Instructive Dicta On Expert Testimony Reliability And "Simple Regression Analysis"

In diversity contract suit, reversing jury verdict for plaintiff because applicable state law did not permit recovery for any losses incurred; however, circuit dicta cautions on the admissibility of expert forensic accountant testimony based on a regression calculation of plaintiff's damages, which should have been excluded because, despite the broad acceptance of regression analysis, the witness here failed to apply it "reliably to the facts of the case," in ATA Airlines, Inc. v.Federal Esp. Corp., __ F.3d __ (7th Cir. Dec. 27, 2011) (Nos. 11-1382, 11-1492).

It is often a mistake to ignore instructive dicta concerning application of common evidence principles. A recent example if found in a Seventh Circuit case assessing why certain expert testimony should not have been admitted. Allowing the admission of the testimony not only violated the requirements of Daubert and FRE 702, but the matter was certainly harmless because the merits of the case were resolved as a matter of law.

In the case, the jury awarded the plaintiff a verdict for $65,998,411. Remarkably this was what the plaintiff specifically asked for and had supported with expert testimony. On the merits of the contract claim, the circuit found the verdict incorrect as a matter of law and reversed. However, the circuit added dicta concerning the use or abuse of expert testimony in the damages determination. Certain expert evidence should not have been admitted but the circuit opined upon it as a matter that "presents important questions that have been fully briefed and are bound to arise in future cases," ATA Airlines __ F.3d at __.

The plaintiff's expert testimony calculating its damages claim was provided by a forensic accountant. The circuit concluded that his testimony should have been excluded as it was merely a straight line projection of unrelated data used in a "simple regression analysis. The analysis was fatally flawed as it took what is occasionally a reliable methodology and applied it in an unreliable way.

The circuit acknowledged that FRE 702 and Daubert gate keeping of expert testimony may not be "easy." In this case the circuit considered it deficient because it was never clear that the court or the parties understood the methodology at issue. At a minimum, the court should have "require[d] the lawyer who wants to offer the expert's testimony to explain ... in plain English what the basis and logic of the proposed testimony are." Similarly, the opponent of the expert evidence should explain that opposition in "plain English." If this does not resolve the difficulty, the circuit noted that under FRE 706 the court could appoint its own expert to help the court understand and evaluate the expert evidence. It was not inappropriate for the court to go beyond this presentation of methodology and to undertake its own research on the principles involved from relevant reference materials. ATA Airlines __ F.3d at __.

The circuit concluded that the trial court erred by admitting the expert's testimony. The expert's use of a "linear regression" model was inappropriate to assess the issue at hand. The expert's execution of the regression was also deplorable for a host of reasons, such as for assigning unwarranted dependent and independent variables, for sloppy confidence testing, for misapplying a binary analysis to probe a multivariate relationship, for inappropriately using "counterfactual assumptions," and engaging in implausible modeling. These difficulties rendered the expert opinion without "a rational foundation" and resulted in rendering a "fallac[ious] prediction". ATA Airlines __ F.3d at __.

The circuit made a detailed assessment of the regression model used by the expert. By the time the circuit had finished its assessment, it apologized for leaving the proffered analysis with "as many bloody wounds as Julius Caesar when he was stabbed 23 times by ... Brutus." The lesson from the circuit's assessment of the expert testimony "at such length" was "to remind district judges that, painful as it may be, it is their responsibility to screen expert testimony, however technical" and that this "responsibility is especially great in a jury trial." ATA Airlines __ F.3d at __.

The deficiency of the expert testimony here undermined any possibility of a trial based on the facts and on reasoned analysis. The circuit thought it apparent that the jury in the case did not have a sufficient basis for an award of damages because the expert's "examination and cross-examination ... must have struck ... jurors as gibberish." The damage expert testimony failed to "present[] an intelligible damages analysis to the jury," preventing it from properly discharging its duties. In short, the circuit warned that "[i]f a party's lawyer cannot understand the testimony of the party's own expert, the testimony should be withheld from the jury. Evidence unintelligible to the trier ... of fact has no place in a trial."

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