1. FORENSIC ECONOMICS & SCIENTIFIC EVIDENCE Scott Gilbert Economics Department Southern Illinois University Carbondale Comments? Please send to: gilberts@siu.edu

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

3. 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

4. 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

5. The tribe of forensic economists Who 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

6. 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

7. NAFE Ethical Statement 1. Engagement Practitioners 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. Compensation Practitioners 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. Diligence Practitioners 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.

8. Ethical Statement, continued 4. Disclosure Practitioners 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. Consistency While 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.

9. Ethical Statement, continued 6. Knowledge Practitioners of forensic economics should strive to maintain a current knowledge base of their discipline. 7. Discourse Open, 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. Responsibility Practitioners 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.

10. NAFE Members, by State

11. Lawyers, by State

12. What they say: FE opinion Centers 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

13. Case Study Robert 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

14. Retirement Age Past Losses 2 Discounted Future Lost Income 3 Discounted Future Lost Fringe Benefits 4 Discounted Future Lost Household Services 5 Total Economic Losses 67$151,240$779,284$153,597$99,773$1,183,854 Economic Damages for Robert Carlisle December 2007 After-tax income in 2008 = $53,595 1 2008 before tax income of $61,061. State plus federal average income tax rate = 12.23% 2 Past losses in 2005, 2006 and 2007 based on before tax income of $61,061. Includes past lost wages and past lost household services. 3 Net discount rate = 1.5%. 4 Net 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. 5 Net discount rate = 2.0%. Annual loss of household services = $5,488 in 2008.

15. Cowboys or Cogs? FE Procedure Reference Manual of Scientific Evidence (3 rd 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

16. Table 4. Plaintiff’s Damages Analysis (in Millions of Dollars) (2) Earnings(3)(5)(6) (1)but forActual(4)DiscountDiscounted YearMisconductEarningsLossFactorLoss 1996$187$34$153$1.21$185 199720056144 1.14164 199821345168 1.07180 199922787140 1.00140 200024296147 0.96141 2001259105153 0.92142 2002276116160 0.89142 2003294127167 0.85143 Total 1,237 Example from Reference Manual (2 nd 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”.

17. Scientific Evidence Case study: Thomas Bruno v. BVC Entity 1 (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.” 1 Source: 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.

18. YearPortion of Year Projected Gross Earnings [@3.9%] Projected Adjusted Earnings [(2)x(3)x75.53%] Present Value [@4.75%] Cumulative Present Value (1)(2)(3)(4)(5)(6) 201175%$464,432$263,089 2012100%464,432350,785334,879597,968 2013100%464,432350,785319,693917,661 2014100%464,432350,785305,1961,222,858 2015100%464,432350,785291,3571,514,215 2016100%464,432350,785278,1451,792,360 2017100%464,432350,785265,5322,057,892 2018100%464,432350,785253,4912,311,384 2019100%464,432350,785241,9972,553,380 2020100%464,432350,785231,0232,784,403 2021100%464,432350,785220,5473,004,950 2022100%464,432350,785210,5463,215,497 202347%464,432164,869 94,4693,309,966

19. 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

20. Federal Statute FRE Rule 702: Testimony by Expert Witnesses A 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.

21. 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.

22. Court interpretation of econ. evidence Federal Supreme Court Jones & 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.

23. The Jones decision stipulates relevant factors: - expected income stream - discount rate but 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.

24. 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.”

25. 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

26. What are pecuniary remedies for? Make-Whole Principle A 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

27. pre-taxpost-taxtax onfund yearageearnings interest value 2007$805,030 2008516106153595531325007799560 2009526417556328527714973791030 2010536744859201522084920779117 2011547088862220514224846763473 2012557450365394503894748743720 2013567830368729490864626719451 2014578229672234474844475690227 2015588649375918455554293655571 2016599090579790432684077614972 2017609554183859405883825567877 20186110041388136374803532513689 20196210553492631339033195451767 20206311091797355298172810381419 202164116573102320251742372301901 202265122519107538199251878212411 202366128767113023140191321112086 20246713533411878773986970 Example 1: Future Loss Fund for Thomas Carlisle ← PV

28. pre-taxpost-taxtax onfund yearageearnings interest value 2007$579,957 2008516106153595382773607561032 2009526417556328370283489538243 2010536744859201355243348511218 2011547088862220337403179479559 2012557450365394316512983442833 2013567830368729292272754400578 2014578229672234264382491352290 2015588649375918232512191297433 2016599090579790196311850235424 2017609554183859155381464165639 2018611004138813610932103087405 2019621055349263157695440 ← PV Example 2: Future Losses, alternative worklife

29. Questions