Expert Article Library

Economists as Expert Witnesses

by Stanley P. Stephenson, PhD

By Stanley P. Stephenson, PhD Email:

Imagine you are lead defense counsel in an airline crash case. More than 200 lives were lost and liability has been established against your client. The plaintiff in your case, a French businessman who imported leather goods, is represented by a major firm who has obtained the services of an academic economist as an expert witness. This witness says losses are over $200 million for this single individual. What should you do?

Similarly, you have been asked to represent a client whose medical practice was disrupted due to a fire which destroyed his office building. As a result, the physician had to relocate to temporary, suburban quarters about two miles away from his former location in a medium-sized community in Northern California. What do you do? Are there economic losses involved? How much and why?

Each of these are real cases. In the first situation, the case settled below $1 million. The second case is ongoing, but a preliminary report estimates economic damages at nearly $2 million. In each case, the economist's role in establishing a reasonable level of economic damages was critically important. This brief note lists frequently asked questions (FAQs) for litigators to consider in choosing and effectively using an economic expert.

Why use an economic expert?

As implied in the above two cases, a skilled economist can provide valuable advice and counsel and generally enable his or her fees to more than be offset by favorable outcomes for the client. In the airline case, fees were about $7,500 and the associated savings for the client exceeded $100 million! Similarly, in the second case, the economist's report has significantly redefined the range of economic loss being considered. In short, one uses an economist as an expert when there is a solid business case to do so.

Are there minimal damages one should consider before hiring an economist?

This issue is subjective, but in general, if the case is worth at least, $100,000, then it may be worth considering use of an economic expert. Incidentally, in most personal injury or wrongful death cases, an experienced forensic economist should be able to provide a "guesstimate" of economic damages for a fee of $300-500. This is provided informally by only a few experts, e.g.. presented via phone conversation, using minimal research, and not involving any written letters, or reports.

What factors are most important in choosing an economist?

(While there are several answers to this question, personal style is most important.)

  1. Style...this is generally considered the most important single factor: how credible will this witness be in front of a judge or jury? Is the expert's demeanor convincing? Are questions handled well?
  2. Costs...can the expected fees be justified; what are the risks of not hiring an expert economist?
  3. Case Strategy...what type of case is this (intellectual property, personal injury, malpractice, security fraud, antitrust, breach of contract, or some other type?); is the work to be done for defense or plaintiff (many times, especially in defense cases, the economic expert is not disclosed and is used as an economic consultant)
  4. Experience...credentials such as a Ph.D. in Economics from a noted university, a strong resume, academic affiliation are helpful, but less important than Style.
OK, but what does an economic expert actually do?

There are least two ways to answer this question. First, economists offer analysis consisting of several steps:

  1. Develop a Theory of Damages...for example, the so-called human capital model lies at the core of many lost earnings cases, but it is not the only theory. The point is that the theory should be made explicit.
  2. Conduct a "But-For" Analysis...what are mitigation earnings or profits...if the "event" had not taken place, what would be the results?
  3. Use Appropriate Data and Information...examine the company or the individual in terms of industry, occupation, past and future outcomes, markets, and economic conditions.
  4. Adjustments Required...depending on the case, the expert should consider the following factors: productivity, inflation, taxes, expected duration of loss, work-life and life expected of a person, time value of money, and similar factors.

For the plaintiff, the expert writes a report, cites sources, and attaches spreadsheet models and references. For defense, the expert can use this same general outline and also estimate damages and/or develop a line of questions for the opposition, e.g.. "What was your theory of damages?" Or, in a death case, the defense expert might suggest using the following sort of questions ..."In projecting foregone lifetime earnings, how did you consider the fact that Mrs. Jones had a terminal illness and a 75% chance of death in 5 years?"

How does an economist help litigation?

During litigation economic experts provide the following services:

  1. Before Filing the Complaint. estimate economic damages; allow use of name for offensive purposes, e.g.. use of resume and threat of raising the ante as "bargaining chip" to induce settlement.
  2. Discovery Phase Activities...document production; data collection & review; damage estimation; review opposition expert's report; develop deposition lines of question for opposition.
  3. Settlement & Pre-Trial Phase...presentation of economic damages; evaluate settlement offers; develop decision trees.
  4. Trial Phase...prepare trial binder, including damages reports, question scripts, exhibits, background of expert; present testimony; develop lines of questions for opposition.
When should you use an economist and when should you use an accountant?

The roles and uses of these two groups can overlap, but are somewhat distinct. In general, economists are used more in situations requiring economic modeling, forecasts, statistical analyses, and market assessments, whereas accountants are used more in situations involving the uses of accounting data, cost analysis and income taxes. Moreover, the two roles can be highly complementary, especially in cases which involve substantial data processing in response to an economic theory of damages.

What tips are there regarding hiring and managing an economic expert?

The process is not unlike hiring any other management consultant. While lists of expert economists are available from Bar Associations, legal publications and related sources, word of mouth and referrals are the most likely ways in which one hires an economist. Frequently, experts make presentations to law firms or continuing education seminars on a case or particularly sensitive or complicated economic issue. This is a good opportunity for exchange and for evaluating the individual.

The retention process should involve checking for possible conflicts of interest, a written agreement on scope of work, fees and expenses, and may involve a small retainer. It is not ethical for the expert to be paid on a contingency basis when doing plaintiff work. On most cases, early in the engagement the expert should provide the client with an overall management plan which outlines tasks, resources and milestones. This greatly reduces surprises, enhances communication and overall quality of results.

During the engagement, the client should expect regular reports, briefings and other progress statements in addition to invoices for fees and expenses.

What are the most problematic issues which arise estimating economic damages?

Again, this issue is subjective, but four issues are nearly always the main source of contention. These are:

  1. choosing the normal level of past and future earnings or profits;
  2. choice of an interest rate for use in discounting future earnings and possibly determining pre-judgment interest;
  3. determining the timing or duration of economic loss; and
  4. adjusting for "but-for" changes in economic profit or earnings.
Where can an attorney learn more about this topic?

There are several excellent references, books, and journals, including:

  • Litigation Services Handbook, Roman L. Weil, Michael J. Wagner, Peter B. Frank (eds.), New York: John Wiley & Sons, Inc., 1995;
  • Litigation Economics, (Patrick A. Gaughan, Robert J. Thornton (eds.), Greenwich, CT: JAI Press, Inc., 1993;
  • Journal of Forensic Economics, PO. Box 30067, Kansas City, Missouri 64112
What really happened in those first two cases?

In the first case, plaintiff's expert made projections of lost income based on overly optimistic assumptions regarding the future market for imported leather goods, especially high-quality skins from Korea. Once adjustments were made to reflect the impact on profit margins of US leather goods companies due to new suppliers entering the market from China and India and from changes in economic demand, estimated economic losses were sharply reduced.

In the case of the physician's office, economic losses were estimated due to lost rent, asset value of the building, lost profits from his own medical practice (adjusted for mitigation profits), the costs of restoring 6,000 patient records which were destroyed, and less tangible, the loss of practice value due to the erosion in customer base during the disruption.

Who are the main providers of expert economist witness services?

Traditionally, academic economists offered this service and many remain active either as independent consultants or through affiliation with medium-sized specialty companies which provide economic analysis, case management and administrative services. In addition to these groups, major accounting and management consulting firms have started to build economic witness services which complement their other services. However, at the end of the day, it is the credibility of the individual on the witness stand and the quality of his or her analysis and presentation which makes the difference.