Legal Definitions - yardstick theory

The yardstick theory is a method used in antitrust lawsuits to calculate the financial harm, such as lost profits or excessive charges, that a company has suffered due to illegal anti-competitive behavior.

This theory involves identifying a business that is very similar to the company claiming damages but has not been affected by the antitrust violation. This unaffected, comparable business then serves as a "yardstick" or benchmark. By comparing the performance (e.g., profits, sales, growth) of the damaged company to that of the unaffected "yardstick" company, legal and economic experts can estimate what the damaged company's financial performance would have been if the illegal conduct had not occurred.

For this method to be reliable, it is crucial that the two companies and the markets in which they operate are genuinely comparable. The more similar they are, the more accurate the estimate of damages will be.

Here are some examples:

• Local Retail Business: Imagine a small, independent coffee shop called "The Daily Grind" in a bustling neighborhood. A large national coffee chain, "MegaBrew," opens nearby and engages in illegal predatory pricing (selling coffee below cost to drive out competitors). The Daily Grind experiences a significant drop in profits and eventually has to close. To determine its lost profits, The Daily Grind's owners might identify another independent coffee shop, "Morning Jolt," located in a similar neighborhood in a different city where MegaBrew has not engaged in anti-competitive practices. Morning Jolt's historical profit margins, customer traffic, and growth rates would serve as the "yardstick" to estimate what The Daily Grind would have earned without MegaBrew's illegal actions.

• Regional Service Provider: Consider "CleanSweep," a regional commercial cleaning service that operates in a specific metropolitan area. A group of larger cleaning companies in that area forms an illegal cartel, agreeing to fix prices and divide up major contracts, effectively shutting out smaller competitors like CleanSweep from bidding fairly. CleanSweep suffers from stagnant growth and reduced profitability. To calculate its damages, CleanSweep could look for a comparable regional cleaning service, "SparklePro," operating in a similar-sized metropolitan area in a neighboring state where no such cartel exists. SparklePro's revenue growth, success in winning new contracts, and overall profitability would provide the "yardstick" to estimate CleanSweep's lost earnings and market share.

• Specialized Manufacturing: Let's say "Precision Gears Inc." is a small manufacturer of highly specialized gears used in industrial machinery. A much larger competitor, "Global Gearworks," illegally acquires a monopoly over a critical raw material needed for these gears, then charges Precision Gears Inc. inflated prices for the material while giving its own manufacturing division a significant discount. This makes Precision Gears Inc. less competitive and reduces its profits. Precision Gears Inc. might identify a similar specialized gear manufacturer, "Apex Components," located in a different country or region where Global Gearworks does not control the raw material supply. By comparing raw material costs, production efficiency, and profit margins, Precision Gears Inc. could use Apex Components as a "yardstick" to quantify the financial harm caused by the monopolistic practices.