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Recently in the case of 21st Century Systems, Inc. v. Perot Systems Government Services, Inc. (“Perot Sytems”) (available here), the Virginia Supreme Court overturned a multi-million dollar goodwill damages award.  On appeal, the Virginia Supreme Court found that Perot Systems did not present adequate proof of the value of its lost goodwill.

The facts in Perot Systems are forthright, Perot Systems alleged that Defendants, former Perot Systems employees, conspired to “destroy [Perot Systems] and steal away tens of millions of dollars a year of [Perot Systems] business by unfairly and improperly using [Perot Systems’] confidential and proprietary information.”  The case centered on a group of ex-Perot Systems’ employees who left the company to join 21st Century Systems, a rival government contracting firm.  Perot Systems filed suit, alleging violation of Virginia’s business conspiracy act, violation of Virginia’s Uniform Trade Secret Act, breach of fiduciary duty, breach of non-disclosure agreements, and breach of non-compete and non-solicitation agreements.  After the employees left but before the trial, Perot Systems was sold to Dell for $3.878 billion.  As part of the sale Dell assigned $1.6 billion in goodwill to Perot Systems.  Perot Systems’ valuation expert used the Dell sale as a benchmark for assessment purposes when calculating the total loss of goodwill resulting from the defendants’ actions.  The jury ultimately accepted this assessment in awarding Perot Systems damages.

When dealing with tangible assets the valuation of a company is often more easily understood; firm values can be assessed to real estate, machinery and equipment, inventory and receivables.  But businesses are not valued solely based upon tangible assets. Goodwill is a non-tangible asset that a business can earn over time.  It is the benefit and advantage of the good name, reputation and connection of a business, the attractive force which brings in customers.  Goodwill has been defined as “the excess of the sales price of a business over the fair market value of the business’ identifiable assets.”  Advanced Marine Enters. v. PRC Inc., 256 Va. 106, 501 S.E.2d 148 (1998).  Valuation of this asset is subjective and difficult to clearly calculate.  When a business is sold, goodwill can greatly enhance the sales price.

On appeal the Virginia Supreme Court overturned the jury’s award of lost goodwill damages.  The Court held that Perot Systems failed to use any data concerning the sales of comparable business.  It also faulted Perot Systems from failing to demonstrate that the sale price was negatively affected as a result of the defendants’ actions.  And merely taking the later sales price attributed to goodwill and applying that amount to the defendants’ prior conduct is insufficient to support a claim for loss of goodwill.

The court did acknowledge, however, that “damages for loss of goodwill may be recovered if proven” even if it is “impossible of valuing with mathematical precision . . . .”  Like many things in life, proving loss of goodwill can be done- you just have to do it the right way.