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Measuring Business
Interruption Losses and
Other Commercial Damages:
an Economic Approach
I wish to thank Sheck Cho, my editor at John Wiley & Sons, for all of his
support over the years.
Measuring Business
Interruption Losses and
Other Commercial Damages:
an Economic Approach
Third Edition
PATRICK A. GAUGHAN
This edition first published 2020
© 2020 John Wiley & Sons, Inc.
The right of Patrick A. Gaughan to be identified as the author of the editorial material
in this work has been asserted in accordance with law.
Registered Office
John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, USA
Editorial Office
111 River Street, Hoboken, NJ 07030, USA
For details of our global editorial offices, customer services, and more information
about Wiley products visit us at www.wiley.com.
Wiley also publishes its books in a variety of electronic formats and by print‐on‐
demand. Some content that appears in standard print versions of this book may not be
available in other formats.
10 9 8 7 6 5 4 3 2 1
Contents
CHAPTER 1 Introduction 1
Development of the Field of Litigation Economics 2
Development of the Field of Forensic Accounting 3
Qualifications of an Economic Expert 5
Qualifications of an Accounting Expert on Damages 8
Interdisciplinary Nature of Commercial Damages
Analysis 8
Difference Between Disciplines of Economics
and Finance 10
Finding a Damages Expert 11
Critically Reviewing a Potential Expert’s Curriculum
Vitae 12
Getting the Damages Expert on Board Early Enough 18
Courts’ Position on Experts on Economic Damages 19
Standards for Admissibility of Expert Testimony 21
Exclusion of Experts 25
Trends in Daubert Challenges to Financial Experts 25
Expert Reports 28
Defense Expert as a Testifying Expert, Not Just
a Consultant 33
Quantitative Research Evidence on the Benefits
of Calling a Defense Expert 35
Treatment of the Relevant Case Law 36
Legal Damage Principles 36
Other Types of Damages Cases 42
Summary 46
References 46
v
viContents
Index 513
CHAPTER 1
Introduction
Measuring Business Interruption Losses and Other Commercial Damages: an Economic Approach,
Third Edition. Patrick A. Gaughan.
© 2020 John Wiley & Sons, Inc. Published 2020 by John Wiley & Sons, Inc.
1
2 Measuring Business Interruption Losses and Other Commercial Damages
encountered. For this reason, this book focuses on those circumstances that
are most commonly encountered and attempts to present a general damages
evaluation framework capable of handling most of them.
1
Lance Bachmier, Patrick Gaughan, and Norman Swanson, “The Volume of Litigation
and the Macroeconomy,” International Review of Law and Economics, 24(2) (2004):
191–207.
Introduction 3
2
Stanley P. Stephenson, David Macphearson, and Gerald Martin, Determining
Economic Damages, Revision 25 (Costa Mesa, CA: James Publishing, 2016).
3
Thomas Ireland, Stephen M. Horner, and James Rodgers, “Reference Guide for
Valuing Economic Loss in Personal Injury, Wrongful Death and Survival Actions,” in
Economic Expert Testimony: A Guide for Judges and Attorneys (Tucson, AZ: Lawyers
and Judges Publishing, 1998), pp. 1–108.
4
Michael Brookshire and Frank Slesnick, “A 1990 Survey Study of Forensic Economists,”
Journal of Forensic Economists 4(2) (Spring–Summer 1991): 125–149.
4 Measuring Business Interruption Losses and Other Commercial Damages
5
Charles L. Baum II, “Employee Tenure and Economic Losses in Wrongful Termination
Cases,” Journal of Forensic Economics, 24(1) (2013): 41–66.
6
Michael Piette, “Economic Methodology and the Analysis of Employment
Discrimination,” Journal of Forensic Economics 4(3) (Fall 1991): 307–316.
Introduction 5
7
Mattott v. Ward, 48 N.Y. 2d 455, 423 N.Y.S. 2d 645 (1979).
8
Stuart Speiser, Recovery for Wrongful Death and Injury, 2nd ed. (Lawyer’s
Cooperative Publishing, 1988); Michael L. Brookshire and Stan V. Smith,
Economic/Hedonic Damages, The Practice Book for Plaintiff and Defense Attorneys
(Cincinnati, OH: Anderson Publishing, 1990); Gerald Martin, Determining Economic
Damages (Santa Ana, CA: James Publishing, 1995); W. Gary Baker and Michael K.
Seck, Determining Economic Loss in Personal Injury and Death Cases (Colorado
Springs, CO: Shephard’s/McGraw-Hill, 1987).
9
Patrick A. Gaughan, “Economics and Financial Issues in Lost Profits Litigation,” in
Litigation Economics, Patrick A. Gaughan and Robert Thornton, eds. (Greenwich,
CT: JAI Press, 1993).
6 Measuring Business Interruption Losses and Other Commercial Damages
The qualified witness may not possess all of the above but may have
strengths in one area that outweigh deficiencies in other areas. Courts and
juries should consider such factors when weighing the testimony of indi
viduals who have been presented as experts but who may lack many of
these attributes or who only possess minimal levels of the listed qualifica
tions. Other individuals who are strong in most or even all of the areas may
“bring a greater level of expertise to the table.”
Siegfried has authored over 100 articles, which have been published in
economics journals or as chapters in various books on economics.
Siegfried currently serves on the editorial board of three economics jour-
nals, and frequently “referees” articles submitted for publication as a
contribution to scientific knowledge in the field of economics.10
10
United Phosphorus, Ltd. v. Midland Fumigant, Inc., 173 F.R.D. 675, 1997.
8 Measuring Business Interruption Losses and Other Commercial Damages
and was also a referee for such publications. The court seemed impressed
with these credentials, and it is not surprising that it put more weight on that
expert’s opinions.
11
Thomas Kline v. Lorrilard, 878 F. 2d 791 (4th Cir. 1989).
10 Measuring Business Interruption Losses and Other Commercial Damages
Digital & Analog Design Corporation v. North Supply Company, 44 Ohio St. 3d 36;
12
13
A data source that publishes such information on a weekly basis is Verdict Search
(East Islip, NY: Moran Publishing Company).
12 Measuring Business Interruption Losses and Other Commercial Damages
(www.examworks.com).
Introduction 13
A closer review of the listings included on the CV, however, may possibly
expose the misleading nature of the items. For example, in lieu of quality pub
lications, an expert may list presentations made before attorneys, which are
nothing more than marketing appeals and sales pitches. A CV may list very
general articles published in legal newspapers and magazines. These articles,
though, do not enjoy the scrutiny that a peer‐reviewed or refereed journal arti
cle or book would. Sometimes what is listed as a publication is a paper or
article that has not even been published. Opposing counsel may be able to take
advantage of such misleading entries on a CV.
Degrees
Some basic comments on degrees are mandatory. The most fundamental
characteristic of a degree as it relates to litigation is the relevance of the
degree. It is very common for experts to want to testify in an area that is
outside their expertise. Courts, though, have been supportive of objections
to experts who testify outside their expertise.15 In the area of commercial
damages, one sees a variety of individuals present themselves as experts.
Courts are often liberal in accepting such individuals and rely on the voir
dire process and cross‐examination to expose any deficiencies. However,
attorneys should be aware that PhDs in some fields provide little or no
training in the areas that are relevant to most types of commercial damages
analysis. For example, fields like engineering or operations research may
provide little training relevant to measuring damages in litigation.
Attorneys should be very wary of the “mail‐away PhD.” These are PhD
degrees that one can earn at home. Several institutions offering such PhDs
have sprung up, and some even advertise their degrees in major publica
tions. This issue has become more convoluted as online higher education
has grown considerably; now even major academic institutions are offering
online courses. In fact, online education has become one of the faster‐grow
ing areas of academia. If the degree‐granting institution is unknown, the
attorney should read its catalog course descriptions and degree standards to
review the criteria employed for issuing degrees. When encountering
experts with questionable degrees, this can be a very fertile area of inquiry.
Published Books
Published books can be impressive credentials for an expert to have. These
books are even more noteworthy if they are published by major publishers,
who can afford to be more selective. Books that have received acclaim or
won awards for their quality are even better. In addition, books that have
15
Wright v. Williams, 47 Cal. App. 3d 802, 121 Cal. Rptr. 194 (1975).
14 Measuring Business Interruption Losses and Other Commercial Damages
been used as textbooks may also provide the author with credentials that
other experts who have not published any books may lack. Books in the
area in which the expert is testifying can be invaluable. It is ideal to use as
an expert the person “who wrote the book” in the area.
Beware of books published by vanity publishers. These publishers
“publish” a book for an author – for a fee. They are not unlike photocopy
houses as opposed to the more traditional publisher. Having a book pub
lished in such a way implies that none of the reputable publishing houses
considered the work worthy of publication. It also implies that the book in
question has a very limited readership and may not be regarded as authori
tative by anyone in the field.
Presentations
An expert’s CV often contains lists of presentations. In the academic world,
the publication process often begins with a refereed presentation to one’s
peers in the specific area of the article. Refereed presentations are those that
are accepted after a “call for papers” has been announced and submitted
articles are reviewed by the organizers of paper sessions at academic confer
ences. The standards for acceptance vary widely but are usually higher than
those for nonrefereed presentations. Attorneys should be wary of listings that
are merely sales presentations made before potential clients. For example, a
talk before a group of attorneys or at a law firm may be nothing more than
a marketing session. This should not be considered a “credential.”
16
Thomas Kline v. Lorrilard, 878 F. 2d 791 (4th Cir. 1989).
16 Measuring Business Interruption Losses and Other Commercial Damages
In Re Brand Name Prescription Drugs Antitrust Litigation, 1999 U.S. Dist. Lexis
17
Sad to say, Dr. Lucas’ testimony did not measure up to his unique quali-
fications. Among other things, his testimony showed the following:
It seems that in the above case, the attorneys who retained Dr. Lucas
probably thought that presented with such a notable expert, the court
would simply adopt his opinions. However, Dr. Lucas is a known expert in
macroeconomic theory – a field that is somewhat removed from the issues
of that particular lawsuit.
The expert’s credentials can certainly add weight to the presentation,
but the expert’s work has to be able to hold up under scrutiny. Notable
academic articles that one has written along with awards for prior work can
be very helpful, but the work done in formulating and supporting the
opinions expressed in the current case has to maintain a high standard. In
addition, academic credentials without experience in litigation work should
give cause for concern.
18 Measuring Business Interruption Losses and Other Commercial Damages
A typical disaster scenario. The damage expert gets hired two days before
the deadline for expert disclosure. A pile of documents and depositions
arrive at the expert’s office a week later. When the expert calls the attor-
ney to ask for key data that was not in the pile, the litigator says, “It looks
like we never asked for that in the document request or at depositions.
Oh by the way, they want to take your deposition next week.” The expert
must do a damages analysis that makes assumptions about key facts
and then alter those assumptions depending on trial testimony. This
often results in a poorer analysis and increases experts costs by a factor
of 2 or 3.18
James Plummer and Gerald McGowan, “Ten Most Frequent Errors in Litigating
18
The astute dentist says very sensibly: “If there is any money to be
made out of me, why not make it myself? If there is any gossip to be
told about me, why not tell it myself? If modesty restrains me from
praising myself as highly as I should expect a biographer to praise
me, prudence dictates the ignoring of circumstances which an
indiscreet biographer might drag into the light. I am, to say the least,
as safe in my own hands as I should be in anybody else’s; and I
shall, moreover, enjoy the pleasure dearest to the heart of man, the
pleasure of talking about myself in the terms that suit me best.”
Perhaps it is this open-hearted enjoyment which communicates
itself to the reader, if he has a generous disposition, and likes to see
other people have a good time. Even the titles of certain
autobiographical works are saturated with self-appreciation. We can
see the august simper with which a great lady in the days of Charles
the Second headed her manuscript: “A True Relation of the Birth,
Breeding and Life of Margaret Cavendish, Duchess of Newcastle.
Written by Herself.” Mr. Theodore Dreiser’s “A Book About Myself”
sounds like nothing but a loud human purr. The intimate wording of
“Margot Asquith, An Autobiography,” gives the key to all the cheerful
confidences that follow. Never before or since has any book been so
much relished by its author. She makes no foolish pretence of
concealing the pleasure that it gives her; but passes on with radiant
satisfaction from episode to episode, extracting from each in turn its
full and flattering significance. The volumes are as devoid of
revelations as of reticence. If at times they resemble the dance of the
seven veils, the reader is invariably reassured when the last veil has
been whisked aside, and he sees there is nothing behind it.
The happiness of writing an autobiography which is going to be
published and read is a simple and comprehensible emotion. Before
books were invented, men carved on stone something of a
vainglorious nature about themselves, and expected their subjects,
or their neighbours, to decipher it. But there is a deeper and subtler
gratification in writing an autobiography which seeks no immediate
public, and contents itself with the expression of a profound and
indulged egotism. Marie Bashkirtseff has been reproached for
making the world her father confessor; but the reproach seems
hardly justified in view of the fact that the “Journal,” although “meant
to be read,” was never thrust by its author upon readers, and was
not published until six years after her death. She was, although
barely out of girlhood, as complex as Mrs. Asquith is simple and
robust. She possessed, moreover, genuine intellectual and artistic
gifts. The immensity of her self-love and self-pity (she could be more
sorry for her own troubles than anybody who ever lived) steeped her
pages in an ignoble emotionalism. She was often unhappy; but she
revelled in her unhappiness, and summoned the Almighty to give it
his serious attention. Her overmastering interest in herself made
writing about herself a secret and passionate delight.
There must always be a different standard for the confessions
which, like Rousseau’s, are made voluntarily to the world, and the
confessions which, like Mr. Pepys’s, are disinterred by the world from
the caches where the confessants concealed them. Not content with
writing in a cipher, which must have been a deal of trouble, the great
diarist confided his most shameless passages to the additional cover
of Spanish, French, Greek and Latin, thus piquing the curiosity of a
public which likes nothing better than to penetrate secrets and rifle
tombs. He had been dead one hundred and twenty-two years before
the first part of his diary was printed. Fifty years later, it was
considerably enlarged. One hundred and ninety years after the
garrulous Secretary of the Admiralty had passed into the eternal
silences, the record of his life (of that portion of it which he deemed
worth recording) was given unreservedly to English readers. The
“Diary” is what it is because of the manner of the writing. Mr. Lang
says that of all who have gossiped about themselves, Pepys alone
tells the truth. Naturally. If one does not tell the truth in a Greek
cipher, when shall the truth be told?
The severe strictures passed by George Eliot upon
autobiographies are directed against scandal-mongering no less
than against personal outpourings. She could have had the English-
speaking world for a confidant had she consented to confide to it; but
nothing was less to her liking. She objected to “volunteered and
picked confessions,” as in their nature insincere, and also as
conveying, directly or indirectly, accusations against others. Her
natural impulse was to veil her own soul—which was often sick and
sore—from scrutiny; and, being a person of limited sympathies, she
begrudged her neighbour the privilege of exhibiting his soul, sores
and all, to the public. The struggle of human nature “to bury its
lowest faculties,” over which she cast unbroken silence, is what the
egotist wants to reveal, and the public wants to observe. When
Nietzsche says debonairly of himself, “I have had no experience of
religious difficulties, and have never known what it was to feel sinful,”
the statement, though probably untrue, creates at once an
atmosphere of flatness. It is what Walt Whitman ardently admired in
beasts—
“They do not lie awake in the dark, and weep for their sins,
They do not make me sick discussing their duty to God.”