Return To Publications
Download This Publication
Getting the Most From An Economic Expert
by Philip Saunders, Jr., Ph.D.
The economist consulting for the attorney on economic damages can perform two functions: advise the attorney and provide expert testimony in court. To put it another way, the economist is both consultant to the attorney and consultant to the judge and jury. Only by making full use of the economist in both capacities will the attorney be getting maximum value.
Much has been written about the expert in the courtroom. This article focuses on the economist's support of the attorney outside the courtroom.
To gain the greatest advantage, the attorney should consult with the economist early, sometimes even before taking the case. The consultation need not necessarily be extensive; often a single meeting will be sufficient to obtain an assessment of the analysis required, time and costs involved, likelihood of being able to demonstrate damages, potential amounts, extent to which conclusions could be unqualified, likely response of opposing experts, and information and documents needed.
There may be more than one approach or line of argument that can be taken in estimating damages, and the economist can advise the attorney what the options are and the pros and cons of each. This enables the attorney to manage the case more cost effectively, plan his or her own strategy, and avoid false starts down lines of argument that may prove unproductive. Early input from the economist allows the attorney to acquire the necessary documents and information in the normal course of trial preparation. If the economist is called late in the case, the attorney runs the risk that certain information required for the analysis will be unavailable because the discovery period is over or not enough time is left to collect the information from the least expensive sources or at all.
Just the retention of an economist early in the case can have a psychological advantage. If the attorney chooses to let the fact be known to the other side, the retention of an economic expert telegraphs to the opposition that the attorney and the client are serious and are probably ready and willing to try the case.
Particularly valuable to the attorney in the early stages can be a "ball park" estimate by the economist of the likely damages and the certainty with which they can be demonstrated. The estimate tells the attorney how much is at stake and how sure he or she can be of there being a particular award, if the court finds for the plaintiff. The plaintiff attorney may want to obtain the estimate even before taking the case or when drafting the complaint and certainly should it have prior to any settlement negotiations.
The defense attorney also needs early evaluation of damages. If the economist's analysis indicates a good case can be made for a substantial award, the defense attorney will want to know before beginning negotiations rather than finding out at the trial stage. Conversely, the economist's analysis may indicate that the actual damages suffered by the plaintiff are, in monetary terms, fairly modest. The potential for minimal or nonexistent damages is often present in lender liability, breach of contract, or patent infringement litigation where the tort may be related to a new product or project and the losses claimed based on previously anticipated profits which may be speculative. An economic or financial analysis of the aborted product, project, or transaction, may indicate that, although the tort may be provable and palpable, the actual losses are small. The defense attorney may want to make the plaintiff's attorney aware of these findings; the knowledge that he or she is about to win a pyrrhic victory can have a salutary effect on a plaintiff's willingness to settle.
In estimating the earning capacity of an individual (relevant in personal injury, wrongful death, wrongful discharge, and, sometimes, divorce cases) there are a host of factors to be taken into account, such as (depending upon the type of case and issues involved) life expectancy, health, ability to work, training and qualifications, education, past working history (earnings, job stability, longevity, seniority), likely participation in the labor force, probability of finding work, time necessary to find employment, employer-specific factors (promotions, compensation structures, solvency and survival), industry and/or occupation employment conditions and outlook, life cycle earnings patterns, and wage and salary growth rates due to productivity and/or inflation, to name a few. There may also be additions to or deductions from the estimate for benefits packages, work-related expenses, medical or other support expenses, living expenses (wrongful death), and value of services to the household.
There exists a wealth of statistical data, primarily but not exclusively government data, which shed light on most of the above issues. The economist needs to examine the facts and consider carefully the extent to which the published data are applicable. The advantages of using the published data are obvious: speed, convenience, economy, and authority. Disadvantages will occur when there is reason to believe that the averages of the published data are inapplicable to the instant case. In general the more solid information there is on the earning capacity of the plaintiff the more the economist has a basis for deviating from the published data. Conversely, when indications of earning capacity are sparse (e.g., as in the death of a juvenile who has never held a job) the more the statistical averages will have to be relied upon.
While the general economic principles are the same in estimating the economic loss of a business as compared with the economic loss of an individual, the economist will look at different specific factors and, typically, can rely much less on published data. In breach of contract, lender liability, performance, antitrust, patent infringement, fraud, unfair or deceptive practices, or other business-related litigation, the economist needs to look much more at the specifics of the project, product, or business to determine the amount of loss.
Business losses may be one-time, as when an act of the defendant aborted a project or activity or otherwise destroyed something of value to the plaintiff. In other cases the loss may have been on- going, as in an anti-trust or patent infringement action wherein the defendant's acts and their effects on the plaintiff are alleged to have continued over a period of time.
In analyzing a loss the economist must consider not only what the plaintiff planned on doing in the absence of the alleged injury (e.g., continue in business, develop a property, introduce a product, expand market share, sell the defendant's product line) but also the capacity of the plaintiff for executing its plans and the probability of success.
Again, there are a host of factors which may need to be considered, such as business and financial history of the plaintiff (profitability, return on investment, return on equity, stability, growth, financial strength); industry in which the company operates (business practices, cyclicality, prevailing conditions and outlook); plans, proposals, and projections for the project or activity which the actions of the defendant purportedly affected; management capability and depth; organizational and operational strengths and weaknesses; markets and market shares for the company's products or services; competition, including likely competitive reactions; market value and marketability of the business itself; and taxes, to name a few.
Estimating damages may call for a variety of alternative calculations or scenarios, which can provide valuable input for the attorney. All estimates are based upon initial assumptions. In some cases it is easier to find a clear basis for the assumptions than in others. The future lost earnings of an incapacitated civil servant who had worked in the same job in a state bureaucracy for 10 years are more easily estimated with precision than the future earnings of a former undertaker who had given up his practice and was going to school to obtain a degree as a forester. In the latter case the attorney may want the economist to produce a best estimate and also alternative estimates under a variety of assumptions to demonstrate that the loss was in all probability no less than (or no more than) some amount.
The sensitivity analyses also can determine what the critical factors are. In most analyses there are some inputs or assumptions changes in which can have dramatic impact on the damage estimates, and then there are others which can vary over fairly wide ranges without seriously affecting the results. It is important for both the economist and the attorney to understand which are the critical factors, so the economist and attorney can make the analysis clear to the court and also respond effectively to any attempts by the opposing attorney in cross-examination to focus on factors and assumptions which may appear tenuous or damaging to the case but in reality are trivia.
Once the damages have been estimated, either as a stream of net cash flow over time or as a specific value at a point in time, the damages must be translated into present values by discounting future losses at some interest rate and compounding past losses at a selected interest rate. The discounting and the compounding take account of a fact that a dollar received today is worth more than a dollar received in the future and less than a dollar received in the past. The higher the interest rates assumed and the longer the time periods over which the values are compounded or discounted, the larger the differences between the present values of the losses and the values of the losses at the times that they are estimated to have occurred. The amount of damages can be highly sensitive to the rates of interest chosen.
In a tort claim there are four times that are significant in estimating damages: the time of the injury, the time of filing of the claim, the current time (or the time at which payment of the award is expected to be made), and the times in the future for which losses are estimated. The damage is estimated as of the time of the injury. The award is estimated as of filing of the complaint. Payment is as of the current or some specified time. The economist has to chose the appropriate interest rates for converting values from one point in time to another. One exception occurs in Massachusetts where the rate to be used in compounding the award from the time of filing of the case to the current time is set by statute at 12% (MA G.L. Chapt. 231 Sec. 6B). To select the appropriate rates the economist will have to weigh all the relevant factors of the case and determine the appropriate application of economic or financial theory.
In selecting the rates, two overall principles should govern. First the rates chosen should reflect the underlying financial instruments (actual or hypothetical) which would be appropriate investments, or sources, for the funds in question; the rates and instruments should have the same risk and maturity characteristics. Second, the rates should be consistent with other data used in making the damage estimates; comparisons should be apples to apples. For example, if the estimates of future lost income or profits are pretax and include an inflation factor, then the interest rate or rates used to discount the estimated losses back to a present value should be based upon taxable investments and should be nominal rates (i.e., unadjusted for the effects of inflation).
Although it is most important that the estimate of damages be performed correctly, it is also important that the estimate and supporting analysis be presented clearly and persuasively at trial. This involves presentation in testimony of the economist's analysis, defense during cross-examination, and cross-examination of any expert for the opposition. To help prepare, the economist should play devil's advocate, evaluating the strengths and weaknesses of the case, hypothesizing how he or she would attack the case, if he or she were on the other side, and preparing appropriate responses.
The attorney should have the economist review and evaluate affidavits of the opposing expert, advise on information that it would be desirable to obtain in deposition, and prepare questions for deposition. Based on the information derived, the economist can then advise the attorney on the reasonableness of the opposing side's estimates, the validity of the methods of analysis used, how and why the estimates differ from the economist's own estimates (if in fact they do), what strategy to take with respect to the opposing estimates, and appropriate lines of questioning in cross-examination.
It can also be valuable for the attorney to have the economist available during pre-trial negotiations and during trial to assist in formulating settlement proposals and to respond to proposals and to information produced by the opposition.
Sometimes the opposition may propose, or the attorney and the client may want to propose, a structured settlement. The economist can assist in structuring the settlement, determine its value, and evaluate whether the proposed structure accomplishes the client's objectives.
During trial, sometimes the other side provides testimony which sheds additional light on the circumstances surrounding the business, injury, or loss. They may also, albeit inadvertently, admit as fact information or points that would otherwise be open to dispute, or they may provide numerical values for data that would otherwise have to be estimated with a margin of error. The economist can recalculate the damage estimates based upon the new information, allowing the attorney to respond quickly to changes as they occur in trial.
- The attorney will obtain maximum benefit from using an economic expert when the attorney:
- Consults with the economist and develops a strategy early in the case.
- Obtains a preliminary estimate of damages.
- Receives a thorough and professional analysis of the estimated personal or business loss.
- Makes use of the economist's sensitivity analysis.
- Receives a damage estimate based upon rates of discount appropriate to the facts of the case and the methods of analysis used.
- Utilizes the economist in trial preparation.
- Has the economist available for analysis of settlement proposals, structured settlements, and new developments during trial.
First published in Massachusetts Lawyers Weekly, Dec. 9, 1991.
Return To Publications
Download This Publication