Economic Testimony - The Good, the Bad, and the Ugly

There are times in which the economic expert is either unprepared or led into difficult positions. Likewise, there are times in which the cross examination opens the door for further damaging economic testimony.  Over the years, we have compiled a list of some of the goofs and some of the successes among economic experts we have observed. Hopefully, these mistakes can be a valuable resource. They certainly make us keenly aware of possible pitfalls for the economist and for the cross examining attorney. We continually add to the list as we experience the unusually good or bad.  We hope you find these short abstracts useful.

What spreadsheet?

During trial the plaintiff’s attorney during cross examination focused upon the computer spreadsheet used by the defense’s economic expert to allegedly prove that there were zero economic damages.  The expert had relied heavily upon research assistants to construct the spreadsheet, but under the expert’s supervision.  Unfortunately, the expert had not carefully examined the calculations and was not aware of several calculation errors.  The spreadsheet was blown up as a trial exhibit, along with an alternate spreadsheet with corrected figures. The expert's testimony at trial was inconsistent with the corrected spreadsheet. The expert was forced to acknowledge to the court the calculation error, and tried to explain it was not a serious one.  Yet it was too late.  The jury lost confidence in the testimony. The jury awarded the plaintiff more than $12 million in damages.

Is he an economist?

The plaintiff’s expert was considered to be a negotiations expert.  He was formally trained in the law, but had no economic training.  In a patent infringement suit, he “invented” a bargaining scenario which put the opposing side in an unrealistic and compromised position.  His “invented” situation created extravagant damage amounts which were unable to be substantiated with any economic principles. After a finding of infringement, the jury awarded these damages to the plaintiff.

On appeal, the appellate court looked at the methodology of the negotiations expert and threw out all of his work and testimony.  In their decision the appellate judges specifically indicated that they could not see where he had adhered to any sound economic principles and remanded the case for retrial on the damages.

Are these competitive markets?

A plaintiff-dealer sought damages from a manufacturer on the grounds of price discrimination, claiming that the manufacturer sold inventory at discriminatory prices to dealers. The plaintiff's expert was a computer scientist with no economics or statistics background.

The plaintiff had to prove, among other things, that his dealership paid higher prices for inventory than other dealers and that this caused measurable lost profits. The expert's evidence was a listing of plaintiff products purchased at prices greater than the lowest price paid by any other dealer, adjusted for make, model, and options.  The underlying theory of this method was that all dealers were “due” the minimum price ever paid for a product.

A proper analysis of prices demonstrated that there were numerous economic factors that caused dealer prices to differ besides the few that the plaintiff’s expert was willing to consider.  Among local markets in which competitive branded dealers resided, the manufacturer’s prices to its dealers were lower.  The manufacturer’s lower prices reflected competitive necessity.

Additionally, the plaintiff's expert claimed that the retail markets for these products were highly competitive. This argument necessarily implies that reductions in the manufacturer’s prices to a dealer would have been passed on to the customer and not retained in the form of dealer profits. The computer scientist failed to understand the logical implications of his own arguments and failed to examine the effects of competitive market forces on dealer prices.

Can you admit your mistake?

An industry expert was asked to project sales for a prospective new branch in a distant market.  The defendant had allegedly prevented the plaintiff from entering this market, and damages were to be assessed on the basis of lost profits. The industry expert prepared a report, containing the derivation of sales projections for the new branch.

The expert relied upon the historical sales of the home office as evidence of the capabilities of management and staff and the potential sales of the new branch. However, the historical evidence began with an 8-month fiscal year, continuing with a succession of 12-month fiscal years. In his calculation of the percentage change in sales from the initial period to the first full year, the expert failed to adjust the series for the beginning 8-month fiscal year. He projected the initial year's growth for the new branch at 100% rather than the 39% that he should have used had he taken the short fiscal year into account.

Being shown the error through a written response by the defendant's expert before trial, the expert refused to correct the mistake and argued that the 100% was based, not upon the historical record, but upon his "expert opinion and professional experience." The court rejected the plaintiff's entire damage calculations because there was no empirical support for his projections.

Had the mistake been corrected, it would have lowered the calculated damages by $2 million, but due to stubbornness the entire $7 million damage claim was thrown out.

Are you sure you want an answer?

The case involved a forecast of future medical expenses with an unknown life expectancy. The defense chose not to take the economist's deposition and did not name an opposing economist to testify at trial.  The plaintiff's economist presented multiple damage calculations based upon differing life expectancies ranging from 6 years to 79 years with resulting damages ranging from $2 million to $63 million.

During cross examination, the defense chose to center on two themes: 1) damages if the life expectancy were only one year, and 2) the use of an annuity to replace the calculated present values. This allowed the plaintiff's economist the opportunity to opine on the many uncertainties of the timing of expenses imposed upon the family, to which the cross-examining attorney had no response.

The jury awarded $30 million to the plaintiff. The defense attorney desperately needed assistance in handling the concepts of 1) expected values of future expenses, 2) the uncertainties of future expenses, and 3) the characteristics of an annuity. The defense attorney really did not want the answers to his questions.

Taking the bait?

The plaintiff's attorney filed the original complaint before retaining an economist. The antitrust cause of action requires a definition of a relevant geographic market and product market. Without consultation with an economist, the definitions were poorly constructed, offering three separate definitions of a relevant geographical market, all with differing dimensions. The defendants' attorneys retained several economists to prepare experts' reports, due the same day as the last day for filing an amended complaint. The lead defense counsel paid a considerable sum for the preparation of the reports.

The defense counsel chose not to take the plaintiff's economist's deposition. The plaintiff's economist also prepared an expert's report also due on the lasts day for filing an amended complaint. With the consultation of the economist, the plaintiff's report proposed a more reasonable definition of the geographic market which was included in the final amended complaint. The defense expert's report, instead of presenting a reasonable definition of a relevant geographic market, chose to base all calculations on the most unreasonable of the original definitions proposed in the original complaint.

All of the work performed by the defense’s economists was shown to be irrelevant. These economists then had little time to prepare a rebuttal report which had to contain responses to the plaintiff's expert's report and a complete reconstruction of their own report.  Had they based their report on their own definition of the relevant geographic market, the investment in the report would not have been wasted.

Staff Support Work or the Expert’s Work?

In a substantial antitrust case, the plaintiff’s economic expert, with impeccable credentials, worked as an associate of a consulting firm with able support staff. A considerable amount of work was accomplished with commensurate fees.  However, the expert provided supervisory services and never became acquainted with important facts about the industry, the firm being defended, or the plaintiff.  Although the expert’s report contained important facts, some of the more obvious facts were not included in the report.

The defense counsel cleverly set up the expert during the early part of his deposition by obtaining an agreement that a firm’s scope of products is critical to its success. Without a full scope of products in the market, any firm could not expect to grow market share.  Later in the deposition, the defense counsel asked the expert to list the plaintiff’s scope of products.  Not being familiar with the facts, the expert guessed, but guessed wrong.  The expert had already constructed a written opinion but was admittedly wrong in key facts. The expert failed to bring to the case key facts that had to be known before an opinion could be formed. Support staff knew these facts well, but the expert was too unfamiliar.  Overall credibility was lost.

Where did this come from?

An economic expert was asked to estimate the damages associated with the improper use of a trademark.  The trademark had been sold to a competitor, but the use of the trademark in annual distributors’ catalogs inadvertently had not been excluded from the manufacturer’s listings.  The plaintiff sought economic damages, arguing that the misuse of the trademark injured the plaintiff’s sales while enhancing the defendant’s sales of it new product line.  The plaintiff’s economic expert, in estimating its alleged lost sales, made the argument that one-third of the defendant’s sales of its new product “belonged” to the plaintiff as a direct result of the misuse of the plaintiff’s trademark.  There was no foundation for the one-third proportion, and the expert provided no justification for the figure, other than its seemed “likely” that this was the appropriate proportion.  Needless to say, the calculation of alleged damages was not convincing.

Doesn’t Price Matter?

In a case involving individual distributors in a multi-level-marketing (MLM) industry, the plaintiff’s economic expert sought to estimate the number of would-be distributors the manufacturer would have in its distributor force, in the absence of alleged disparaging remarks and literature.  An economic model was developed and an estimating equation was presented as the basis for quantifying the “missing” distributors.  Lost sales were directly linked to the missing distributors.

Over the period of time in which the expert had collected his supporting data, the manufacturer had increased the price of the introductory sales kit which was required by all new distributors.  The expert had reported that the price of the kit was too small to be of consequence and failed to account for its doubling in price.  The re-estimation of the equation, including the price of the introductory sales kit, eliminated all missing distributors.  In short, the reason for the decline in the number of distributors was completely due to the doubling of the price of the introductory sales kit.

The omission of the price of the kit in the estimating equation was fatal to the plaintiff’s arguments.  It required very little extra work to test for the inclusion of the price of the introductory kit, but the plaintiff’s expert failed to conduct the test.  An expert can sometimes miss the most obvious.

How can a benchmark sale cause economic damages?

An economic expert attempted to group “similar” sales in order to search for the highest rebate offered by the manufacturer.  His took the list prices of plaintiff dealer sales and combined these list prices with list prices of sales among all other dealers.  Prices of each sale were sorted in increasing order. Similar sales were defined as sales that were within ±1% of the plaintiff dealer’s list price.  The sale with the highest rebate in each group was chosen as the benchmark sale and used to compute damages on the plaintiff’s sale.

Unfortunately, the expert did not realize that his method of capturing all sales within ±1% of each plaintiff’s list price resulted in some overlapping groupings.  To the surprise of the expert, a single sale could serve as a benchmark in one grouping, but also be a source of economic damages in a neighboring grouping.  It could have received a relatively low rebate when it was the subject of the comparison, but also be the benchmark for the next grouping.  The alleged damage for that sale was ambiguous. The expert had failed to fully explore the consequences of his method.  His credibility was lost.

Does the expert know the data?

In an antitrust case, the plaintiff claimed that one of defendant's plants was not efficient and was pricing below average variable cost. An important component of variable cost was transportation expense, measured by transport time of delivery trucks. A computerized transmitter had been installed in each truck so that the home station could receive transport times.  Monthly summaries were produced for each plant as part of the regular reporting schedule.

The defendant’s economist failed to examine both deposition testimony and underlying trip tickets to discover that the transmissions from the subject plant were unreliable due to its distance from the plant to the home station. Transmissions were frequently lost or incomplete. When transmissions were incomplete, the computer recorded zero time for the trip. The monthly summaries used by the economist included the zero-time tasks, giving the mistaken impression that the subject plant was even more efficient as the other plants with complete reporting.  These monthly summaries formed the economist's proof that price was not below average variable cost.  The economist’s credibility was lost due to a failure to carefully examine the underlying data.  Much of the evidence used by the economist suggested that, at the subject plant, trucks could move at the speed of light.

Did you copy all the way down?

A plaintiff's economic expert was claiming that damages were to accrue over an extended period of time due to a permanently damaged reputation. A spreadsheet was used to list sales, costs, and resulting profits by month for over twenty years.   The expert had altered and refined the spreadsheet several times.

The final version of the spreadsheet was turned over as part of the expert's report. A growth rate was inserted that was picked up by the formula contained in the monthly sales figures.

Due to an incorrect use of a copy command in the spreadsheet, the lost profits after the tenth year of the projection became discontinuous, abruptly decreasing in one month, then following a smooth trend upward though the remainder of the time horizon. Although totals did not show it, the path of profits actually became negative for several years after the tenth year. The economist had revised the spreadsheet, but failed to copy the revision down all cells, stopping after ten years. The remainder of the projection used the unrevised formula which abruptly took the profits into the negative regions. Since the profits were projected for a surgeon, it made little economic sense that a surgeon would continue practicing for several years with a negative income.

Upon questioning in the deposition, the expert could not quickly figure out the reason for the questions and admitted that, if the projection showed it, it was quite possible for profits to be negative for short periods of time.

Problems and inconsistencies could have been detected by the expert by simply graphing the result. However, the expert chose not to admit the possibility of a mistake in a deposition and provided damaging testimony instead.

How bad is bad?

The case involved a dispute between a retailer and the manufacturer.  The plaintiff chose not to hire an economic expert, instead choosing to retain a CPA to submit a report in support of the claims of alleged economic damages.  The plaintiff’s expert based her report upon multiple theories.  The two initial alternative theories were (1) a before-after valuation approach designed to show the drop in value of the plaintiff’s business allegedly resulting from defendant’s actions and (2) a price-discrimination theory in which damages are calculated based on a comparison of actual and “but-for” price concessions.

All approaches used by the expert were replete with errors.  The before-after points in time selected had nothing to do with the alleged beginning of the alleged conduct of the defendant.   There was no attempt to isolate the effects of the alleged conduct of the defendant from other market forces easily observed in the industry. No effort was made to account for the increase in sales of other products as the sales force was shifted away from the subject product line.

Defendant’s expert economist submitted a report in response to plaintiff’s expert report, pointing out the many errors in the analysis.  The plaintiff had paid the expert to prepare three reports and testify in two depositions.  However, none of this expert’s work product succeeded in providing a reasonable measure of alleged economic damages.  Furthermore, the expert did not offer any evidence of inappropriate conduct on the part of the defendant.  After incurring considerable expense, the plaintiff chose not to use the expert at trial.