FORENSIC ECONOMICS & SCIENTIFIC EVIDENCEScott GilbertEconomics DepartmentSouthern Illinois University Carbondale

Comments? Please send to: gilberts@siu.edu

Source: Barry Ritholtz, http://www.ritholtz.com

Outline• What is forensic economics?• The tribe of forensic economists (FE)• What they say: FE opinion• Case Study: Carlisle v. Illinois Central Railroad• Cowboys or Cogs? FE procedure • Scientific Evidence • Court interpretation of economic evidence• Best FE practices

What is forensic economics?The use of economic theory and statistics to identify pecuniary remedies for economic damages.  

Examples:• lost future income in cases of injury, death, job loss• lost future profits in cases of business loss• future income in divorce cases

The tribe of forensic economistsWho are they? National Association of Forensic Economics (NAFE) - about 600 members - about 300 Ph.D. economists - about 150 Ph.D. economics professors Some publish research in Journal of Forensic Economics - about 100 NAFE Ph.D. econ. profs. publish in JFE

..and some present their research at NAFE meetings - about 75 NAFE Ph.D. econ profs. publish in JFE

and present at NAFE meetings

Source: drawinghowtodraw.com

Forensic economists are: - a small tribe - highly specialized expert witnesses, mainly in: personal injury, wrongful death, wrongful termination, contract disputes - mostly solo practitioners or small firms - a vibrant community, via NAFE’s online discussion board & others (AAEFE) - self-policing, via NAFE code of ethics

NAFE Ethical Statement

1. EngagementPractitioners of forensic economics should decline involvement in any litigation when they are asked to assume invalid representations of fact or alter their methodologies without foundation or compelling analytical reason.

2. CompensationPractitioners of forensic economics should not accept contingency fee arrangements, or fee amounts associated with the size of a court award or out-of-court settlement.

3. DiligencePractitioners of forensic economics should employ generally accepted and/or theoretically sound economic methodologies based on reliable economic data. Practitioners of forensic economics should attempt to provide accurate, fair and reasonable expert opinions, recognizing that it is not the responsibility of the practitioner to verify the accuracy or completeness of the case-specific information that has been provided.

Ethical Statement, continued

4. DisclosurePractitioners of forensic economics should stand ready to provide sufficient detail to allow replication of all numerical calculations, with reasonable effort, by other competent forensic economics experts, and be prepared to provide sufficient disclosure of sources of information and assumptions underpinning their opinions to make them understandable to others.

5. ConsistencyWhile it is recognized that practitioners of forensic economics may be given a different assignment when engaged on behalf of the plaintiff than when engaged on behalf of the defense, for any given assignment, the basic assumptions, sources, and methods should not change regardless of the party who engages the expert to perform the assignment. There should be no change in methodology for purposes of favoring any party's claim. This requirement of consistency is not meant to preclude methodological changes as new knowledge evolves, nor is it meant to preclude performing requested calculations based upon a hypothetical--as long as its hypothetical nature is clearly disclosed in the expert's report and testimony.

Ethical Statement, continued

6. KnowledgePractitioners of forensic economics should strive to maintain a current knowledge base of their discipline.

7. DiscourseOpen, uninhibited discussion is a desired educational feature of academic and professional forensic economic conferences. Therefore, to preserve and protect the educational environment, practitioners of forensic economics will refrain from the citation of oral remarks made in an educational environment, without permission from the speaker.

8. ResponsibilityPractitioners of forensic economics are encouraged to make known the existence of, and their adherence to, these principles to those retaining them to perform economic analyses and to other participants in litigation. In addition, it is appropriate for practitioners of forensic economics to offer criticisms of breaches of these principles.

NAFE Members, by State

Lawyers, by State

What they say: FE opinionCenters on economic damage appraisal - includes past losses (before trial date) & future losses (after trial date) - bottom line: “present value” of losses

Are FEs human calculators? - if yes, cheaper to buy a digital one

- but good FEs creatively identify pecuniary remedies, when needed

Case StudyRobert Carlisle v. Illinois Central Railroad Co.(Case Number 2007-L-17, First Judicial Circuit, Illinois state court)

- personal injury case, injured railroad worker - lost wages, past & future - forensic economist hired by plaintiff’s attorney -- uses statistics to estimate wages -- uses market data to determine discount rate -- econ. damages estimate: $1.184 million - case settles

Retirement Age

Past Losses2

Discounted Future Lost Income3

Discounted Future Lost Fringe Benefits4

Discounted Future Lost Household Services5

Total Economic Losses

67 $151,240 $779,284 $153,597 $99,773 $1,183,854

Economic Damages for Robert CarlisleDecember 2007

After-tax income in 2008 = $53,595

12008 before tax income of $61,061. State plus federal average income tax rate = 12.23%2Past losses in 2005, 2006 and 2007 based on before tax income of $61,061. Includes past lost wages and past lost household services. 3Net discount rate = 1.5%.4Net discount rate = 1.5%. Fringe benefit loss begins January 1, 2008. Fringe benefits include lost medical insurance valued at 17.3% of before tax income.5Net discount rate = 2.0%. Annual loss of household services = $5,488 in 2008.

Cowboys or Cogs? FE Procedure

Reference Manual of Scientific Evidence (3rd edition) Section on economics: “Reference Guide on Estimation of Economic Losses in Damages Awards” by Robert Hall & Victoria Lazear

- Broad survey of procedure, with examples - Citation of relevant case law and statutes

Source: 321coloringpages.com   Sourceclker.com 

Table 4. Plaintiff’s Damages Analysis (in Millions of Dollars)

(2)Earnings (3) (5) (6)

(1) but for Actual (4) Discount DiscountedYear Misconduct Earnings Loss Factor Loss1996 $187 $34 $153 $1.21 $1851997 200 56 144 1.14 1641998 213 45 168 1.07 1801999 227 87 140 1.00 1402000 242 96 147 0.96 1412001 259 105 153 0.92 1422002 276 116 160 0.89 1422003 294 127 167 0.85 143Total 1,237

Example from Reference Manual (2nd ed.), lost profits:

- Total damages of $1.237 million- Other opinions are possible, depending on economic assumptions- Manual treats assumptions as flexible. FEs are not “cogs”.

Scientific Evidence

Case study: Thomas Bruno v. BVC Entity1 (wrongful termination)

FE opinion: “Within a reasonable degree of economic certainty, and based on the facts and analysis contained in this report, it is our professional opinion that the total present value of pecuniary losses to Thomas Bruno amounts to between $2,461,115 and $4,774,286.”

1Source: expert’s report : “A Revised Appraisal of Economic Loss to Thomas Bruno”, by Kristin K. Kucma and Frank D. Tinari, currently online at nelanj.org.

Year Portion ofYear

Projected GrossEarnings[@3.9%]

Projected Adjusted Earnings

[(2)x(3)x75.53%]

Present Value[@4.75%]

CumulativePresent Value

(1) (2) (3) (4) (5) (6)

2011 75% $464,432 $263,089 $263,089 $263,089

2012 100% 464,432 350,785 334,879 597,968

2013 100% 464,432 350,785 319,693 917,661

2014 100% 464,432 350,785 305,196 1,222,858

2015 100% 464,432 350,785 291,357 1,514,215

2016 100% 464,432 350,785 278,145 1,792,360

2017 100% 464,432 350,785 265,532 2,057,892

2018 100% 464,432 350,785 253,491 2,311,384

2019 100% 464,432 350,785 241,997 2,553,380

2020 100% 464,432 350,785 231,023 2,784,403

2021 100% 464,432 350,785 220,547 3,004,950

2022 100% 464,432 350,785 210,546 3,215,497

2023 47% 464,432 164,869 94,469 3,309,966

Case Law

Fry General Acceptance Test (Fry v. U.S., 1923)

Is the expert’s approach generally accepted by the relevant scientific community?

Daubert/Joiner/Kumho Tire “Trilogy”

- Daubert v. Merrell Dow Pharms. Inc. (1993) - General Electric Co. v. Joiner (1997) - Kumho Tire Co. v. Carmichael (1999) → Stronger test: scientific knowledge, reliability

Federal Statute

FRE Rule 702: Testimony by Expert WitnessesA witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if:(a) the expert’s scientific, technical, or other specialized knowledge

will help the trier of fact to understand the evidence or to determine a fact in issue;(b) the testimony is based on sufficient facts or data;(c) the testimony is the product of reliable principles and methods; and(d) the expert has reliably applied the principles and methods to the

facts of the case.

Bruno v. BVC case, continued:

(a) expert is a forensic economist (econ. Ph.D., NAFE member, JFE author) (b) data used by FE: plaintiff’s employment records & personal history, market interest rates, statistical estimates of worklife and retirement age, government tax tables (c) principles and methods: discounting, present value, “gross up” tax adjustment (d) combines principles, methods & data to assess Mr. Bruno’s economic damages range: $2,461,115 to $4,774,286.

Is this scientific? Yes, if FE’s assumptions are accepted.

Court interpretation of econ. evidenceFederal Supreme CourtJones & Laughlin Steel Corporation etc. v. Howard E. Pfeifer 462 U.S. 523 (103 S.Ct. 2541, 76 L.Ed.2d 768)

(a) The two elements that determine the calculation of a damages award to a permanently injured employee in an inflation-free economy are the amount that the employee would have earned during each year that he could have been expected to work after the injury, and the appropriate discount rate, reflecting the safest available investment.

(b) In an inflationary economy, inflation should ideally affect both stages of the calculation described above. This Court, however, will not at this time select one of the many rules proposed by the litigants and amici in this case and establish it for all time as the exclusive method in all federal courts for calculating an award for lost earnings in an inflationary economy. First, by its very nature the calculation of an award for lost earnings must be a rough approximation. Second, sustained price inflation can make the award substantially less precise. And third, the question of lost earnings can arise in many different contexts. 

The Jones decision stipulates relevant factors: - expected income stream - discount ratebut declines to say how these factors are to be used when determining economic damages.

UPSHOT Starting from reasonable assumptions, damage estimates can be inferred via economics. But there are many reasonable assumptions.

Recent Findings

Bi-Market Economy, Inc. v. Harleysville Ins. Co. of New York (NY 2008)

“Damages for the loss of future profits must proven with reasonable certainty and be capable of measurement based upon known reliable factors without undue speculation.”

Helpin v. Trustees, U. of Penn., 10 A.3d 267 (PA 2010)

“the calculation of an award for lost earnings must be a rough approximation. . . not . . .based on mere guesswork or speculation, but rather requires a reasonable basis to support such an award.”

Best FE Practices - identify pecuniary remedies for economic damages - state assumptions, discuss them if needed

- document data sources & methods

- explain remedies in terms understandable to a typical American

- explore alternative assumptions, when reasonable

What are pecuniary remedies for?

Make-Whole PrincipleA pecuniary remedy for economic damages should make the plaintiff whole, restoring the plaintiff to the pre-loss economic position, or as near to that position as possible.

How? - payment for past losses - investment fund to cover future losses, facilitated via “lump sum” or structured settlement

pre-tax post-tax tax on fundyear age earnings earnings interest interest value2007 $805,0302008 51 61061 53595 53132 5007 7995602009 52 64175 56328 52771 4973 7910302010 53 67448 59201 52208 4920 7791172011 54 70888 62220 51422 4846 7634732012 55 74503 65394 50389 4748 7437202013 56 78303 68729 49086 4626 7194512014 57 82296 72234 47484 4475 6902272015 58 86493 75918 45555 4293 6555712016 59 90905 79790 43268 4077 6149722017 60 95541 83859 40588 3825 5678772018 61 100413 88136 37480 3532 5136892019 62 105534 92631 33903 3195 4517672020 63 110917 97355 29817 2810 3814192021 64 116573 102320 25174 2372 3019012022 65 122519 107538 19925 1878 2124112023 66 128767 113023 14019 1321 1120862024 67 135334 118787 7398 697 0

Example 1: Future Loss Fund for Thomas Carlisle

← PV

pre-tax post-tax tax on fundyear age earnings earnings interest interest value2007 $579,9572008 51 61061 53595 38277 3607 5610322009 52 64175 56328 37028 3489 5382432010 53 67448 59201 35524 3348 5112182011 54 70888 62220 33740 3179 4795592012 55 74503 65394 31651 2983 4428332013 56 78303 68729 29227 2754 4005782014 57 82296 72234 26438 2491 3522902015 58 86493 75918 23251 2191 2974332016 59 90905 79790 19631 1850 2354242017 60 95541 83859 15538 1464 1656392018 61 100413 88136 10932 1030 874052019 62 105534 92631 5769 544 0

← PV

Example 2: Future Losses, alternative worklife

Questions