Legal Definitions - before-and-after theory

The before-and-after theory is a method used in legal cases, particularly in antitrust disputes, to calculate financial damages, such as lost profits or overcharges. This theory involves comparing a business's financial performance during three distinct periods:

• Before the alleged harmful action occurred.
• During the period when the harmful action was taking place.
• After the harmful action ceased or its effects began to diminish.

By analyzing these different periods, courts and financial experts can estimate the specific financial losses directly caused by the defendant's wrongful conduct, isolating them from other market fluctuations or general business changes.

Examples:

• Small Business Impacted by Predatory Pricing

  Imagine a local independent bookstore, "The Literary Nook," which had consistently earned an average net profit of $8,000 per month. A large national chain, "MegaBooks Inc.," then opens a store nearby and begins selling popular new releases at prices significantly below cost, a practice known as predatory pricing, to drive out competition. During the six months MegaBooks engaged in this practice, The Literary Nook's average monthly profit plummeted to $3,000. After a court issues an injunction stopping MegaBooks' predatory pricing, The Literary Nook's profits slowly recover to $7,500 per month.

  How it illustrates the term: The "before-and-after theory" would compare The Literary Nook's $8,000 monthly profit before MegaBooks' predatory pricing with the $3,000 profit during the predatory pricing period. This comparison helps quantify the $5,000 monthly loss directly attributable to MegaBooks' anti-competitive actions. The recovery period after the injunction further supports the claim that the predatory pricing was the cause of the lost profits.

• Manufacturer Affected by Price-Fixing Cartel

  A bicycle manufacturer, "Pedal Power Co.," relies on a specific type of aluminum tubing for its frames. For years, Pedal Power purchased this tubing at a stable price of $50 per meter, maintaining a healthy 15% profit margin on its bicycles. Then, three major aluminum suppliers allegedly form a cartel and collude to fix prices, raising the cost of the tubing to $75 per meter for a period of two years. During this time, Pedal Power's profit margin dropped to 10%, even though its sales volume remained constant.

  How it illustrates the term: The "before-and-after theory" would be used to calculate the overcharges paid by Pedal Power. By comparing the $50 per meter cost before the alleged collusion to the $75 per meter cost during the collusion, the $25 per meter difference can be identified as the direct financial harm (overcharge) caused by the price-fixing scheme. This also demonstrates the impact on Pedal Power's profit margins during the period of the alleged violation.