On the right discount factor in injury cases...

What is wrong with using a high discount factor in present valuing the lost earnings of an injured person?

Nothing; unless it requires the investor to injured person become a successful stock market speculator!

For most economists, the ultimate goal of a present value calculation is to determine how much money would have to be invested today to replace the earnings that a person would have earned over their work life. The key term is invested.

In an injury case the person will be given a lump sum of money and will have the responsibility of investing that money into an investment that will earn a rate of return. The person’s estimated lost lifetime of earnings will replaced by periodically withdrawing some of the lump sum and some of the interest that is earned on the investment.

According unless there is some incredibly compelling reason, it should not be assumed that the injured person will have either the desire or the ability to earn extraordinary rates of return on their chosen investment.

What does this mean? It means that economic analyses should not use an unreasonably high discount rate (and unrealistically lower economic damages) because it would in fact require the injured person to in effect become a successful stock market speculator. For instance, while some economists use a mix of low risk and low return investments such as treasury bills others use discount factors based on the returns from stocks and bonds.

Courts have generally agreed that interest rates should be based on low risk/return investments (i.e. investments with below market returns) and not stock market based returns. A number of courts have flat out rejected discount factors based on stock market and mutual fund returns. Here is one example.

Hogans v. United States, 2005 U.S. Dist. LEXIS 32359 (W.D.Tex. 2005).

This case involved Dr. Don Huddle as an economic expert for the plaintiff and Dr. Stan Smith as an economic expert for the defendant. The Court held that Dr. Huddle’s method: “followed the ‘below market’ rate method required by the Fifth Circuit as stated in Culver v. Slater Boat Co., 722 F.2d 114 (5th Cir. 1983). His discount rates of 1.2 percent for future medical cost and 1.0% for future lost earnings fall squarely within the example of proper below-market discount rates set forth in Culver.”

The Court said of Dr. Smith: “The methodology employed by defendant’s economic expert, Dr. Smith, violates Culver because Dr. Smith relied primarily on a market methodology specifically disapproved by the Fifth Circuit Court of Appeal’s below market requirements. Dr. Smith’s high discount rate of 7.42% fails the Culver test because Dr. Smith’s methodology employs a 2/3 (65%) reliance on the stock market’s average over the highest performing period in the market’s history, and Culver maintains a below method that distinguishes a seriously injured plaintiff’s need to sustain his or her future economic needs after suffering a serious injury from speculating investors willing and able to accept some risk for a potentially higher return on their investments.”

Minimizing Economic Damages - Why Defense Attorneys MUST present Economic Damage Estimates to a Jury

The attorney blogger John Day at Day on Torts, http://www.dayontorts.com/, reports on wonderful article written by trial consultants ( http://www.trialbehavior.com/articles/Strategies%20for%20Minimizing%20Damages.htm) that lays out the Pros and Cons of presenting economic damage numbers to a jury. In a nutshell, they believe that defense should present damages estimates to a jury to provide an anchor:

(Excerpt from trialbehavior.com)
Give jurors strong defense damage anchors

Because of the severity shift, it is essential for the defense to give reasonable defense damages anchors to jurors. It is of course often tough to argue both for zero liability and to argue damages, but research is quite clear that without a “low” anchor to balance the plaintiff demand, jurors will use the plaintiff demand as the focal point of their discussion and compromise and ultimately award a higher damage award than if given an alternate, lower defense number. That defense number must be reasonable, however, and based in some reality.

...... there is also a substantial body of psychological research on the importance of “anchors” when people are involved in an ambiguous situation where there are no external guidelines or benchmarks. My feeling is that there are effective ways to handle the contradictions. Failing offering a low number anchor in a situation where there is a good chance you will lose on liability seems too risky.

Since plaintiff numbers are often not based in reality, the defense can help defense-oriented and low-damages jurors considerably by giving a number or numbers that are clearly backed up by discussing the value of the money. How much would this money really buy of whatever it is the plaintiff needs? Tie the amount to real-world expenditures and possibilities to help take it out of the realm of play and into the common sense worlds of bills and payments that jurors know.

For example, in a recent wrongful death case in which a mother died in a terrible accident, leaving behind minor children, we recommended the defense argue for an award of $1 million each for the minor children, explaining that an excellent college education would cost $50,000 a year, or $200,000, leaving the still large sum of $800,000 for a child to invest, start a business, and buy a house. Explain how compound interest works and show jurors the amount of interest that would grow in a conservatively invested $100,000 or $1,000,000. Talk about how much it would take to create a financial security plan—shift the language away from “damage awards” to discussions of how to meet the human needs of the plaintiff(s).

The complete article can be found @ ( http://www.trialbehavior.com/articles/Strategies%20for%20Minimizing%20Damages.htm)

The importance of economic damage experts in employment cases

In far too many cases, defense attorneys underestimate the importance of economic damage experts in employment discrimination cases. Here is an example posted on Ross' Employment Law Blog, where the defense's failure to show that there was comparable work available for the plaintiff cost them a cool $1 million.

Background:

Bruce Hope, a gay man, won a jury verdict for $914,104 in economic damages plus $1,000,000 in non-economic damages. On November 30 the California Court of Appeal affirmed. Hope v. California Youth Authority (California Ct App 11/30/2005).

Hope worked as a cook in one of California's youth correctional facilities. He claimed that he was harassed - because he was gay - over a period of about five years. The jury agreed. The employer appealed, arguing that the verdict was not supported by the evidence.

The economic damage award:

Economic damages - $914,104.

The jury implicitly found that Hope would have worked for the state until retirement age but for the harassment.

Although Hope was HIV positive, he had no obligation to prove that he had a normal life expectancy. He didn't have AIDS, and was responding well to medication.

Although the employer argued that Hope did not prove he could never work again, it was the employer's burden to prove what he would have earned.

The court's opinion:

At trial, there were “dueling” experts testifying about whether Hope could work
again. Hope himself made clear that he wanted to go back to work. But CYA offered no evidence as to the amount that Hope might have earned through reasonable effort.

Nor did CYA make any showing about the availability of comparable or substantially similar
employment. For these reasons, CYA’s mitigation argument fails.

What would Daubert say about those damages? 12.01.05

The situation

Plaintiff is discharged from a job. Ten months later, the plaintiff obtains a substantially equivalent position. After 3 months in the new position, plaintiff voluntarily resigns. There is no reason to believe the plaintiff would not have been able to remain in the job indefinitely. Plaintiff's attorney wants to argue that the earnings in the second job are not mitigating earnings, since the plaintiff resigned?

Does this make sense? What would Daubert say?


Some economists and vocational experts think so:

Voc. Expert and Economist #1 Says:

"I would think that the plaintiff's claims may have merit. Just being hired for a job (placeability) has little to do with the ultimate ability to complete the job tasks and be successful in this position (employability). A comprehensive vocational evaluation would suggest jobs in which the plaintiff could expect long-term success and these positions would be mitigating in nature.

Success on the job is a combination of having the appropriate skills to complete the essential job tasks required in that position AND a general liking of the job and all that it entails...I imagine that there are many jobs for which I would qualify but that I would have a total disgust of doing. In my opinion, it is not the responsibility of the plaintiff to mitigate losses by working in a position which may contribute to long-term frustration, stress, etc.

Voc Expert and Economist #2 Says:

I believe vocational experts can make a strong argument that interests and temperaments should be taken into account in evaluating losses and appropriate mitigation.

Stress (or properly, unhealthy reaction to stress)is the secret killer in our economy. It results from a poor match between work and worker. Chronic pain, either physical or emotional, is a contributor. Previously embedded triggers need to be identified and taken into account in the selection of mitigating employment. Without such analysis we may set the plaintiff up for failure.