Ex Ante versus Ex Post: Janis Joplin’s Yearbook Revisited

It has been almost 30 years since the publication of Franklin Fisher and Craig Romaine’s widely-cited 1990 article, “Janis Joplin’s Yearbook and the Theory of Damages.” Fisher and Romaine argue that, in disputes over a lost asset or opportunity the value of which can change over time, commercial damages should be measured as of the time the wrongful act occurred. However, calculating damages as of the time of trial – an ex post analysis as opposed to Fisher and Romaine’s ex ante analysis – may not be inferior from an economic perspective.

A substantial amount of time may pass between when a wrongful act occurs and when a damage amount is determined. In cases involving a lost asset or opportunity, Fisher and Romaine argue that damages should be measured as of the time the wrongful act occurred. They offer the following evocative hypothetical scenario:

Janis Joplin, the rock star, went to high school in Port Arthur, Texas. Suppose that when she graduated she signed one copy of her high-school yearbook. … Assume that signed high-school yearbooks were being bought and sold for $5.00 in Port Arthur, regardless of whose signature they contained.

Assume that the thief stole and destroyed a copy of the yearbook with Janis Joplin’s signature. The legal proceedings that followed took considerable time, and, by the time a damage award is to be made, Janis Joplin is known to have been a star, with her autograph selling for $1,000. … [W]hat damage award will make the plaintiff (the book’s owner) whole?

The temptation, of course, is to use hindsight and award $1,000. The other answer – $5.00 plus interest at the risk-free rate – seems somehow very unfair. That perception is incorrect, however, and the temptation should be resisted.

The logic of their argument is presented as follows:

Suppose that the asset destroyed was the opportunity to enter into a long-term contract thought at the time to be valuable. Suppose, however, that, with the benefit of hindsight, we now know that the contract would have been a disaster, losing money for the plaintiff. Surely, one would not assess negative damages, having the plaintiff pay the defendant.

The two cases are symmetric, however. The reader who finds it hard to accept our argument should attempt to enunciate a principle on which the use of hindsight leads to paying a high award when the asset turns out to have been unexpectedly valuable and does not lead to negative damages when the asset turns out to be a loser.

The two cases are symmetric, but the symmetry does not favor one approach over the other. When the asset’s value increases, damages will be higher under an ex post approach; when the asset’s value decreases, damages will be higher under x an ex ante approach. The Fisher and Romaine critique of the ex post approach is compelling only if it were to be applied inconsistently, depending on the change in value.

Evaluating damages as of the time of trial can generate negligible or even negative damages, as Fisher and Romaine point out. But negative damages can occur when calculated as of the time of the wrongful act as well. Consider the loss of an “asset” that has a negative value due to encumbrances placed upon it. In either case, the prospect of negative damages does not cause a legal conundrum. With negative damages neither party would have a claim: the party saved from losses by the wrongful act suffers no harm; the party committing the wrongful act has no claim to the economic profits generated thereby, because the legal system does not allow someone to profit from a violation of the law.

To bolster their argument, Fisher and Romaine state:

The violation did not merely deprive the plaintiff of the stream of returns that would have accompanied the asset. It also relieved the plaintiff of the uncertainty surrounding the stream.

That is correct, but at the time of the violation the plaintiff had not chosen to be deprived of either the asset or the uncertainty. Suppose that, absent the violation, the plaintiff would have held the asset. In that scenario the violation denied the plaintiff the asset as well as the resolution of the uncertainty associated with ownership.

It is possible that the plaintiff would have disposed of the asset at any point between the violation and the trial, but that is not likely to be knowable. If there is such evidence indicating when a sale would have occurred, then that but-for sale date becomes the appropriate time at which to value the asset. Absent evidence that the asset would have been sold around the time of the violation, however, there is no economic basis for employing that assumption.

Regardless of whether the passage of time renders the asset more or less valuable, without the violation the plaintiff may well have maintained ownership and that would be a coherent legal presumption. In any case, there is no reason to prefer a rule that implies a coincidental outcome – that the asset would have been disposed of around the time of the violation.

When it comes to awarding damages, the goal of the law is to put the plaintiff in the financial position he would have been in if the wrongful act had not occurred. Economics is not informative as to whether that goal is more likely to be achieved by evaluating damages from an ex ante or an ex post perspective. There is no a prior reason for preferring the ex ante approach. Indeed, unless there is evidence that the asset in question would have been disposed of at some point between the violation and the trial, calculating damages as of the trial may be the more intuitive approach.

EI Senior Vice President Paul E. Godek has worked on numerous matters involving the computation of damages. This article is based on the author’s Law 360 article, published July 22, 2015.