In Helpin v. Trustees of the University of Pennsylvania, 10 A.3d 267 (2010), the Pennsylvania Supreme Court continued its disregard of economic/financial principles and decades of economic data. With a 4-3 majority, the court held that the total offset method was appropriate to value a terminated employee’s contract claim on a future lost profit stream. In other words, the court accepted the argument that a plaintiff’s contract claim for compensation attributable to future lost profits is properly considered for damage calculations as a risk-free investment. That is, the projections on which the lost profit claim was based would occur with absolute certainty.
It has been 30 or so years since the Pennsylvania Supreme Court, in Kaczkowski v. Bolubasz, 421 A.2d 1027 (1980), affirmed the use of the total offset method to calculate economic damages in personal injury and wrongful death cases. The total offset method assumes earnings grow due to inflation and productivity increases, and that the discount rate used to reduce future earnings to present value is equal to inflation, leaving productivity increases as the measure of future earnings growth. In Helpin, the Pennsylvania Supreme Court extended this “economics free” argument to include a contract claim for lost earnings derived from a share of projected profits. There is no theoretical or empirical economic support for such a position. Moreover, the decision is a new view of contract damages that seeks to return the non-breaching party as near as possible to the position they would have been in, but for the breach. Applying total offset to business earnings will significantly overcompensate the plaintiff at the expense of the defendant. This overcompensation results from ignoring the business risk inherent in the generation of business income or profits.
