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Economic Damages - Recent Developments in Damages
for Economic Losses of Persons
(1998 client memo)
by Philip Saunders, Jr., Ph.D.
Quantifying economic damages is an art and science in constant evolution as a result of court rulings and economic research. This memo notes some recent developments. It concentrates on damages for losses of individuals: lost earning capacity, loss of enjoyment, lost time, and household services.
Available data for estimating worklife expectancy are improving. Since the mid-1980's forensic economists have been estimating worklife expectancy (the number of years an individual is expected to participate in the labor force) using U.S. Bureau of Labor Statistics studies based upon data for 1979-80. As the data became increasingly out of date many economists, including yours truly, became concerned about its relevance. Fortunately, the U.S. Bureau of Census has been making available detailed population survey figures from the early 1990's.
Worklife expectancy estimates can now either be calculated directly from the 1990's Census figures or obtained from studies in the professional literature based upon the data. Breakdowns are available by age, education, sex, race, whether an individual is disabled or not, and whether he or she is currently active in the labor force. The studies are not all strictly comparable because they use different data sets and different methods of calculating worklife expectancy. (There are three such methods, known as the conventional model, a variant thereof called the LPE approach, and the increment-decrement model.)
What all this means for the attorney is that there are more up-to-date statistics available and more opportunities to tailor the worklife estimate to the profile of the particular plaintiff.
Lost profits of a self-employed contractor received more liberal evidentiary treatment in a personal injury suit than they would have in a commercial breach of contract or tort case.
See Anderson v. Litzenberg, 694 A.2d 150 (Md.App. 1997). The typical standard for awarding damages for lost profits in commercial cases is that they be proven with "reasonable certainty." While courts have awarded damages to companies with no earnings history, the courts can be wary of doing so.
However, for a self-employed plaintiff, "loss of profit is essentially an element of loss of earnings from personal services and, therefore, is used as an aid in calculating damages for impairment of earning capacity." Id. Since "impairment of earning capacity is not measured by what the claimant actually earned," Id., the failure of the plaintiff to demonstrate past profits from his contracting business appears to have been of less concern to the court than it would have been in commercial litigation.
A plaintiff in a medical malpractice suit who needed to take seven to ten minutes every four hours for self-catheterization was awarded damages for her lost time by a Kansas court. See Shirley v. Smith, 933 P.2d 651 (Kan. 1997). The loss was not part of lost earning capacity, as the plaintiff testified that the process did not affect her work. Rather, the award was part of future medical expenses. The plaintiff's time was valued at an hourly rate of "what an employer would have paid for her time." Id. It happened that the range of hourly rates for the plaintiff ($6 to $14 per hour) served, in the opinion of the court, "to establish what [plaintiff] or another nonmedical person would be paid for the time it takes to administer the treatment." Id. Presumably the court might have felt differently had the plaintiff had a $200 hourly rate. The court would then have had to face the issue of whether the appropriate rate was the plaintiff's earning rate or the rate of a third party who might have performed the service.
The general rule is that the plaintiff is to be compensated for loss of capacity to earn rather than for actual earnings lost. Some courts have been explicit that, if the plaintiff chose to engage in an activity with less remuneration than the plaintiff's full earning capacity, the plaintiff was not to be penalized for that choice. Occasionally, however, courts back away from that standard, as happened in a recent case in Louisiana. A 28-year old paraplegic accident victim had been making $6 per hour at the time of the accident, but was awarded only $98,700 for lost earning capacity, which was well less than an award for earnings of $6 per hour over the plaintiff's expected worklife would have been. See Lemaire v. Estate of Harrington, 701 So.2d 484 (La.App. 3 Cir. 1997).
In affirming the award the appellate court noted that the plaintiff lived with his grandmother, he had made less than $2000 in any year, and his "work ethic was erratic and inconsistent. ... He preferred to party, rather than work regularly." Id. The court did not claim that the plaintiff could not earn more but that the plaintiff chose not to work more. Evidently, some lives of leisure are more acceptable than others, at least in Louisiana.
Some fairly basic issues in the calculation of damages continue to experience jurisdictional variations. One such issue is whether liability, or lack thereof, for income taxes on an award should be taken into account. An Illinois court, in a case under the Federal Employers' Liability Act (FELA), followed the U.S. Supreme Court, which held that "the wage earner's income tax is a relevant factor in calculating the monetary loss," in a FELA case. Norfolk & Western Ry. Co. v. Liepelt, 444 U.S. 490 (1980). At the same time the Illinois court noted that under Illinois law "gross earnings, not net, is the proper figure to use in computing earning capacity." Van Holt v. Nat. R.R. Passenger Corp., 669 N.E.2d 1288 (Ill.App. 1 Dist. 1996). Some other jurisdictions, such as Massachusetts, follow a more middle ground, allowing taxes to be considered by the jury, if "the subject of income taxes on the amount of the verdict has been brought to the attention of the jury in a serious way." Griffin v. General Motors Corp., 380 Mass. 362, 403 N.E.2d 402 (Mass. 1980).
Another damage issue continuing to experience variations by venue is whether a plaintiff should receive compensation for the cost of performing household services the plaintiff is no longer able to perform, if the services are performed gratis by a friend or relative. Kansas says yes. If the services are performed "'by some good friend or member of the family, who donated his services, that is the good fortune of the appellee, and a matter with which the persons liable have no concern. If she had paid ten times the true value of such services she could only have recovered what such services were reasonably worth.'" Shirley v. Smith, 933 P.2d 651 (Kan. 1997), quoting Brosnan v. Sweetser, 26 N.E. 555 (Ind. 1891).
New York says no. "[S]ince plaintiff did not incur actual expenditures on household services between the accident and the date of verdict, having relied on the gratuitous assistance of relations and friends, the jury improperly awarded" damages for loss of household services. Schultz v. Harrison Radiator Div. GMC, 683 N.E.2d 307 (N.Y. 1997).
Damages for loss of quality of life, or "hedonic damages" as they have come to be known, have become harder to quantify in expert testimony.
The testimony has relied heavily on extrapolations from wage-risk studies which showed that wages tend to be higher in industries with high occupational risk (e.g., coal mining). The assertion that this wage differential, allegedly related to risk of loss of life, can be used to quantify the values people put on their lives has always been considered erroneous by many economists, including me. It now turns out that even the underlying relationship is suspect. A study using occupational wages instead of industry wages (e.g., miners as opposed to all employees in the mining industry, including accountants, salespeople, etc.) failed to find a relationship between occupational risk and wages.
Courts have been excluding expert testimony on hedonic damages. The U.S. Supreme Court ruled in Daubert v. Merrell Dow Pharmaceuticals, Inc., 113 S. Ct. 2786 (1993), that a theory propounded as a basis for expert testimony must (1) be capable of being tested, (2) have been subjected to peer review, (3) have a known error rate, and (4) be generally accepted. Of the four tests, hedonic damages theory passes only the second; it has been subjected to peer review, but the review has been generally unfavorable.
Since Daubert, there have been 13 cases, of which I am aware, that addressed admissibility of expert testimony on the amount of damages for loss of enjoyment of life. In twelve of the thirteen the courts declared such testimony inadmissible. See e.g., Ayers v. Robinson, 887 F.Supp. 1049 (N.D.Ill. 1995). The courts concluded that "an economist is no more expert at valuing the pleasure of life than the average juror." Montalvo v. Lapez, 884 P.2d 345 (Hawaii 1994).
Courts continue to penalize plaintiffs who fail to do their homework and prove the amount of loss. The message in the following examples is, don't stint on discovery and analysis of the specifics.
A claim was denied for lost future earnings by an army dental officer who was not promoted, allegedly because injuries received in an accident prevented her from taking certain tests and completing a residency program. See Singleton v. Phillips, 494 S.E.2d 66 (Ga.App. 1997). The plaintiff failed to introduce evidence demonstrating that, with the tests and the residency program completed, it would have been "more likely than not" that she would have been promoted. Id. The plaintiff would have done better introducing statistical evidence indicating the history of promotions of similarly qualified candidates.
Lost income and lost earning capacity awards were reduced because, inter alia, the plaintiff failed to introduce personal tax returns as evidence of past earnings. See Carter v. Baham, 683 So.2d 299 (La.App. 4 Cir. 1996).
In a case involving an employee owed fees based upon the collection of accounts receivable, proof of damages was declared insufficient when plaintiff's expert used "an industry-wide average of collection of accounts receivable[,] ... especially where, as in the present case, appellant, through discovery, could have obtained the records necessary to prove his damages with absolute certainty, but neglected to do so." Wujcik v. Yorktowne Dental Associates, Inc., 701 A.2d 581 (Pa.Super. 1997).
The use of reliable worklife expectancy estimates (see above) might have avoided the problem encountered when an economic expert's calculation of lost income to an assumed age 65 was excluded for the lack of "any concrete evidence that plaintiff would likely work ... until the age of 65." Branum v. Slezak Construction So., Inc., 682 N.E.2d 1165 (Ill.App. 1 Dist. 1997).
This memo is not meant to include all significant developments on the subject. Also, please note that, although the information herein has been compiled with care from sources believed to be reliable, the information is not warranted as to accuracy.