First Circuit's Critical Assessment Of "Willingness-To-Pay" Hedonic Damages Testimony

What proof can measure a victim's “loss of enjoyment of life”? The First Circuit explored the measure of “hedonic damages” based on expert testimony; in considering it's utility, calculation, and the mixed reception by the courts, the circuit remanded the case for retrial a jury's damages verdict because the court had improperly admitted "loss of enjoyment of life" expert testimony, violating FRE 702, in Smith v. Jenkins, _ F.3d _ (1st Cir. Oct. 15, 2013) (Nos. 11–2349, 11–2378, 11–2389)

The First Circuit addressed the hedonic damages issue as part of an appeal involving "a fraudulent real estate mortgage scheme that involved inducing a schizophrenic trash collector into acting as a straw buyer for two overvalued residential properties in Massachusetts." When the scheme collapsed, the straw buyer sought recompense from the defendants for hedonic damages caused by their alleged fraud and breach of fiduciary duty. At trial, a forensic economist testified about three forms of damages: "(1) the loss of enjoyment of life (so-called "hedonic damages");(2) the loss of credit expectancy as a result of two foreclosures on his record; and (3) the loss of time expended dealing with the consequences of the fraud scheme." After the jury found the defendants liable, the defendants appealed contending that the trial judge should not have admitted an expert witnesses' estimates of the "hedonic damages" suffered by the plaintiff. Smith, __ F.3d at __.

Calculation Of Hedonic Damages

The First Circuit determined that the trial court had erred in admitting the testimony on "the contentious issue of hedonic damages", which the expert in the case (like the plaintiff, also named Smith) had provided to the effect that the plaintiff was:

entitled to $219,900 for his loss of enjoyment of life. To arrive at that figure, [forensic economist expert] Dr. Smith employed a method for valuing life known as the “willingness-to-pay” model. This model measures the monetary worth of life by calculating the amounts that individuals, government agencies, and businesses are willing to pay for reductions in health and safety risks. The model relies on labor market studies reflecting wage risk premiums, studies reflecting consumer purchases of safety equipment, questionnaires regarding consumers' willingness to pay for safety measures, and studies of government regulations requiring expenditures for certain safety devices. Dr. Smith testified that the resulting figure is between $5 and $6 million for the value of a “statistically average” person's life, defined as a 31–year–old with a 45–year additional life expectancy.

Smith, __ F.3d at __.

Reservations About "Willingness-To-Pay" Methodology

The First Circuit noted that it "share[d] the concerns of those courts that have excluded expert testimony based on the 'willingness-to-pay' methodology." In particular, the First Circuit noted the Seventh Circuit's view that the hedonic damages calculation was "lacking in reliability." These concerns were so extensive that the circuit, had "serious doubts that the underlying [hedonic damages] studies actually measure the value of life, citing the Seventh Circuit explanation that:

spending on items like air bags and smoke detectors is probably influenced as much by advertising and marketing decisions made by profit-seeking manufacturers and by government-mandated safety requirements as it is by any consideration by consumers of how much life is worth. Also, many people may be interested in a whole range of safety devices and believe they are worthwhile, but are unable to afford them. More fundamentally, spending on safety items reflects a consumer's willingness to pay to reduce risk, perhaps more a measure of how cautious a person is than how much he or she values life. Few of us, when confronted with the threat, “Your money or your life!” would, like Jack Benny, pause and respond, “I'm thinking, I'm thinking.” Most of us would empty our wallets.

Smith, __ F.3d at __ (quoting Mercado v. Ahmed, 756 F.Supp. 1097, 1103 (N.D.Ill. 1991), aff'd, 974 F.2d 863, 868–71 (7th Cir. 1992))).

Majority Of Courts Reject "Willingness To Pay" Model

Not only has the hedonic damages model drawn heated criticism, it has also "been the subject of numerous decisions regarding the admissibility of his expert opinions on this very issue. The overwhelming majority of courts have concluded that his “willingness-to-pay” methodology is either unreliable or not likely to assist the jury in valuing hedonic damages, or both." Smith, __ F.3d at __. The circuit cited a number of district court cases, a few affirmed by the circuit, to support the contention that the hedonic damage evidence is not helpful evidence:

  • Allen v. Bank of Am., N.A., CIV. CCB–11–33, 2013 WL 1164898, at *12 (D.Md. Mar. 19, 2013)
  • Richman v. Burgeson, No. 98 C 7350, 2008 WL 2567132, at *2–*4 (N.D. Ill. June 24, 2008) (although the expert could testify about "the concept of hedonic damages," his testimony assigning a specific dollar amount of hedonic damages was "not sufficiently reliable or helpful to the jury and . . . therefore, inadmissible")
  • Davis v. ROCOR Int'l, 226 F.Supp.2d 839, 842 (S.D.Miss. 2002)
  • Saia v. Sears Roebuck & Co., 47 F.Supp.2d 141, 148–50 (D.Mass. 1999)
  • Brereton v. United States, 973 F.Supp. 752, 758 (E.D.Mich. 1997)
  • Kurncz v. Honda N. Am., Inc., 166 F.R.D. 386, 388–90 (W.D.Mich. 1996)
  • Ayers v. Robinson, 887 F.Supp. 1049, 1059–64 (N.D.Ill. 1995)
  • Sullivan v. U.S. Gypsum Co,, 862 F.Supp. 317, 321 (D.Kan. 1994)
  • Mercado v. Ahmed, 756 F.Supp. 1097, 1103 (N.D.Ill. 1991), aff'd, 974 F.2d 863, 868–71 (7th Cir. 1992)
  • Dorn v. Burlington N. Santa Fe R.R. Co, 397 F.3d 1183, 1195 n. 5 (9th Cir. 2005) (collecting state cases where Dr. Smith's testimony was excluded)

Ultimately, the First Circuit concluded that the trial court erred in admittined portions of the expert testimony concerning "hedonic damages" and "the loss of credit expectancy". In remanding the case, the circuit left it for the trial court to determine, after a Daubert analysis, whether the third form of proffered damages ("the loss of time expended dealing with the consequences of the fraud scheme") was admissible.

Conclusion

The Smith case provides a recent example concerning the proof of "hedonic damages." The record is not totally negative about the reception of hedonic damages experts in federal court, see Sherrod v. Berry, 629 F.Supp. 159, 162–64 (N.D.Ill. 1985), aff'd, 827 F .2d 195, 205–06 (7th Cir. 1987), vacated and remanded on other grounds, 856 F.2d 802 (7th Cir. 1988). However as the Smith case suggests, the Tenth Circuit was not far from the point when it opined that “[t]roubled by the disparity of results reached in published value-of-life studies and skeptical of their underlying methodology, the federal courts which have considered expert testimony on hedonic damages in the wake of Daubert have unanimously held quantifications of such damages inadmissable” in Smith v. Ingersoll–Rand Co., 214 F.3d 1235, 1245 (10th Cir. 2000)).

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