Cases that deal with linear regression are not particularly exciting except to a small brand of “quant” lawyers who see such things “differently.” Judge Posner, the author of several books, including Economic Analysis of Law (8th ed. 2011), is a judge who sees things differently as well.
In a case decided late last year, Judge Posner took the occasion to chide the district court and the parties’ legal counsel for failing to assess critically a regression analysis offered by an expert witness on the quantum of damages in a contract case. ATA Airlines Inc. (ATA), a subcontractor of Federal Express Corporation, sued FedEx for breaching an alleged contract to include ATA in a lucrative U.S. military deal.
Remarkably, the contract liability was a non-starter; the panel of the Seventh Circuit reversed and rendered the judgment in favor of the plaintiff. There never was a contract, and so the case should never have gone to trial. ATA Airlines, Inc. v. Federal Exp. Corp., 665 F.3d 882, 888-89 (2011).
End of Story?
In a diversity case, based upon state law, with no liability, you would think that the panel would and perhaps should stop once it reached the conclusion that there was no contract upon which to predicate liability. Anything more would be, of course, pure obiter dictum, but Judge Posner could not resist the teaching moment, both for the trial judge below, the parties, their counsel, and the bar:
“But we do not want to ignore the jury’s award of damages, which presents important questions that have been fully briefed and are bound to arise in future cases.”
Id. at 889. That award of damages was based upon plaintiff’s expert witness’s regression analysis. Judge Posner was perhaps generous in suggesting that the damages issue, as it involved a regression analysis, had been fully briefed. Neither party addressed the regression with the level of scrutiny given by Judge Posner and his colleagues, Judges Wood and Easterbrook.
The Federal Express defense lawyers were not totally asleep at the wheel; they did object on Rule 702 grounds to the regression analysis offered by plaintiff’s witness, Lawrence D. Morriss, a forensic accountant.
“There were, as we’re about to see, grave questions concerning the reliability of Morriss’s application of regression analysis to the facts. Yet in deciding that the analysis was admissible, all the district judge said was that FedEx’s objections ‘that there is no objective test performed, and that [Morriss] used a subjective test, and [gave] no explanation why he didn’t consider objective criteria’, presented issues to be explored on cross-examination at trial, and that ‘regression analysis is accepted, so this is not “junk science.” [Morriss] appears to have applied it. Although defendants disagree, he has applied it and come up with a result, which apparently is acceptable in some areas under some models. Simple regression analysis is an accepted model.”
Id. (quoting District Judge Richard L. Young).
Apparently it is not enough for trial judges within the Seventh Circuit to wave their hands and proclaim that objections go to weight not admissibility; nor is it sufficient to say that a generally accepted technique was involved in formulating an opinion without exploring whether the technique was employed properly and reliably. Judge Posner’s rebuke was short on subtlety and tact in describing the district judge’s response to FedEx’s Rule 702 objections:
“This cursory, and none too clear, response to FedEx’s objections to Morriss’s regression analysis did not discharge the duty of a district judge to evaluate in advance of trial a challenge to the admissibility of an expert’s proposed testimony. The evaluation of such a challenge may not be easy; the ‘principles and methods’ used by expert witnesses will often be difficult for a judge to understand. But difficult is not impossible. The judge can require the lawyer who wants to offer the expert’s testimony to explain to the judge in plain English what the basis and logic of the proposed testimony are, and the judge can likewise require the opposing counsel to explain his objections in plain English.”
Id. The lawyers, including Federal Express’s lawyers, also came in for admonishment:
“This might not have worked in the present case; neither party’s lawyers, judging from the trial transcript and the transcript of the Rule 702 hearing and the briefs and oral argument in this court, understand regression analysis; or if they do understand it they are unable to communicate their understanding in plain English.”
Id.
The court and counsel are not without resources, as Judge Posner pointed out. The trial court can appoint its own expert to assist in evaluating the parties’ expert witnesses’ opinions. Alternatively, the trial judge could roll up his sleeves and read the chapter on regression analysis in the Reference Manual on Scientific Evidence (3d ed. 2011). Id. at 889-890. Judge Posner’s opinion makes clear that had the trial court taken any of these steps, Morriss’s regression analysis would not have survived the Rule 702 challenge.
Morriss’s analysis was, to be sure, a rather peculiar regression of costs regressed on revenues. Inexplicably, ATA’s witness made cost the dependent variable, with revenue the independent variable. Common sense would have told the judge that revenue (gained or lost) should have been the dependent term in the analysis. ATA’s expert witness attempted to justify this peculiar regression by claiming that that the more plausible variables that make up costs (personnel, labor, fuel, equipment) were not available. Judge Posner would have none of this incredible excuse mongering:
“In any event, a plaintiff’s failure to maintain adequate records is not a justification for an irrational damages theory.”
Id. at 893.
Judge Posner proceeded to dissect Morriss’s regression in detail, both in terms of its design and implementation. Interestingly, FedEx had a damages expert witness, who was not called at trial. Judge Posner correctly observed that defendants frequently do not call their damages witnesses at trial lest the jury infer that they are less than sincere in their protestations about no liability. The FedEx damages expert, however, had calculated a 95 percent confidence interval for Morriss’s prediction for ATA’s costs in a year after the alleged breach of contract. (It is unclear whether the interval calculated was truly a confidence interval, or a prediction interval, which would have been wider.) In any event, the interval included costs at the high end, which would have resulted in net losses, rather than net profits, as Morriss had opined. “All else aside, the confidence interval is so wide that there can be no reasonable confidence in the jury’s damages award.” Id. at 896.
After summarizing the weirdness of Morriss’s regression analysis, Judge Posner delivered his coup de grâce:
“This is not nitpicking. Morriss’s regression had as many bloody wounds as Julius Caesar when he was stabbed 23 times by the Roman Senators led by Brutus. We have gone on at such length about the deficiencies of the regression analysis in order to remind district judges that, painful as it may be, it is their responsibility to screen expert testimony, however technical; we have suggested aids to the discharge of that responsibility. The responsibility is especially great in a jury trial, since jurors on average have an even lower comfort level with technical evidence than judges. The examination and cross-examination of Morriss were perfunctory and must have struck most, maybe all, of the jurors as gibberish. It became apparent at the oral argument of the appeal that even ATA’s lawyer did not understand Morriss’s analysis; he could not answer our questions about it but could only refer us to Morriss’s testimony. And like ATA’s lawyer, FedEx’s lawyer, both at the trial and in his appellate briefs and at argument, could only parrot his expert.
***
If 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 or triers of fact has no place in a trial. See Fed.R.Evid. 403, 702.”
Id. at 896. Ouch! Even being the victor can be a joyless occasion before Judge Posner. For those who are interested in such things, the appellate briefs of the parties can be found on line, both for ATA and for FedEx.
It is interesting to compare Judge Posner’s close scrutiny and analysis of the plaintiff’s expert witness’s regression with how the United States Supreme Court treated a challenge to the use of multiple regression in a race discrimination case in the mid-1980s. In Bazemore v. Friday, 478 U.S. 385 (1986), the defendant criticized the plaintiffs’ regression on grounds that it omitted variables for major factors in any fair, sensible model of salary. The Fourth Circuit had treated the omissions as fatal, but the Supreme Court excused the omissions by shifting the burden of producing a sensible, reliable regression model to the defense:
“The Court of Appeals erred in stating that petitioners’ regression analyses were ‘unacceptable as evidence of discrimination’, because they did not include ‘all measurable variables thought to have an effect on salary level’. The court’s view of the evidentiary value of the regression analysis was plainly incorrect. While the omission of variables from a regression analysis may render the analysis less probative than it otherwise might be, it can hardly be said, absent some other infirmity, that an analysis which accounts for the major factors ‘must be considered unacceptable as evidence of discrimination’. Ibid. Normally, failure to include variables will affect the analysis’ probativeness, not its admissibility.
Id. at 400. The Court, buried in a footnote, made an abstract concession that “there may, of course, be some regressions so incomplete as to be inadmissible as irrelevant; but such was clearly not the case here.” Id. at 400 n.15. When the Court decided Bazemore, the federal courts were still enthralled with their libertine approach to expert witness evidence. It is unclear whether a straightforward analysis of the plaintiffs’ regression analyses in Bazemore under current Rule 702, without the incendiary claims of racism, would have permitted a more dispassionate analysis of the proffered evidence.
