Earlier this month, a panel of the Seventh Circuit of the United States Court of Appeal decided a relatively straight forward case by reversing the trial court’s exclusion of a forensic accountant’s damages calculation. Manpower, Inc. v. Insurance Company of the State of Pennsylvania, No. 12‐2688 (7th Cir. Oct. 16, 2013). In reversing, the appellate court disregarded a congressional statute, Supreme Court precedent, and Circuit decisional law.
The case involved a dispute over insurance coverage dispute and an economic assessment of Manpower, Inc.’s economic losses that followed a building collapse. The trial court excluded Manpower’s accounting expert witness, Sullivan, who projected a growth rate (7.76%) for the plaintiff by comparing total revenues for a five month period in 2006 to the same five months in the previous year. Id. at 8. The historical performance, however, included a negative annual growth rate of 4.79% , over the years 2003 to 2009. Over the five months immediately preceding Sullivan’s chosen period in 2006, the growth rate was merely 3.8%, less than half his projected growth rate. Id. Sullivan tried to justify his rather his extreme selectivity in data reliance by adverting to information that he obtained from the company about its having initiated new policies and installed new managers by the end of 2005. Id.
The trial court held that Sullivan, who was not an expert on business management, had uncritically accepted the claimant’s proffered explanation for a very short-term swing in profitability and revenue. Id. at 9. While suggesting that Sullivan’s opinion was not “bulletproof,” the panel of the Seventh Circuit reversed. The panel, which should have been reviewing the district court for potential “abuse of discretion,” appears to have made its own independent determination that Sullivan opinion was “sufficiently reliable to present to a jury.” Id. at 17. In reversing, the panel explained that “the district court exercised its gatekeeping role under Daubert with too much vigor.” Id.
The panel attempted to justify its reversal by suggesting that a district court “usurps the role of the jury, and therefore abuses its discretion, if it unduly scrutinizes the quality of the expert’s data and conclusions rather than the reliability of the methodology the expert employed.” Id. at 18. The panel’s reversal illustrates several methodological and legal confusions that make this case noteworthy beyond its mundane subject matter.
Of course, the most striking error in the panel’s approach is citing to a Supreme Court case, Daubert, which has been effectively superseded by a Congressional statute, Federal Rule of Evidence 702, in 2000:
“A witness who is qualified as an expert … may testify in the form of an opinion or otherwise if:
(a) the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;
(b) the testimony is based on sufficient facts or data;
(c) the testimony is the product of reliable principles and methods; and
(d) the expert has reliably applied the principles and methods to the facts of the case.”
Pub. L. 93–595, § 1, Jan. 2, 1975, 88 Stat. 1937; Apr. 17, 2000 (eff. Dec. 1, 2000); Apr. 26, 2011, eff. Dec. 1, 2011.) Ironically, the Supreme Court’s Daubert case itself, had the Manpower panel paid attention to it, reversed the Ninth Circuit for applying a standard, the so-called Frye test, which predated the adoption of the Federal Rules of Evidence in 1975. Rather than following the holding of the Daubert case, the panel got mired down in its dicta about a distinction between methodology and conclusion. The Supreme Court itself abandoned his distinction a few years later in General Electric Co. v. Joiner, when it noted that
“conclusions and methodology are not entirely distinct from one another.”
522 U.S. 136, 146 (1997).
The panel of the Seventh Circuit concluded, without much real analysis, that the district court had excluded Sullivan’s opinions on a basis that implicated his conclusion and data selection, not his methodology. Id. at 19-20. The problem, of course, is that how one selects data of past performance to project future performance is part and parcel of the methodology of making the economic projection. The supposed distinction advanced by the panel is illusory, and contrary to post-Daubert decisions, and the Congressional revision of the statute, which requires attention to whether “the testimony is based on sufficient facts or data; the testimony is the product of reliable principles and methods; and, the expert has reliably applied the principles and methods to the facts of the case.” Rule 702.
To make matters worse, the appellate court in Manpower proceeded to attempt to justify its reversal on grounds of “[t]he latitude we afford to statisticians employing regression analysis, a proven statistical methodology used in a wide variety of contexts.” Id. at 21. Here the appellate court suggests that if expert witnesses use a statistical test or analysis, such as regression analysis, it does not matter how badly they apply the test, or how worthless their included data are. Id. at 22. According to the Manpower panel:
“the Supreme Court and this Circuit have confirmed on a number of occasions that the selection of the variables to include in a regression analysis is normally a question that goes to the probative weight of the analysis rather than to its admissibility. See, e.g.,Bazemore v. Friday, 478 U.S. 385, 400 (1986) (reversing lower court’s exclusion of regression analysis based on its view that the analysis did not include proper selection of variables); Cullen v. Indiana Univ. Bd. of Trustees, 338 F.3d 693, 701‐02 & n.4 (7th Cir. 2003) (citing Bazemore in rejecting challenge to expert based on omission of variables in regression analysis); In re High Fructose Corn Syrup Antitrust Litigation, 295 F.3d 651, 660‐61 (7th Cir. 2002) (detailing arguments of counsel about omission of variables and other flaws in application of the parties’ respective regression analyses and declining to exclude analyses on that basis); Adams v. Ameritech Servs., Inc., 231 F.3d 414, 423 (7th Cir. 2000) (citing Bazemore in affirming use of statistical analysis based solely on correlations—in other words, on a statistical comparison that employed no regression analysis of any independent variables at all). These precedents teach that arguments about how the selection of data inputs affect the merits of the conclusions produced by an accepted methodology should normally be left to the jury.”
Id. at 22.
Again, the Seventh Circuit’s approach in Manpower is misguided. Bazemore involved a multivariate regression analysis in the context of a discrimination case. Neither the Supreme Court nor the Fourth Circuit considered the regression at issue in Bazemore as evidence; rather the analysis was focused upon whether, within the framework of discrimination law, the plaintiffs’ regression satisfied their burden of establishing a prima facie case that shifted the burden to the defendant. No admissibility challenge was made to the regression in Bazemore under Rule 702. Of course, the Bazemore litigation predates the Supreme Court’s decision in Daubert by several years. Furthermore, even the Bazemore decision acknowledged that there may be
“some regressions so incomplete as to be inadmissible as irrelevant… .”
478 U.S. 385, 400 n.10 (1986).
The need for quantitative analysis of race and other suspect class discrimination under the equal protection clause no doubt led the Supreme Court, and subsequent lower courts to avoid looking too closely at regression analyses. Some courts, such as the Manpower panel view Bazemore as excluding regression analysis from gatekeeping of statistical evidence, which magically survives Daubert. The better reasoned cases, however, even within the Seventh Circuit fully apply the principles of Rule 702 to statistical inference and analyses. See, e.g., ATA Airlines, Inc. v. Fed. Express Corp., 665 F.3d 882, 888–89 (2011) (Posner, J.) (reversing on grounds that plaintiff’s regression analysis should never have been admitted), cert. denied, 2012 WL 189940 (Oct. 7, 2012); Zenith Elecs. Corp. v. WH-TV Broad. Corp., 395 F.3d 416 (7th Cir.) (affirming exclusion of expert witness opinion whose extrapolations were mere “ipse dixit”), cert. denied, 125 S. Ct. 2978 (2005); Sheehan v. Daily Racing Form, Inc. 104 F.3d 940 (7th Cir. 1997) (Posner, J.) (discussing specification error). See also Munoz v. Orr, 200 F.3d 291 (5th Cir. 2000). For a more enlightened and educated view of regression and the scope and application of Rule 702, from another Seventh Circuit panel, Judge Posner’s decision in ATA Airlines, supra, is an essential starting place. See “Judge Posner’s Digression on Regression” (April 6, 2012).
There is yet one more flaw in the Manpower decision and its rejection of the relevancy of data quality for judicial gatekeeping. Federal Rule of Evidence 703 specifically addresses the bases of an expert witness’s opinion testimony. The Rule, in relevant part, provides that:
“If experts in the particular field would reasonably rely on those kinds of facts or data in forming an opinion on the subject, they need not be admissible for the opinion to be admitted.”
Here the district court had acted prudently in excluding an expert witness who accepted the assertions of new management that it had, within a very short time span, turned a company from a money loser into a money earner. As any observer of the market knows, there are too many short-term “fixes,” such as cutting personnel, selling depreciated property, and the like, to accredit any such short-term data as “reasonably relied upon.” See In re Agent Orange Product Liability Lit., 611 F. Supp. 1223, 1246 (E.D.N.Y. 1985) (excluding opinions under Rule 703 of proffered expert witnesses who relied upon checklists of symptoms prepared by the litigants; “no reputable physician relies on hearsay checklists by litigants to reach a conclusion with respect to the cause of their affliction”), aff’d on other grounds, 818 F.2d 187 (2d Cir. 1987), cert. denied, 487 U.S. 1234 (1988).
Manpower represents yet another example of Court of Appeals abrogating gatekeeping by reversing a district judge who attempted to apply the Rules and the relevant Supreme Court precedent. The panel in Manpower ignored Congressional statutory enactments and precedents of its own Circuit, and it relied upon cases superseded and overruled by later Supreme Court cases. That’s regression for you.
