Economic Testimony: The Good, the Bad, and the Ugly
Expertise and Work History
Breach of Contracts and Agreements
Contracts and agreements are usually formed when both parties have similar expectations and are otherwise fully informed. When expectations fail to materialize, a party may find it necessary to breach a contract. RRC is experienced in evaluating losses associated with a breach and in evaluating changes in market conditions that allegedly cause a breach. RRC has experience regarding business interruption insurance, non-competing buyout contracts, take-or-pay purchase contracts, cost-plus subcontractor contracts, expedient performance contracts, best efforts clauses, theft of proprietary information, and others.
Damage Theory and Measurement
The measurement of damages should be derived from a consistent damage theory. Too often parties either misunderstand the sources of damages or seriously impair credibility when expanding damage estimates. Lost profits often entail an analysis of opportunities foregone, evaluated in the context of industry growth. Firm capacity is sometimes viewed as fixed over an extended period when, in fact, firms alter capacity as growth opportunities appear. Measurement of future damages always brings into question the relation between inflation and the discount rate. Since RRC forecasts both inflation and interest rates for non-litigation related clients, the development of proper discounting methods is viewed with an added element of objectivity. Consideration of risk adjustments and formulation of the correct risk-adjusted discounted profit stream are performed when appropriate.
Discrimination
RRC's research of labor markets and life cycle examinations of trades and professions provides valuable supporting arguments in discrimination cases. In its work with clients, RRC has successfully estimated the value of labor services among employee groups and evaluated the representativeness of a firm's labor force to that of appropriate labor markets. Economic theory maintains that market wages, in a competitive market, reflect the marginal value of labor to the employing industry. New research findings have underscored the importance of human resource accounting and the value of employee experience and expertise to the employer.
Monopolization and Attempt to Monopolize
The theory of monopoly power is generally understood by the courts. However, measurement of monopoly power entails an examination of competitors, a supportable definition of the relevant market, and an evaluation of possible barriers to entry. Under Rule of Reason, economists must often reconcile collected evidence with existing economic studies. Economists often deal with evidence of market shares from industry periodicals in offering an appropriate definition of the relevant market. In most courts, statistical estimates of market share alone are not persuasive. Discovery and deposition testimony often uncover evidence of intent and corporate goals which assist in the interpretation of alleged anti-competitive behavior.
Price-fixing
Price-fixing in a market must not be confused with price leadership and the pricing practices of dominant firms. Competition implies a degree of price dispersion that can be statistically evaluated. An effective price conspiracy that alters prices in a market necessarily alters quantities in predictable directions. For plaintiffs, such pricing evidence must be inconsistent with reflections of a competitive market and must relate to other supporting evidence. An effective cartel must successfully allocate quantities and police member pricing and output decisions. Occasionally, channels of communication can be critical to the survival of an effective cartel, especially within an industry with several member firms. Reasonable doubt is often found in the ease of entry, taking into account financial risks associated with start-up investments, regulatory uncertainty, and other factors.
Monopsony Purchasing
The consequences of monopsony purchasing are observed either as a reduced quantity of goods or services purchased and/or a price paid that is below internal valuation at the margin. Size of the purchasing market does not necessarily imply monopsony purchasing. The reduced quantity of goods or services purchased by a monopsonist yields predictable consequences in terms of production and final output decisions. Plaintiffs must often consider the importance of available factor substitutes, the price elasticity of supply, and the extent of redistribution of supplied products across other purchasers. The economic evidence required to support a monopsony suit can be a limiting factor. Occasionally, defendant firms maintain admissible evidence of internal valuations of inputs which may appear equal to the purchased price.
Boycotts
Economic boycotts are designed to alter the demand for a good or service through an organized conspiracy. Evidence of an effective conspiracy is often difficult to assemble; evidence of a change in demand is even more difficult to document. A change in demand must be isolated from other influencing factors. Evidence sometimes comes from cross-sectional data that can eliminate the complications of business cycles or seasonal changes. Plaintiffs must be able to prove the existence of an organized boycott and the resulting measurable reduction in the demand for the product. The empirical evidence necessary to support the plaintiff's case require significant empirical analysis.
Product Distribution and Resale
Most manufacturers utilize resellers to market their products, often requiring dealers to agree to vertical restrictions on displays, inventories, minimum orders, credit terms, and territorial boundaries. Legal disputes often focus upon the effects of vertical restrictions on intra-brand competition and the resulting impact upon inter-brand competition. Restrictions must be evaluated as potential efficiency-enhancing methods of competition. Economists are asked to evaluate the impact of certain vertical restrictions, both as per se violations and as violations under the Rule of Reason. Important statistical evidence is sometimes found among distributors' files, industry association reports, and competitors' sales records. Discovery in such disputes is important in developing the necessary economic evidence. To the extent that sufficient monopoly power must be shown, discovery from competitors can be the only reliable source of usable data.
Product Liability and Warranty
The sale of goods or services can carry an express and implied warranty, a contractual promise, regarding the nature of the product. In a product liability suit based on breach of warranty claims, the plaintiff is asserting that the product failed to live up to the seller's promise. Plaintiffs in implied warranty cases may be asked to show that the product was not merchantable at the time of the sale, that the failure of the product was the proximate cause of the injury, and that notice of the product failure was given to the seller within a reasonable time after discovery of the breach. Defendants are protected by a statute of limitations and the possible defenses of product misuse, assumption of risk, and contributory negligence. Evidence in warranty liability cases is most often gathered through the discovery process and through fact witness depositions.
Price Discrimination
The statutory defense of cost justification against price discrimination suits can be expensive to develop and is rarely argued in the courts. Functional discounts, however, can sometimes present an effective defense alternative when downstream customers are providing a significant cost-saving service. Usually the courts must understand the functioning distribution system and the competitive requirements in the marketplace. With continuing upstream vertical integration in many retail sectors, the traditional trade discount is being redefined. It is becoming more important to track the value of goods through the distribution channel. Some distributional efficiencies have become competitive necessities. As case law under Robinson-Pattman continues to evolve, economic analysis has been redirected in order to present effective economic testimony.
Predatory Pricing
While the conditions under which predatory pricing makes economic sense are rare, there are observable implementations of predatory pricing designed to eliminate a competitor. However, under the Areeda-Turner rule, establishing proof of predatory pricing is difficult in some Federal courts. When a firm sells one product at a reduced price, it can lose sales of a substitute product it also markets. At least one recent court decision has attacked the inclusion of lost sales of substitute products as a component of the relevant measure of cost, but another has permitted its inclusion in support of the predatory pricing argument. For some industries, the loss of alternative revenue in product pricing is a substantial component in measuring the firm's short run loss (or investment in market power). In these industries, the broader economic analysis of the firm's choices is critical to the determination of the relevant measure of cost. In any predatory pricing suit, the evaluation of barriers to entry remains a key component in the analysis. Some recent cases have extended the application of the predatory model to predatory buying.
Risk Analysis and Financial Instruments
The creation of new financial instruments in the financial markets has been followed with suits contending negligence or fraud on the part of the party trading in these new instruments. Banks and large corporations have made use of financial derivatives in hedging against detrimental market swings. The intended purpose of many of these financial instruments is to reduce risk. Plaintiffs' suits typically argue that the result of taking positions in these instruments is higher risk and substantial loss or that marketing information did not explain the true risks. Corporate officers are sometimes alleged to have overvalued these assets, thereby misleading investors. The courts must understand the nature of these financial instruments and the degree to which their values change with market conditions. Economic analysis is useful in establishing a reasonable basis for valuing these instruments and illustrating the risk-reducing objectives of the parties involved. In some instances it is important to explain the use and purpose of risk-adjusted discount rates in determining the values of certain assets.
Merger Analysis
Mergers of large companies and combinations of competitors in joint efforts must pass the antitrust scrutiny of the Department of Justice and the Federal Trade Commission. Geographic and product market reports and analyses submitted by prospective merging partners must address the antitrust concerns of the regulators. RRC has assisted industries in influencing the final determination of DOJ Guidelines which define the "safe harbors" of activities. RRC has been selected by regulators to review applications for joint projects which can be awarded a "safe harbor" certification. RRC's experience in antitrust issues can assist businesses in lowering the regulatory compliance costs of merger proceedings and joint efforts among competitors.
Personal Injury and Wrongful Death Damages
The methodological approach to assessing personal injury and wrongful death damages is more uniform from case to case than analyses in commercial litigation. Nevertheless, there are choices to make competently in performing such analyses. Proper education and experience are crucial for these choices which, to be accurate, require an understanding of the methodology, the data used, the interest rates employed, and sources on which accurate analyses are based. In trial, a clear presentation is essential, but much credibility depends upon competent responses to cross examination. Issues commonly addressed include lost income and benefits, life cycle of income, taxes, lost household services, discounting for time, continuing medical expenses, among others. Analyses of personal injury and wrongful death damages must be efficiently conducted, evidence based, and competently conveyed to a jury.
