The Economic Damage Gatekeeper

Daubert challenges to economic expert testimony
A free internet resource for attorneys with cases dealing with economic damages evidence

1.30.2005

By Line: Court upholds exclusion of economic damage testimony

Case: Storage Tech. Corp. v. Cisco Sys., Inc., No. 03-3673 (8th Cir. Jan. 26, 2005) (Loken, Gibson, & Bye, JJ.).

Reporting source: Daubert on the web (http://www.daubertontheweb.com/blog702.html)

Type of economic damage testimony: Lost profits due to trade secret appropriation, corporate raiding, and breach of contract

Overview of the relevant case facts:

Storage Tech alleged that NuSpeed, which was acquired by Cisco for $420 million, stole trade secrets and raided Storage Tech employees.

Synopsis of economic damage testimony:

Plaintiffs economic damages expert testified that the economic losses in this case were approximated by the amount ($420 million) that Cisco paid for NuSpeed.

Summary of court opinion dealing with economic damage testimony:
(click here to download full text opinion)

Storage Technology's entire evidentiary basis for a restitutionary remedy consisted of the report of its expert...that "Cisco's valuation of NuSpeed (basically, its key people and storage technology expertise) was $450 million and represents a proper valuation of the damages to Storage Technology and due to it for the trade secret appropriation, corporate raiding, and breach of contract and fiduciary responsibilities promulgated."

The district court rejected [the plaintiff's expert] opinion as "rank speculation.

Detailed comments on the economic testimony by The court:

* The first and most apparent problem with [the plaintiff's expert] testimony is that he attributed the entire value of the NuSpeed acquisition to employees and trade secrets wrongfully appropriated from Storage Technology, even though NuSpeed had other assets and employees.

* [The plaintiff's expert] opined, "The value inherent in the price Cisco paid for NuSpeed was in the key employees of NuSpeed who embodied the storage expertise technology Cisco sought." But [the plaintiff's expert] testified at his deposition that he did not know what the technology was.

* [The plaintiff's expert] later contended that the value of NuSpeed to Cisco was in the fifteen key employees named in the acquisition documents. Of these, five are listed as having come from firms other than Storage Technology. However, [the plaintiff's expert] did not know what percentage of NuSpeed's total employees were from Storage Technology at the time Cisco acquired the company. He did not know if the deal would have gone forward if the people listed had not agreed to go to Cisco.

*[The plaintiff's expert] was unwilling or unable to answer questions exploring what proportion of the acquisition price was attributable to what NuSpeed assets.

*Moreover, there is crucial evidence, which [the plaintiff's expert] does not take into account, that the reason Cisco was interested in NuSpeed was that NuSpeed had begun work on using iSCSI (a new technology) to access stored data. [the plaintiff's expert] did not take into account any value that may have resulted from the incorporation of the iSCSI standard [into Cisco's current operations]

Dispactches from the courtroom 1.20.2004

A ruling in support of the scientific method

Daubert motions commonly strike fear in the hearts of economic experts. However, as the courts become more and more aware of the techniques that are used by experts, the gatekeeping role of the courts has the potential of becoming less of a fearful burden for experts. In fact the gatekeeping role can actually help experts overall by keeping the level of work at a higher level and allow them to actually dig deeper into some of the more relevant scientific issue that underlie the economic expert analysis.

As reported on Daubertontheweb, The CA Court of Appeals upheld an exclusion of economic damage testimony that did rely on sound science. See below.

Daubertontheweb:

Its expert insisted that the Puerto Rico market was unique, and so he did not consult data from other markets or perform any regression analysis. "A witness who invokes 'my expertise' rather than analytic strategies widely used by specialists is not an expert as Rule 702 defines that term," said the Court of Appeals. If the expert "could or would not explain how his conclusions met the Rule's requirements, he was not entitled to give expert testimony. As we so often reiterate:

'An expert who supplies nothing but a bottom line supplies nothing of value to the judicial process.'"

See Zenith Elecs. Corp. v. WH-TV Broad. Corp., No. 04-1635 (7th Cir. Jan. 20, 2005) (Easterbrook, Kanne, & Evans, JJ.).

Dispatches from the courtroom 1.15.2005

In a Virginia wrongful death case, the Virginia Supreme Court concluded that the testimony of an economic expert witness in a wrongful death case should have been excluded because of its unreliability. Thanks to (SW VIrginia Law Blog)

In this case, the court concluded, among other things, that the plaintiff's expert utilized unrealistic assumptions to construct the economic damage report. The court found that the economists earnings projections did not comport with the facts in the case. Background concerning the economic experts testimony and excerpts from the court's decision can be found below in this post.

The bottomline: Using realistic assumptions is crucial. In this case, the court nor the defendants had any issue with the qualifications of the plaintiffs expert, it was his inability to build a economic damage model that was soundly based on the case facts that the courts took issue with.


Click here to download decision

Background on what the economist did (from the court's decision):

No objection was made to his [the economist's] qualifications. He testified that
Mrs. Mabini’s lost income and benefits would have amounted to
$121,533 if she had worked until age 60 and $203,145 if she
had worked until age 66. He gave the value of her lost
household services as $343,287 and reasonable funeral expenses
as $12,403.

His calculation of the total economic loss to the
beneficiaries was thus $477,223 based on retirement at 60 and
$558,835 based on retirement at 66. These conclusions were
necessarily dependent upon certain assumptions to which the
defendants objected:

*that the decedent would have found fulltime employment the day after the accident at a wage of $8.00 per hour ($16,000 per year) and

* would have remained so employed until retirement;

* that her employer would have provided additional contributions amounting to 3.7% of her income in the form of a “401(k)” or similar retirement benefit;

* that her income would increase by 4.25% per year, and that Pomeroy, her dependent adult son,

*would have continued to live 24 years into the future even though the witness knew that he had died before trial.

*The defendants also objected to the witness’ failure to consider the life expectancy of the
decedent’s husband in arriving at the economic value of her
lost household services.


The Court said (from SW Virginia Law Blog):


In Vasquez v. Mabini, the Virginia Supreme Court concluded that the testimony of an expert witness in a wrongful death case should have been excluded because of its unreliability.

The expert gave testimony based on assumptions that the decedent (who in life never made more than $7,000 in a year) would get a job paying at least $16,000 per year, get a 401(k) savings plan, get a bunch of raises, and so on.

The Court explained:"We have never, however, construed [Va. Code 8.01-401.1] to permit the admission of expert testimony that lacks evidentiary support. . . . Estimates of damages based entirely on statistics and assumptions are too remote and speculative to permit 'an intelligent and probable estimate of damages.' . . . .

Expert testimony founded upon assumptions that have no basis in fact is not merely subject to refutation by cross examination or by counter-experts; it is inadmissible. . . . Furthermore, expert testimony is inadmissible if the expert fails to consider all the variables that bear upon the inferences to be deduced from the facts observed."

Analyzing the expert's conclusions that the decedent would have obtained full-time work, what it would have paid, what raises she would have obtained, were all not based in fact, even where they involved otherwise valid statistics.

The Court concluded:"Because the expert testimony was based upon fictional assumptions not supported by the evidence, it was speculative and unreliable as a matter of law and should have been stricken."

Stock Options vs. Stock Purchase Programs

Injury, death, and employment cases frequently involve a plaintiff who has lost out on the value of company stocks that could have been purchased. Generally, the calculation of the number and the amount of company stocks is fairly straightforward. However the value of the lost shares is not as straightforward. The calculation of the value of the lost shares typically involves the use of sophisticated mathematical models such as the Black-Scholes model.

Here are the typical types of plans that the injured or deceased plaintiff could have had:

Employee Stock Option Plans:

Stock options plans give the employee the ability to purchase a specific number of shares of a company's stock at a future date at a pre-set price. Options are typically granted for a certain period of time. If individuals do not exercise the options before the end of the period, they expire and are forfeited. Also they must exercise them usually within 3 months of leaving the company. Note that until the individual exercises the option, they are not the owner of the stock.

Employee Stock Purchase Programs:

Stock purchase programs give the employee the ability to purchase a quantity of shares of a company’s stock within a certain time period at a discounted price of 10-15%. Employees typically use payroll deduction to purchase stock in a stock purchase program. These purchases must happen within the allotted time and the individual becomes the owner of the stock at purchase.

Can an economist affect the damages awarded?

From Gerald Martin’s Determining Economic Damages, section 104, 2004:

“Not all attorneys use an economist, nor are they convinced of the value of using one. For those who do not think an economist makes a difference, some numbers may be illuminating. Dr. Robert Trout of Spectrum Economist (619 Vulcan Ave., Suite 210, Encinitas, CA 92024, phone (619) 944-9721) examined over 1,000 cases in California in the year ending in July 1988. Included were cases where neither side used an economist, where only the plaintiff used one, where only the defendant used one, and where both sides retained an economist.

“When neither side used an economist, the average award was $180,317. When the plaintiff retained an economist, and defendant did not, the average award jumped dramatically to $418,355. This, alone, should alert defense to the possible need for some economic expertise. To emphasize this, in the cases where both sides used an economist, the award dropped all the way to $98,567. This is certainly not conclusive proof of the value of an economist to your case, but it is food for thought by both sides.”