692 P.2d 175, 179 (1984) (Endorsing and applying straight capitalization method in marital dissolution case.)
[152] See e.g.
Alan S. Zipp, Divorce Valuation of Business Interests: A Capitalization of
Earnings Approach, 23 FAM. L. Q. 89, 91 (1989-1990). See also Dugan v.
Dugan, 457 A.2d 1, 7 (N.J. 1983) (Describing the excess earnings method as a
capitalization of residual earnings.); Grace Ganz Blumberg, Identifying and
Valuing Goodwill at Divorce, 56 LAW AND CONTEMPORARY PROBLEMS 217, 265
(1993).
[153]
See e.g. Dugan v. Dugan, 92 N.J. 423, 431, 457 A.2d 1, 5 (N.J.
1983).
[154]
See e.g. Grace Ganz Blumberg, Identifying and Valuing Goodwill at
Divorce, 56 LAW AND CONTEMPORARY PROBLEMS 217, 242
(1993).
[155]
See American Institute of Certified Public Accountants, Small Business
Consulting Practice Aid No. 8, VALUATION OF A CLOSELY HELD
BUSINESS 10
(1987).
[156]
See e.g. People ex rel. Department of Transportation v. Muller, 36 Cal. 3d 263,
271; 681 P.2d 1340, 1345; 203 Cal. Rptr. 772, 777 n. 7 (1984) (Approving the
excess earnings method of valuing goodwill); In the Matter of the Marriage of
Luckey, 73 Wn. App.
201; 868 P.2d 189 (Accounting expert valued the goodwill of
a medical practice using the excess earnings method.); Dugan v. Dugan, 92 N.J.
423, 431, 457 A.2d 1, 5 (N.J.
1983).
[157]
See REV. RUL. 59-60, 1959-1 C.B.
237.
[158]
See e.g. Metropolitan Bank v. St. Louis Dispatch Co., [1893] USSC 176; 149 U.S. 436, 446 (1893)
("[G]oodwill is in many cases a valuable thing, although there is difficulty in
deciding accurately what is included
under the term."); Morgan v. Perhamus, 36
Ohio St. 517, 522 (Ohio, 1881), quoting Lindley, A Treatise on the Law of
Partnership (1860) ("[The goodwill of] an established business .. has
...
marketable value, whether ... that of a professional man or of any other
person."); 38 AM. JUR. 2d Good Will § 4, citing Gilmore Ford, Inc.
v. Turner, 599 So. 2d 29 (Ala. 1992) ("Good will is intangible property that
constitutes a valuable asset of the business of which it is a part, unless in a
particular
instance it is too uncertain and contingent in nature to be
appraised."); Des Moines Gas Co. v. City of Des Moines, [1915] USSC 179; 238 U.S. 153, 165 ("That
there is an element of value in an assembled and established plant, doing
business and earning money, over one not thus
advanced, is self-evident. This
element of value is a property right, and should be considered in determining
the value of the property,
upon which the owner has the right to make a fair
return ... "); Buckl v. Buckl, 542 A.2d 65, 70 (Pa. Super. Ct. 1988) (Stating
that the physical assets, financial assets and goodwill collectively comprise
the total value
of the firm.); Bradford v. Montgomery Furniture Co., 115 Tenn.
610, 92 S.W. 1104 (1905) (Stating that "[t]he good will of a firm
is a species
of property, often very valuable and it may be sold and transferred."); Smith v.
Bull, 50 Cal. 2d 294, 302-03, 325 P.2d 463, 468 (1958) ("goodwill of advertising
firm constitutes an asset"); See also Stephen L. Carter, The Trouble With
Trademark, 99 YALE L.J. 759, 761. (1990) ("Goodwill is intangible and often
its precise source is difficult to trace, but it is one of a firm's most valued
assets
because it is, by definition, a major reason for the consumer's choice
among competing brands."); Randall B. Wilhite, The Effect of Goodwill in
Determining the Value of a Business in a Divorce, 35 FAM. L. Q. 351, 362
(2001) (Stating that a professional business' good reputation is a valuable
asset and "essentially what its goodwill consists
of."); Alicia Brokars Kelly,
Sharing a Piece of the Future Post-Divorce: Toward a More Equitable
Distribution of Professional Goodwill, 51 RUTGERS L. REV. 569, 584 (1999)
("[E]ven though [professional] goodwill cannot be sold or transferred separately
from the individual services of the
professional, the 'asset' has value to the
professional as an ongoing member of the profession or business.")
[159] See e.g. In
the Matter of Marriage of Crosetto, 82 Wash. App. 545,
553, 918 P.2d 954, 958, citing In re Marriage of Hall, 103 Wn.2d 236, 241
(Recognizing goodwill as an asset "which usually supplements the earning
capacity of another asset, a business or a profession."); State Dept. of
Transportation v. Cowan, 120 Nev. 851, 856-57 (Nev., 2004), Citing NICHOLS ON
EMINENT DOMAIN, § 29.01[1] ("[Goodwill] imbues a business with value which
cannot be
accounted for by a mere examination of its physical or tangible
assets; in short, where the whole business exceeds the sum of its
tangible
parts, business goodwill accounts for the additional value."); Dugan v. Dugan,
92 N.J. 423, 431, 457 A.2d 1, 5 ("Goodwill can be translated into prospective
earnings.")
[160] See
e.g. Dugan v. Dugan, 92 N.J. at 431, A.2d at 5. See also Rev. Rul. 59-60, §
4.02(f), 1959-1 C.B. 237, 241 ("In the final analysis, goodwill is based on
earning capacity. The presence of goodwill and its value, therefore, rests upon
the excess of net earnings over and above a fair return on the net tangible
assets.")
[161] 482 N.E.2d
1232.
[162]
482 N.E.2d at 1239 (emphasis
added.)
[163]
482 N.E.2d at 1239. See also Western Union Tel. Co. v. Poe, 61 F. 449, 456-57
("The annual earnings of a business corporation depend, not on the value of the
visible, tangible property of the corporation
as a passive investment, like real
estate or government bonds or mortgages, but they depend on the goodwill of the
business, its
volume, the speed with which the money capital can be turned over,
the business skill and experience and economy of its management.
... [T]he
elements that are united to produce those earnings are not all, or a majority of
them, in the form of tangible property,
though it may be conceded that they were
acquired by investing tangible capital. A corporation does not own its capital
stock, divided
into shares. It owns the property which, when used in a business
with skill and industry, aided by the good will ... will produce
the net
earnings, out of which the dividends on the stock are to be paid. This is true
of all active business corporations ... that
their annual profits are the
result, not of their real estate, business plant, and mechandise only, but of
those things united with
the good will and the skill, experience and economy
used in the conduct of the
business.")
[164]
See e.g. Spayd v. Turner et al., 482 N.E.2d 1232, 1236 ("Generally, a
partnership business may build goodwill as an asset, and upon dissolution of the
business by one or more of
the partners, courts have recognized that measurable
goodwill is a proper asset for consideration in an accounting between the
partners
...")
[165]
See e.g. Mutual Life Ins. Co. v. Menin, 115 F.2d 975 (2d Cir. 1940), cert.
denied, 313 U.S. 578 (1941) (Goodwill as asset subject to powers of trustee in
bankruptcy.)
[166]
See e.g. Washburn v. National Wall-Paper Co., 81 F. 17, 20 (2d Cir.
1897).
[167]
See e.g. Standard Oil Company of California v. Moore, [1957] USCA9 372; 251 F.2d 188, 219-20 (9th
Cir.
1957.)
[168]
See e.g. People ex rel. Department of Transportation v. Muller, 36 Cal. 3d 263,
681 P.2d 1340, 203 Cal. Rptr. 772 (1984); Kimball Laundry Co. v. U.S., [1949] USSC 95; 338 U.S.
1
(1949).
[169]
See e.g. In the Matter of the Marriage of Luckey, 73 Wn. App. 201, 206; 868 P.2d
189, 193; Mitchell v. Mitchell, 732 P.2d 208, 211 (Ariz. 1987) (Recognizing that
"the economic reality that the goodwill of a professional practice has value,
and [that] it should
be treated as property upon dissolution of the community
..."); Prahinski v. Prahinski, 75 Md. App. 113, 540 A.2d 833 (1988) (Stating
that "[i]f it does exist, ... goodwill is an asset to be valued and considered
in equitable distribution.") See also
COMMENT: Professional Goodwill in
Louisiana: An Analysis of its Classification, Valuation and Partition, 43
LA. L. REV. 119 (1982) (Valuation of goodwill in professional practice in
marital
resolution.)
[170]
See e.g. Copland v. Wisconsin Dept. of Taxation, 16 Wis.2d 543, 114 N.W.2d 858,
864-67 (1962); In re Whalen, 41 Misc. 2d 825, 246 N.Y.S.2d 327 (Sur. Ct. 1963)
(Goodwill as subject of testamentary
bequest).
[171]
See e.g. Lyon v. Lyon, 54 Cal.Rptr. 829, 246 Cal.App.2d 519 (1966); Murray v.
Bateman, 315 Mass. 113, 51 N.E.2d 954
(1943).
[172]
See e.g. Courier Journal Job Printing Co. v. Glenn, 37 F.Supp. 55, 59-60
(W.D.Ky. 1941), aff'd. 127 F.2d 820 (6th Cir.1942); Houston Chronicle Publ. Co.
v. United States, [1973] USCA5 1321; 481 F.2d 1240, 1248 (Stating that "the economic value of a
taxpayer's continuing goodwill within his field of operations is seen as an
ongoing
asset that fluctuates but does not necessarily diminish."); Mutual Life
Ins. Co. v. Menin, 115 F.2d 975 (2d Cir. 1940), cert. denied, 313 U.S. 578
(1941) (Goodwill as taxable item.) See also NOTE, Valuation of Goodwill for
Tax Purposes, 48 VA. L. REV. 1274 (1962); Edward J. Schnee, Acquiring
Assets by Purchasing Corporate Stock, 13 TAX ADVISER 354, 361-63
91982).
[173]
See e.g. Carrey v. Boyes Hot Springs Resort, Inc., 54 Cal.Rptr. 199, 245
Cal.App.2d 618, 622-23 (1966). See also Forensic Economics - Valuation of
Business and Business Losses, 16 AM. JUR. Proof of Facts 2d 253,
375-84
(1978).
[174]
See e.g. Eslami v. Eslami, 218 Conn. 801, 813; 591 A.2d 411, 418 ("It can hardly
be doubted that the increment of value, loosely termed goodwill, that arises
from the established reputation
of a business for the quality of its goods or
services may often be found to enhance the value of professional as well as
other enterprises
by increasing their ability to attract patrons."); Houston
Chronicle Publ. Co. v. United States, [1973] USCA5 1321; 481 F.2d 1240, 1248, citing J.C. Cornillie
Co. v. United States, E.D. Mich. 1968, 298 F.Supp. 887 (Describing "the ongoing
expectation that customers would utilize its services in the future" as the
"archetypical element of goodwill."); Boe
v. Commissioner of Internal Revenue,
[1962] USCA9 287; 307 F.2d 339, 343 (C.A. 9, 1962) ("The essence of goodwill is the expectancy of
continued patronage, for whatever reason."); Agr. Services Ass'n
, Inc. v. Ferry
Morse Seed Co., [1977] USCA6 187; 551 F.2d 1057, 1071 (6th Cir. 1977) ("Goodwill/business
reputation is that aspect of a business which helps it generate profits -
usually it is
a reputation for good service which helps attract a client
base."); Burke v. Canfield et al., 121 F.2d 877, 880 (Stating that "[i]t is not
necessary to consider exhaustively what constitutes good will. It is of course
characteristic of
a going business and essentially is constituted in the
tendency of customers to return for trade to those with whom they are accustomed
to deal. Many and varied elements may hold out the lure to return. They include
an established trade name, a specific or general
location, a reputation for
service, personal attention, reasonable prices, etc."); Commissioner of Internal
Revenue v. Killian, [1963] USCA5 142; 314 F.2d 852, 855 (C.A. 5, 1963); Nelson Weaver Realty Co.
v. Commissioner of Internal Revenue, [1962] USCA5 471; 307 F.2d 897, 901 (C.A. 5, 1962); 38 AM.
JUR. 2d Good Will § 1, citing Seiler v. Seiler, 308 N.J. Super. 474,
706 A.2d 249 (App. Div. 1998) ("When a business' future earning capacity has
been enhanced because its reputation leads to probable future patronage
from
existing and potential clients, good will may exist and have value.") See also
Steven M. Auvil, Gray Market Goods Produced by Foreign Affiliates of the U.S.
Trademark Owner: Should the Lanham Act Provide a Remedy?, 28 AKRON L. REV.
437, 448 ("[A]ssuming the producer expends the necessary resources on quality,
service and advertising, the reputation of the [producer's]
trademark will allow
the producer to take advantage of the higher sales that flow from the
willingness of consumers to pay higher
prices in exchange for lower search costs
and the assurance of consistent
quality.")
[175]
See e.g. 38 AM. JUR. 2d Good Will § 1, citing In re Corrugated Paper
Corp., 185 B.R. 667, 27 Bankr. Ct. Dec. (CCR) 941 (Bankr. D. Mass. 1995)
(Emphasizing value of advantageous relationships with parties such as
financiers.)
See also NOTE, Scarlet Letters For Corporations? Punishment By
Publicity Under The New Sentencing Guidelines, 65 S. CALIF. L. REV., 2387,
2399 ("A good image ... may make financial institutions more likely to extend
credit during difficult
times.")
[176] See
e.g. Winn-Dixie Montgomery, Inc. v. United States, [1971] USCA5 1021; 444 F.2d 677, 681 ("Location
may indeed be a key element in retail food store patronage, but to the extent
location contributes to the expectancy
that the old customers will resort to the
old place it is an element of goodwill."), citing Commissioner of Internal
Revenue v. Seaboard
Finance Co., [1966] USCA9 463; 367 F.2d 646, 651 n. 6 (C.A. 9, 1966). Burke v.
Canfield et al., 121 F.2d 877, 880 (Stating that "[i]t is not necessary to
consider exhaustively what constitutes good will. It is of course characteristic
of
a going business and essentially is constituted in the tendency of customers
to return for trade to those with whom they are accustomed
to deal. Many and
varied elements may hold out the lure to return. They include an established
trade name, a specific or general
location, a reputation for service, personal
attention, reasonable prices, etc.") See also Amortization of Intangibles: An
Examination of the Tax Treatment of Purchased Goodwill, 81 HARV. L. REV.
859, 861 (1968) ("The most important producer of excess earnings is carryover
customer satisfaction which takes the form of continued
patronage. Customers may
be satisfied only in the sense that a certain business is conveniently located
for their needs; indeed,
location was originally considered to be the sine qua
non of goodwill.")
[177] See e.g. Western U. Tel. Co. v. Poe, 61 F. 449, 457 ("The increase in the value of the bank's capital stock over its resources is due to the good will which invites the confidence of the public in the honesty and prudence of its management, and attracts deposits and business ... "); Des Moines Gas Co. v. City of Des Moines, [1915] USSC 179; 238 U.S. 153, 164-65 (Referring to goodwill as "that element of value which inheres in the fixed and favorable consideration of customers, arising from an established and well-known and well-conducted business ...")
[178] See e.g.
38 AM. JUR. 2d Good Will § 1, citing In re Corrugated Paper Corp.,
185 B.R. 667, 27 Bankr. Ct. Dec. (CCR) 941 (Bankr. D. Mass. 1995) ("This
'positive reputation' manifests itself as an expectancy that a business
has of
continued patronage from its customers. The source of that expectancy may be the
advantageous relationships the business has
with parties such as employees,
suppliers, or financiers, or it may be the location of the business or its
general reputation.")
See also NOTE, Scarlet Letters For Corporations?
Punishment By Publicity Under The New Sentencing Guidelines, 65 S. CALIF. L.
REV., 2387, 2399 ("A good image may make it easier for the company to attract
investors and talented management.
Company lobbyists may be seen as more
credible when they lobby for or against legislation affecting the industry.")
[179]
William M. Landes and Richard A. Posner, Trademark Law: An Economic
Perspective, 30 J.L. & ECON. 265,
270.
[180]
See e.g. Warner-Lambert Co. v. Northside Dev. Corp., [1996] USCA2 486; 86 F.3d 3, 8 (2d Cir. 1996)
(Stating that "[b]ad experiences by concentrations of consumers can lead to
communications that mutually reinforce
negative impressions about a mark and
cause substantial numbers of consumers and chains to cease purchasing products
using the mark.");
Red Wing Malting Co. v. Willcuts, Collector of Internal
Revenue, 15 F.2d 626, 632 ("If earnings decline for any reason, the value of
good will declines correspondingly, because by its very nature its value
depends
on earnings of a certain amount being maintained."), citing MONTGOMERY'S
AUDITING THEORY AND PRACTICE; Dodge Bros., Inc.
v. United States, 118 F.2d 95,
100 (4th Cir. 1941) (Stating that the value of goodwill "fluctuates in direct
relationship with the annual variations in the profits
of the business with
which it is associated."); Western U. Tel. Co. v. Poe, 61 F. 449, 457 (Stating
that changes in the earnings of a corporation do not affect the market value of
its tangible and identifiable intangible
assets, but do affect the value of its
goodwill.); Wingate Prettyman v. Peter D. Shockley, 4 Del. (4 Harr.) 112 (1844)
(Holding that
a defamatory publication harmful to a business' perceived
creditworthiness may result in monetary loss, which plaintiff may recover
as
special damages, if proven.) See also Perry Herzfeld, Corporations,
Defamation and General Damages: Back To First Principles, (2005) 10 MEDIA
& ARTS L. REV 135, 142 (A defamatory publication] could reduce [the
plaintiff corporation's] future profits
and the value of its goodwill, which are
both forms of injury to business reputation.")
[181] See e.g.
America Online, Inc. v. LCGM, Inc., 46 F.Supp.2d 444, 450 (E.D. Va. 1998)
(Finding that 18 U.S.C. § 1030(a)(5)) allows recovery for loss of
reputation and goodwill.); Avery v. City
of Lyons, 183 Kan. 611, 621-22, 331
P.2d 906, 914 (1958) (Harm to business' goodwill taken into account in damages
estimate.); Muraco v. Don, 250 Pac. 1109, 1111 (Calif. App. 1926) (Defendant
sold his business, including its goodwill, to the plaintiff. The defendant then
diverted his
old customers to another business, for which he received a
commission. The court held that the resulting loss of patronage impaired
the
goodwill conveyed, for which the plaintiff may recover.); Texas & Pac. Ry.
Co. v. Mercer, 127 Tex. 220, 225-26, 90 S.W. 2d 557, 560 (1936) (Allowing
plaintiff to recover for harm to goodwill of his dairy farm caused by
defendant's unauthorized obstruction
of a highway.); Comment, Loss of
Goodwill and Business Reputation as Recoverable Elements of DamagesUnder Uniform
Commercial Code § 2-715 - The Pennsylvania
Experience, 75 DICK. L. REV.
63; Floyd A. Wright, Tort Responsibility for Destruction of Goodwill, 14
CORNELL L. Q. 298, 307 (1928-29); Nims, Damages and Accounting Procedure in
Unfair Competition Cases, 31 CORNELL L.Q. 431 (1946); L. Sullivan, HANDBOOK
OF THE LAW OF ANTITRUST § 251, at 787 (1977) (Loss of goodwill recognized
as recoverable harm
under the antitrust treble damages
provision.)
[182]
221 Ga. 16, 142 S.E.2d
816.
[183]
221 Ga. 16, 19, 142 S.E.2d 816, 821 ([Respondent grocery store owner] had
created good will and good faith in the course of his business with the
public.")
[184]
221 Ga. 16, 19, 142 S.E.2d 816, 821.
[185] 221
Ga. 16, 19, 142 S.E.2d 816, 821.
[186] 221
Ga. 16, 18-19, 142 S.E.2d 816, 825-26.
[187] 221
Ga. 16, 20, 142 S.E.2d 816, 822.
[188]
Id.
[189] 221
Ga. 16, 29, 142 S.E.2d 816,
827.
[190]
221 Ga. 16, 29, 142 S.E.2d 816, 827 (Plaintiff provided evidence that his "net
income from his business for the twelve months preceding the picketing was
$3,018.26
and that he had suffered a loss of $952.19 during the twelve months
following the beginning of the picketing," and that his loss
would have been
much greater had he not taken certain cost mitigating
measures.)
[191]
221 Ga. 16, 29, 142 S.E.2d 816,
827-28.
[192]
See e.g. Nev. Rev. Stat. Ann. §37.111(1) (Allowing compensation for loss of
goodwill in eminent domain, provided specified conditions
are
met.)
[193]
See UNIFORM EMINENT DOMAIN CODE, § 1016 - Loss of Goodwill. See also
S.B. No. 460, 148th Gen. Assem., Reg. Sess. (Ga. 2006) (Providing that damages
for displacement may include "the loss in
value of the goodwill of any business
located on such property as a result of the taking and a resulting need to
relocate such business
...
")
[194] See
e.g. City of Oakland v. Pacific Coast Lumber & Mill Co., 171 Cal. 392, 398;
153 P. 705, 707
(1915).
[195]
See CAL. CIV. PROC. CODE § 1263.510 (West
1982).
[196]
CAL. CIV. PROC. CODE § 1263.510(b) (West 1982) (Defining goodwill as
consisting of "the benefits that accrue to a business as
a result of its
location, reputation for dependability, skill or quality, and any other
circumstances resulting in probable retention
of old or acquisition of new
patronage.") Other California statutes also define goodwill in terms of the
expectancy of continuing
patronage. See e.g. CAL. BUS. & PROF. CODE §
14100 (West 1987).
[197] 36 Cal. 3d
263, 681 P.2d 1340, 203 Cal. Rptr. 772
(1984).
[198]
36 Cal. 3d at 269; 681 P.2d at 1343; 203 Cal. Rptr. at 775
(1984).
[199]
36 Cal. 3d at 269; 681 P.2d at 1343; 203 Cal. Rptr. at 775
(1984).
[200]
36 Cal. 3d at 270; 681 P.2d at 1344; 203 Cal. Rptr. at 776
(1984).
[201]
36 Cal. 3d at 269; 681 P.2d at 1343; 203 Cal. Rptr. at 775
(1984).
[202]
See e.g. Young v. Seaboard Corp., 360 F.Supp. 490, 497 (Stating that the value
of the shares of an ongoing concern includes the "good will value of the
corporation."); Richland v.
Crandall, 262 F.Supp. 538, 548-49 (Stating that the
market value of the company's shares "was not separable from the value of the
business as a going concern,
since it represented what willing buyers and
sellers had negotiated repeatedly as the price for a proportionate share of the
company's
equity, including its goodwill ..."); Western U. Tel. Co. v. Poe, 61
F. 449, 457 ("The increase in the value of the bank's capital stock over its
resources is due to the good will which invites the confidence
of the public in
the honesty and prudence of its management, and attracts deposits and business,
and to the skill and experience
and foresight of its officers in making
profitable and safe loans." ... [T]he value of [the] capital stock [of a
corporation] is
largely dependent on its good will, the honesty, skill, economy,
and experience of its management and its employees, added to its
property.");
Charter Wire, Inc. v. United States of America, [1962] USCA7 294; 309 F.2d 878, 879 ("The stock
included the good will value of the enterprise."); Food Fair Stores, Inc. v.
Lakeland Grocery Corp., [1962] USCA4 113; 301 F.2d 156, 158 (Stating that the value of the
goodwill of a company as "measured by the market value of its stock in excess of
its book value
was $33,000,000.")
[203] See e.g.
Home Sav. Bank v. Des Moines, [1907] USSC 104; 205 U.S. 503, 512 (Stating that goodwill is an
essential component of the total value of the shares of a
bank.)
[204]
92 N.J. 423, 457 A.2d 1.
[205] 92 N.J.
423, 432, 457 A.2d 1, 5 ("In a publicly held corporation one can determine the
total value of a business whose stock is publicly traded and therefore
its
goodwill by the market price of the stock.") See also Red Wing Malting Co. v.
Willcuts, Collector of Internal Revenue, 15 F.2d 626, 633 ("In a case of a
public company, the good will is known from day to day."), citing HIGHER
ACCOUNTANCY PRINCIPLES AND PRACTICE
(under supervision of William Arthur
Chase.)
[206]
24 N.Y. 2d 494, 248 N.E. 2d 910, 301 N.Y.S. 2d
78.
[207]
Diamond, 24 N.Y. 2d at 498-99.
[208] Diamond, 24 N.Y. 2d at 499, citing Presiding Judge Botein, 29 A.D. 2d, at 287.
[209] See e.g.
Jonathan Berk and Peter DeMarzo, CORPORATE FINANCE: THE CORE (2009), at 405
(Explaining the relationship between risk and
the market value of equity.); Id.,
at 12 ("[A]n important feature of an investment in the equity of a corporation
is its
liquidity.")
[210]
See Mark F. Grady, Proximate Cause Decoded, 50 UCLA L. REV. 293
(2002).
[211]
See e.g. MARC A. FRANKLIN AND ROBERT L. RABIN, TORT LAW AND ALTERNATIVES 399
(7th ed. 2001); Mark F. Grady, Proximate Cause Decoded, 50 UCLA L. REV.
293, 322-332 (2002) (Discussing the reasonable foresight paradigms of proximate
cause.)
[212]
W. Jonathan Cardi, Purging Foreseeability: The New Vision of Duty and
Judicial Power in the Proposed Restatement (Third) of Torts, 58 VAND. L.
REV. 739,
749.
[213]
See Mark F. Grady, Proximate Cause Decoded, 50 UCLA L. REV. 293, 323
(2002) (Stating that plaintiff must show that an untaken precaution would have
reduced the risk of the
accident at issue. If not, the plaintiff fails on
proximate cause grounds.) See also Stephen R. Perry, Responsibility for
Outcomes, Risk, and the Law of Torts, in PHILOSOPHY AND THE LAW OF TORTS 72,
98 (Explaining that proximate causation views the plaintiff's harm "from the
standpoint of
an appropriately general description of the risk created by the
defendant.")
[214]
See Mark F. Grady, Proximate Cause Decoded, 50 UCLA L. REV. 293, 323
(2002).
[215]
Suppose, for instance, a defendant negligently exceeds the speed limit and
arrives at a spot just in time to be struck by a falling
tree. Although a
plaintiff such as an injured passenger may argue credibly that falling trees are
foreseeable, the accident is likely
outside the scope of risk created by the
defendant's speeding. The defendant's speeding created risks of traffic
accidents, but it
neither created the risk that materialized nor made it more
likely. The accident was therefore not within the scope of foreseeable
risk
created by the defendant's conduct. The outcome would likely have been different
if instead a tree had fallen in front of the
speeding driver, and the car
crashed into it. If it can be shown that the accident could have been avoided
had the driver travelled
at a reasonable speed, then the speeding driver's
negligence may have been a proximate cause of the accident. Failure to stop
within
a short time window is a foreseeable risk of speeding. It is coincidental
and not systematically related to the defendant's negligence,
hence
unforeseeable. See Berry v. Borough of Sugar Notch, 191 Pa. 345 (1899); See also
Mark F. Grady, Proximate Cause Decoded, 50 UCLA L. REV. 293, 324
(2002).
[216] See e.g.
Dan B. Dobbs, The Law of Torts, at 444; COMMENT: Group Defamation and
Individual Actions: A New Look at an Old Rule, 71 CALIF. L. REV. 1532, 1555.
Citing Eldredge, THE LAW OF DEFAMATION § 2 (1978) ("A plaintiff who wished
to prove special damages had to demonstrate
that such damages proximately
resulted from the defamation."); D. Dobbs, HANDBOOK ON THE LAW OF REMEDIES, at
520-22; PROSSER &
KEETON ON TORTS § 116, at 842 (5th ed. 1984), §
112 at 795 ("So far as proximate cause is concerned, recovery has been
limited
very definitely to those damages which are regarded as reasonably foreseeable or
normal consequences of the defamation."),
citing Lynch v. Knight, [1861] EngR 822; 1861, 9 H.L.C.
577, 11 Eng. Rep. 854; Georgia v. Kepford, 1876, 45 Iowa 48; Field v. Colson,
1892, 93 Ky. 347, 20 S.W. 264; Lopez v. Kline, 953 P.2d 304, 308 ("Proximate
cause is an element of defamation."); Keeton v. Hustler Magazine, Inc., [1984] USSC 54; 465 U.S.
770, 776 (1984) ([A] tortfeasor shall be liable for damages which are the
proximate result of this tort. ... This interest extends to
libel actions
brought by
nonresidents.")
[217]
See e.g. Robert D. Sack, SACK ON DEFAMATION LIBEL, SLANDER AND RELATED PROBLEMS
(3d ed. 2008), § 10.3.2 ("Special damages are
damages awarded to compensate
the plaintiff for actual pecuniary loss. ... The pecuniary loss comprising
special damages must flow
directly from the injury to reputation caused by the
defamation.")
[218]
See e.g. Bhagat and Romano, Event Studies and the Law: Part I
(Technique and Corporate Litigation), and Part II (Empirical
Studies of Corporate Law). Yale International Center for Finance
(2001).
[219]
See e.g. In Re World Access, Inc. Securities Litigation, 310 F.Supp.2d 1281,
1299 ("An event study is a statistical regression analysis that examines the
effect of an event, such as an allegedly fraudulent
statement or omission, on a
dependent variable, such as a company's stock price."); Jonathan R. Macey et
al., Lessons From Financial Economics: Materiality, Reliance, and Extending
the Reach of Basic v. Levinson, 77 VA. L. REV. 1017, 1028 (1991) (Describing
an event study as "an empirical technique for determining how securities returns
react to new information.")
[220] See e.g.
Jonathan M. Karpoff, D. Scott Lee, and Gerald S. Martin, The Cost to Firms of
Cooking the Books, 43 J. FIN & QUANT. ANALYSIS 581 (Sept.
2008).
[221]
See e.g. Bhagat and Romano, Event Studies and the Law: Part I (Technique and
Corporate Litigation), Yale International Center for Finance (2001),
143-47.
[222]
See e.g. R. GILSON and B. BLACK, THE LAW & FINANCE OF CORPORATE
ACQUISITIONS, Chapter
6.
[223]
Event studies measure the reaction of security prices to new information, and
are therefore most effective and reliable when applied
to share prices in an
efficient market. An "efficient market" is commonly defined as a market in which
stock prices rapidly incorporate
new publicly available information. See e.g.
Jonathan Berk and Peter DeMarzo, CORPORATE FINANCE: THE CORE (2009), at
313-15.
[224]
See e.g. In re Northern Telecom Ltd. Secs. Litig., 116 F.Supp. 2d 446, 460
(Holding that expert testimony is "fatally deficient in that [the plaintiff's
expert] did not perform an event study or similar
analysis to remove the effects
on stock price of market and industry information."); In re Oracle Secs. Litig.,
829 F.Supp. 1176, 1181 (N.D. Cal. 1993) ("Use of an event study or similar
analysis is necessary more accurately to isolate the [specific] influences
...
which defendants allegedly have distorted ..."); Basic v. Levinson, [1988] USSC 36; 485 U.S.
224, 247 (1988) (Relying on empirical studies showing that securities prices
react quickly to the release of new information.) See also
Janet Cooper
Alexander, The Value of Bad News in Securities Class Actions, 41 UCLA L.
REV. 1421, 1428-62; Bradford Cornell & R. Gregory Morgan, Using Finance
Theory to Measure Damages in Fraud on the Market Cases, 37 UCLA L. REV. 883
(1990); Mark L. Mitchell and Jeffry M. Netter, The Role of Financial
Economics in Securities Fraud Cases: Applications at the Securities and Exchange
Commission, 49 BUS. LAW.
545.
[225]
See Robert D. Sack, SACK ON DEFAMATION LIBEL, SLANDER AND RELATED PROBLEMS (3d
ed. 2008), § 10.3.2 ([A]ctual pecuniary loss
resulting from defamation is
typically difficult to establish.") See also Charles J. Faruki, The Defense
of Terminated Dealer Litigation: A Survey of Legal and Strategic
Considerations, 46 OHIO ST. L. J. 925, 994 ("[D]amages for lost goodwill are
difficult to quantify."), citing Agricultural Servs. Ass'n. v. Ferry-Morse Seed
Co., [1977] USCA6 187; 551 F.2d 1057, 1070-72 (6th Cir.
1977).
[226]
See e.g. Robertson v. McCloskey, 680 F.Supp. 414 (D.D.C. 1988) ("Specific
evidence demonstrating the financial harm resulting from the libel is required
before compensation for economic
harm can be awarded.") See also Dan B. Dobbs,
THE LAW OF TORTS 1143 (2001) (Describing special harm as "specifically
identified pecuniary
harm resulting from the slander."); FED. R. CIV. PROC. 9(g)
("When items of special damage are claimed, they shall be specifically
stated.")
[227]
See Robert D. Sack, SACK ON DEFAMATION LIBEL, SLANDER AND RELATED PROBLEMS (3d
ed. 2008), § 10.3.2, citing Anderson, Reputation, Compensation and
Proof, 25 WM. & MARY L. REV. 747, 748 (1984) ("Depending on the law of
the relevant jurisdiction, certain defamatory statements are not actionable at
all, irrespective
of the resulting injury to reputation, unless the plaintiff
pleads and proves special damages.")
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