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Seventh Circuit Sends Important Message Regarding Courts' Responsibility to Screen Expert Testimony

Thursday, January 5, 2012
Betsy Goldman | Bloomberg LawATA Airlines, Inc. v. Federal Express Corp., Nos. 11-1382, 11-1492, 2011 BL 326882 (7th Cir. Dec. 27, 2011)
  • The regression model of ATA's expert was fatally flawed because it encompassed incorrect dependent and independent variables.
  • The trial court failed to fulfill its duty to evaluate the analysis of ATA's expert.
  • ATA's counsel did not understand its own expert's analysis and thus it should not have been presented to the jury.
The Seventh Circuit closed 2011 by reversing a judgment entered against Federal Express Corp. for almost $66 million and determining that ATA Airline, Inc.'s, accounting expert provided an analysis that was "fatally flawed." In doing so, it reprimanded the district court for not fulfilling its duty to evaluate the validity of the expert's technical and complex testimony.

ATA's Lawsuit against FedEx

In 2006, ATA, FedEx, and Omni Air International allegedly entered into a three-year contract pursuant to which ATA and Omni were to provide services to the U.S. Department of Defense as members of its Civil Reserve Air Fleet. In particular, the Fleet's nonemergency passenger business was to be divided equally among ATA and Omni, with FedEx serving as the team's leader. A change in the 2008 contract, however, reduced ATA's allotment for the year, and FedEx subsequently decided that it was going to drop ATA from the team in 2009. ATA withdrew from the team prematurely in 2008 and, having little nonmilitary business, fell into bankruptcy. ATA filed a lawsuit against FedEx, alleging that the company breached the tripartite contract and seeking $65,998,411 in damages. During trial, the district court permitted ATA's expert in forensic accounting to present a regression analysis, thereby overruling FedEx's objections to the testimony under Rule 702. The expert, Lawrence D. Morriss, used the analysis to predict what ATA's military profits would have been had it not been dropped from FedEx's team. The jury based its verdict entirely upon Morriss's testimony and thus awarded ATA the exact amount it requested. FedEx appealed, arguing that Morriss's testimony should have been precluded.

District Court Failed to Uncover Fatal Flaws in Morriss's Analysis

The Seventh Circuit first observed that although there were "grave questions concerning the reliability of Morriss's application of regression analysis to the facts," the district court failed to spend the necessary time examining the proffered testimony. Instead, it provided a "cursory and none too clear" response to FedEx's objections to the expert's testimony. The Court explained, [The trial court's] 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 Seventh Circuit suggested that the trial court could have required ATA's counsel to explain the logic of the testimony "in plain English" or could have required FedEx's counsel to explain the company's objections in a way that the judge could understand. Pursuant to Rule 706 of the Federal Rules of Evidence, the district court also could have appointed its own expert to assist the judge in evaluating Morriss's testimony. The Seventh Circuit further pointed out that the Federal Judicial Center published a nontechnical "Reference Guide on Multiple Regression," by Professor Daniel L. Rubinfeld, which the lower court could have used to understand Morriss's testimony. It commented that "[h]ad the district judge read the relevant portions of Rubinfeld's guide, he would have realized that Morriss's regression analysis was fatally flawed." After reviewing how the district court failed in its responsibility to screen Morriss's analysis, the Seventh Circuit engaged in its own lengthy, in-depth, and highly technical examination of Morriss's regression model. In doing so, it determined that the expert's "most glaring error" was that he used ATA's costs as his dependent variable and revenues as his independent variable. According to the Court, Morriss's approach was incorrect because, in any equation, the dependent variable is a number that is explained by the independent variable. Revenue, however, does not necessarily directly influence cost. Specifically, an increase in revenue could be correlated with an increase in cost if the increased revenue were the result of increased sales. Increased revenue, however, could also be the result of selling the same output at higher prices. Moreover, increases in total costs are driven by increases in component costs including materials and labor, rather than increases in revenue. The Seventh Circuit further determined that Morriss also mistakenly based his prediction of what ATA's costs would have been in 2008 and 2009 on too small a sample—only 10 observations, each of which consisted of ATA's cost in one of the 10 years on which the regression analysis was based. It explained that "small samples are less representative of the population being sampled than large ones. The population here would be the entire cost experience of ATA and similar air carriers." The Court closed its opinion by again admonishing the district court for failing to engage in a sufficient evaluation of Morriss's analysis, noting that "even ATA's lawyer did not understand [it]" and could not answer the Seventh Circuit's questions about it during oral argument. It reiterated the importance of the trial court's gatekeeping responsibility with respect to expert testimony: 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 Seventh Circuit concluded that the jury awarded ATA the exact amount it asked for "[b]oth because FedEx tendered no estimate of damages and because neither Morriss nor the lawyers nor the judge presented an intelligible damages analysis to the jury." It concluded 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 or triers of fact has no place in a trial." DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. 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