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Len Watkins
Joshua Genser
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Offices
in Point Richmond and Emeryville
125 Park Place, Suite 210
Point Richmond, CA 94801
Phone: 510-237-6916
Fax: 510-236-9851
2200 Powell Street, Suite 890
The Watergate Office Towers
Emeryville, CA 94608
Phone: 510-237-6916
Fax: 510-236-9851
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Economists
and Accountants as Expert Witnesses on Damages
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The
most common purpose for which attorneys retain accountants
and economists as expert witnesses is to testify to
the amount of damages the plaintiff did or didn't suffer.
Damages are, usually, the net present value of a future
stream of income the plaintiff would have received
but for defendant's wrongful act. The art of proving
damages is in the determination of the amount of that
future stream of income. Whether an economist should
be hired, in addition to or instead of an accountant,
depends largely on the degree of uncertainty in the
projection of future income, and on how aggressively
each party wants to argue its position on damages.
Contrast, for example, two personal injury cases. In one, the plaintiff
is a stockbroker who has suffered permanent and disabling injuries,
rendering her unable to pursue her former occupation. In the other,
the plaintiff is a plumber who has suffered similarly disabling injuries.
A major component of damages in both cases is the net present value
of the income the plaintiffs would have earned from continuing to
pursue their chosen vocations.
Any damages expert will first want to determine the plaintiff's income
history. This task is obviously within an accountant's expertise,
but most economists ought to be able to gather this information too.
However, should the plaintiff's records not have been kept well,
common in small businesses, then the accountant is clearly favored
over the economist for this part of the job.
The next task is to project into the future the income that the plaintiff
would have received. Given a sufficiently long and well-documented
history, this can be done by projecting past performance forward.
That is, if plaintiff was making $100,000 per year at the time of
the accident, and her income had been increasing at a rate of 20%
per year for five years, it could be argued that plaintiff would
have made $120,000 in the year following her injury, $144,000 the
year following that, and so forth. Any expert ought to be able to
do this, and it makes for a simple presentation to the jury.
The very simplicity of such a linear projection is also its greatest
weakness. It is too easy to poke holes in such testimony by forcing
the expert to admit that many factors could affect the plaintiff's
future income and divert it from the linear path it seemed to have
followed for the past five years.
Among those factors are: the maturity of plaintiff's business (i.e.
revenues of a new business often grow dramatically, at first, but
the growth cannot be sustained indefinitely); demographic changes
in the plaintiff's market area; changes in technology; changes in
the economy; and regulatory and legal changes.
The expert who has not taken such factors in account will lose some
credibility. Moreover, if the plaintiff's income history is not lengthy
or not well documented, then history's power as precedent is diminished.
Thus, if the parties' budgets permit, more creative analysis is recommended.
The more creative analysis, of course, examines precisely the same
factors used to attack the linear projection of the plaintiff's future
income. For example, an expert might testify that the future income
of a stockbroker depends on trends in prices of various investment
products, expected commission rates, changes in the regulatory environment
governing the business, the performance of the national, regional
and local economies, and the number of brokers in competition. In
the plumber's case, future income might be a function of local housing
growth, technological changes in pipe materials and household chemicals,
aging of the existing housing stock, and growth of local competition.
To create a truly sophisticated model, the expert should take each
of these factors, hypothesize various alternative futures, and apply
to them probabilities of coming true.
To illustrate using only one of the factors to study in estimating
the stockbroker's future income, assume that the plaintiff makes
a commission of five percent on transactions involving common stocks,
three percent on transactions in bonds, and one percent on transactions
involving mutual funds. The defense expert might concentrate on the
trend away from stock purchases by individual investors, who are
relying more and more on the judgments of mutual fund managers. Thus,
a reasonable conclusion can be drawn that the plaintiff's commission
income will decrease as a greater proportion of her customers invest
in mutual funds and fewer in stocks and bonds. The defense expert
might also opine that the increased availability of no-load mutual
funds and investment information on the internet means that fewer
investors will be willing in the future to pay any commissions, at
all, on mutual fund investments. As the proportion of investment
funds flowing into mutual funds increases, the amount of
money passing through the hands of stockbrokers decreases.
The plaintiff's expert, on the other hand, might point out that,
as bank interest rates remain low, the stock market continues to
rise, and the economy improves, more money is flowing into non-bank
investments. The sheer volume means that the plaintiff's total commission
income would have increased markedly, even if her average commission
rate decreased and stockbrokers' share of the market dropped.
This sort of detailed, sophisticated analysis can probably be done
by both accountants and economists. Most accountants, or at least
experienced forensic accountants, are pretty good practical economists.
There are also vast quantities of data available, collected by the
government, investment analysts, banks, universities and think-tanks.
Thus, either an economist or an accountant could gather published
information regarding trends in investment fund flows upon which
to base an opinion regarding the plaintiff's future commission income.
However, even the best data will suggest only a range of conclusions.
If the parties desire to argue for a result at the extremes of that
range, then they need the additional power of the expert's credibility
to sell the jury on that result. The plaintiff's expert, for example,
could use the highest estimates of increased flows of money into
non-bank investments and the lowest estimates of increased flows
of money into mutual funds to argue that plaintiff's commission rates
would decrease insignificantly and her total income would increase.
In order to survive the obvious attack that this expert has taken
extreme positions with which a majority of analysts by definition
disagree, the expert must convince the jury based on his or her individual
credibility.
An attorney, choosing among potential experts with experience and
a good presence on the witness stand, can further enhance the credibility
of the case by choosing an expert with impressive academic credentials
and by paying for the development of independent sources of information
to support an aggressive opinion of the plaintiff's damages. A Ph.D.
goes a long way toward establishing that the expert on the witness
stand is very smart, and entitled to an opinion not shared by the
majority of analysts of investment trends. This is especially true
if the opposing expert does not have a similar educational background.
Of perhaps even greater value would be to find an economist who has
done non-litigation-related research that bears some relationship
to the issue upon which the opinion is being expressed. The ideal
expert would be an economist who studied investment trends long before
he or she was asked to be an expert witness in the litigation.
The expert could also be asked to conduct original research to gather
evidence in support of the party's position on damages. For example,
the defendant's expert could gather new raw data on investment trends
in the plaintiff's local market, hoping that it will show that the
local trend away from stocks and toward mutual funds is stronger
than the national average. Such an effort is expensive, but if undertaken,
is probably better done by the economist. The analysis of statistics
by an economist, econometrics, is something of an art, and few accountants
are trained in its techniques.
The plumber's case is simpler than the stockbroker's. The market
for plumbers' services is probably more stable than that for stockbrokers'
services, making future projections based on past performance more
reliable. Using an accountant to testify to a linear projection of
the plumber's future income might be sufficient. However, if this
particular plumber were especially successful, making the potential
damage recovery large enough to justify the investment, the plaintiff's
attorney might retain an economist to opine that, based on aggressive
projections of local housing growth, the plumber's income would have
increased significantly in the future.
The value of expert testimony, of course, depends on a great deal
more than which acronyms trail the expert's name. An economist is
by no means necessarily a better witness than is an accountant, and
accountants are often fully capable of doing most of what an economist
would do in most litigation settings. However, all else being equal,
an economist can be invaluable to large damages claims where the
level of uncertainty and complexity is high. On the other hand, hiring
an economist instead of an accountant may be wasteful in smaller
cases or where the party intends to take a conservative position
on damages. |
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