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Effective Use of Economists as Expert Witnesses

A prior version of this paper appeared as an article for the Daily Recorder, Sacramento, California

By: Dr. Stanley Stephenson
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Imagine you are lead counsel on an airline crash case in which more than 200 lives were lost, each involving a wrongful death case. A plaintiff attorney has hired an economist whose report on damages for one person, a Korean leather goods importer, exceeded $200 million. What should you do? Plaintiff’s expert is a Ph.D. from a top university who teaches economics and has many publications.

In another case, you are asked to represent a dentist whose practice was interrupted due to an explosion and fire that destroyed the building housing his office. He relocated his operations to a nearby strip-mall temporarily but lost equipment, over 5000 files containing patient payment, treatment, and medical histories. What to do? How to compute losses?

Each of these was an actual case. In the first case, an economist rebutted the plaintiff’s expert report, noting numerous errors, and the case settled for below $1 million. In the second case, an economist assessed net operating profits (=projected profits less mitigation) using multiple regression methods. This case also settled, as most do settle, thus avoiding trial.

These examples raise several fundamental questions that the litigator needs to address.

First, why use a damages expert at all? While the use of a damages expert is more and more common, some defense attorneys may still feel disclosure of a rebuttal damages expert worsens their chances of success, especially when they feel zero damages is the proper outcome. Others may recall a lesson from Pennzoil v. Texaco (1987) that not having a defense expert is very risky. Robert Trout (1991) used civil court records to consider the impact of use of an expert on the size of jury awards. While the records were limited to California courts and the award information dated, viz. year ending July 1988, the results are striking: average award if no plaintiff expert and no defense expert was $180,317. Yet, if plaintiff attorney uses a damages expert and defense does not, the average award was $418,355, a ‘gain’ of $238,038. If, on the other hand, both sides use damages experts, the average award was $98,567, which is a ‘savings’ of $319,788 to defense counsel.

Second, what type of damages expert: economist or accountant? Each type of expert has its advantages and both must adhere to Federal Rules of Evidence, notably Rules 702-705. Economists have strengths in econometrics, defining a market, use of databases, price theory, and consideration of market risk. Accountants are generally better at dealing with generally accepted accounting principles (GAAP), income taxes, and financial reporting standards. In many situations, the two skills are complementary, so both are used.

Third, what are the most important factors in choosing an economic expert?

Style: This is most important single factor. How credible is the expert before judge and jury? Are questions handled well?

Costs: It is unethical for an expert to be paid on a contingent basis and some attorneys may shop for experts who provide fixed price reports rather than be paid per hour. As implied by the Trout study, costs of an expert may be more than offset by the court results.

Case Strategy: What type of case is this -- Intellectual property, personal injury, breach of contract, wrongful death, employment dispute, etc.? In a recent trademark/trade dress case, the economist expert testified but the junior accountant actually did the number crunching on diverted sales.

Experience: In general, attorneys wish to hire experts who have testified previously. While credentials for an economist such as holding a Ph.D. and having a strong resume are essential, experience and style are more so.

Fourth, what does an expert economist really do? There are two ways to answer this question. First, in terms of the litigation process, the economist expert can informally estimate damages before a complaint is filed; during discovery, the expert can assist in interrogatories, review opposing expert’s report, and help prepare client for deposing opposing expert; during settlement and pre-trial help evaluate settlement offers; during the trial phase, the expert economist can help prepare trial binder and write testimony question scripts for direct or cross-examination, etc.

Another way to address this question involves various functions. Namely, the expert economist develops a theory of damage, collects/processes/uses appropriate data, conducts economic analysis of damages, writes a report, and prepares for the next phase of litigation process, including responses to questions challenging his/her opinion.

Fifth, what are main reasons for experts to disagree? Actually, the building blocks of an economic damages opinion involve only a handful of key points and most disagreements can be traced to differing beliefs between experts about one or more of these points. The points are as follows:

  • Normal level of wages (or profits) had there been no ‘event’
  • Actual level of wages (or profits) subsequent to limiting event
  • Mitigation wages (or profits), meaning what done to limit loss
  • Normal growth in wages (or profits) with no limiting event
  • Duration and extent of loss -- permanent/temporary; total/partial
  • Discount rate. How are future benefits valued today? How adjust for riskiness of future payments and time value of money?

The task of the expert is generally to develop a model of damages using each of these components. The goal is to assist the trier of fact and not sway one’s opinion depending on which side hires the expert.

Finally, where to locate a forensic economist? Economic experts previously were drawn from academic institutions and many still hold university jobs and provide consulting on the side. Yet today many experts are from firms that specialize in economic and even accounting consulting. Online sources like SEAK, ALM, JurisPro, TASA, and others provide directories of experts.

Stanley P. Stephenson, Ph.D. Economics, has provided Economic Litigation services in more than 300 cases. His experience includes Business Valuations, Economic and Quantitative Analysis and Market Assessments.

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