Tuesday, November 14, 2006 Daubert, November 2006   VOLUME 1 ISSUE 4  

The Third Daubert Tutorial
The Way to a Client’s Heart Is Through His Checkbook: The Compelling Economics of the Sophisticated Daubert Challenge
by Stephen Mahle

This issue addresses the compelling litigation economics of Daubert motions.  It uses as a starting point the well-documented incentives that plaintiffs and their lawyers have for bringing junk litigation that has its basis in junk expert testimony, and then it demonstrates Daubert’s ability to parry such junk litigation by eliminating those incentives.  The strategies discussed here work equally well on junk litigation, whether it is based upon junk science as traditionally construed, or on the soft-science, social science or non-science versions of junk expert testimony.

A Quick Recap of the Received Doctrine of Shakedown Litigation

The Law & Economics literature discusses the economic incentives for a brand of shakedown litigation that requires only (1) a plaintiff with a story about a potential defendant that is alleged to have damaged the plaintiff and (2) a damages “expert” to place the “loss” in the hundreds of millions of dollars.  As commentators and law reviews see this, even absent any damages, if the expert’s damage calculation is large enough, a mere 10% chance of winning a verdict incentivizes entrepreneurial lawyers and plaintiffs to file suit in hopes of shaking down a nuisance settlement.  Symmetrically, a 10% chance of suffering a ruinous verdict has had the power to coerce rational, value-maximizing corporate managers into multi-million dollar settlements of abjectly non-meritorious claims.

The damages “expert” testimony is the cornerstone of this strategy and this can be seen most easily by recognizing that, because junk litigation is junk, there is only a small chance that the plaintiff can litigate it to a verdict.  As the Law & Economics “received” doctrine explains it, and the example below shows, even if there is only a small chance of a verdict, if the potential verdict is very large, then the resulting small chance at a huge verdict incentivizes junk plaintiffs and their lawyers to file junk litigation.  The models show why rational corporate managers often stand ready to settle such matters rather than undertake the cost of defending them, and this incentivizes such litigation further.

Until now.

Because now, a Daubert motion in limine can knock out the damages expert testimony that is the critical central element of this shakedown strategy.

The Daubert Solution to Shakedown Litigation

To oversimplify for ease of exposition, imagine hypothetically a specious claim as described above, and that there exists a mere 10% chance of litigating that claim to a $100 million outcome by putting on an expert who will testify that damages are $100 million.  Abstracting from risk aversion, a 10% chance at $100 million is worth about $10 million.  Fundamental financial analysis instructs that if the prosecution of such claims to such outcomes can be done for less than $10 million, then litigating this nonmeritorious claim to settlement is what financial analysis calls a positive net present value project.  There is substantial history of similarly motivated litigation and the literature is replete with sophisticated versions of this model (hereinafter, the “junk-litigation model”).  But that is all old news; “the received doctrine,” so to speak.

What is interesting here is that this same law review model generalizes immediately to finding the value of a sophisticated Daubert motion filed in response to such a claim.

So, proceeding with the same claim, if a Daubert motion to exclude the junk expert testimony has even a 10% chance of successfully disposing of the matter, the Daubert motion is a positive net present value undertaking to the defendant if it can be done for less than one million dollars (ten percent of ten percent of $100 million).

This condition on the cost of the motion is almost always met, and usually with almost a million dollars to spare, making the Daubert motion what financial analysts (and more importantly, your sophisticated clients) call a positive net present value project (in corporate shorthand, a “+NPV project”).  Your sophisticated clients will have learned in business school that this simply means that the investment project’s expected value exceeds its expected cost.  They will have also learned that undertaking positive net present value projects increases the value of their firm and its stock, not to mention their own salary and bonuses. 

The beautiful intellectual irony in this is that, modeled in this way, the Daubert motion is shown to be a positive NPV strategy that is precisely symmetric to the positive NPV strategy that incentivized the junk litigation in the first place.  In other words, the exact same financial arithmetic that makes junk litigation a financially attractive cottage industry makes Daubert motions to exclude the junk testimony that drives the junk litigation a financially compelling undertaking.

Stephen Mahle is a scientifically trained lawyer who concentrates his practice in litigating Daubert and expert testimony issues for insurance companies and their outside counsel. He has a doctorate in economics, has been a finance professor at several major universities, is webmaster of daubertexpert.com, serves as Articles Editor for DRI ’s Daubert Online newsletter, and lectures and publishes regularly on Daubert and expert testimony issues.  He can be reached ate smahle@daubertexpert.com or (561) 451 - 8400.

Published by DRI Happenings
Copyright © 2006 DRI. All rights reserved.
Powered by IMN™