Causation presents one of the most vexing problems for damages experts. But ignoring causation and simply working off the assumption that it exists may end up being the biggest problem for an expert. This was the message coming from one of the most informative panel discussions at the Las Vegas 2017 AICPA conference.
As its title, Linking Causation to Damages, makes clear, the panel sought to impress on financial experts the need to investigate and analyze the facts of the case to determine what caused the claimed financial loss to the plaintiff and to what extent certain factors contributed to the damage.
Causation is a critical element in establishing a plaintiff’s cause of action. It links the defendant’s alleged misconduct to the plaintiff’s claimed economic harm. Broadly speaking, there are two types of causation requirements. The higher standard requires a showing that, “but for” the defendant’s conduct, the harm would not have occurred. A less rigid standard requires a showing that the alleged misconduct was at least a “substantial factor” in causing the harm.
“Experts need to be part of the case preparations,” Christian Tregillis (Hemming Morse LLP), one of the panelists, said. He noted that it’s quite common for the retaining attorney to want to wall off the damages expert. Attorneys often ask the damages expert to “just assume” there is causation and to rely on data from industry or other experts.
However, if you do that, you take a big risk, Tregillis and his colleagues say. For example, if the court excludes the industry or any other analysis the damages expert relies on, there goes the damages analysis. Also, if the opposing side senses the damages expert lacks an understanding of the facts, it will make sure to exploit the expert’s vulnerability.
Experts must educate the retaining lawyer why there is a need for the financial expert to speak directly with company management and drill down on internal projections or to confer with the industry analyst. Clients also need to understand that it is not a waste of money to allow the damages expert to do his or her own industry and company analyses, the panel members say.
A recent Texas Supreme Court case exemplifies the importance of lawyers and damages experts working together to develop both aspects of the damages analysis: the fact of lost profits and the amount of the loss. In a business tort case, the Court of Appeals struck down a $4.2 million jury award, finding the damages testimony was defective in both regards. The state Supreme Court agreed.
Although the damages expert showed some understanding of the facts, he ultimately failed to ask key questions related to causation. This failure to examine the particulars of the case ultimately made his damages model mere speculation, the state Supreme Court found.For a digest of Horizon Health Corp. v. Acadia Healthcare Co., 2017 Tex. LEXIS 480 (May 26, 2017), and the court’s opinion, click here (BVLaw subscription required).