Financial Experts: Bridging the Gap Between Causation and Economic Damages

Note: This article originally appeared in the Indiana Lawyer.

In civil litigation, causation is a critical element in establishing the plaintiff’s cause of action by linking the defendant’s alleged misconduct to the claimed economic harm. Because of this linkage between causation and damages, qualified financial experts are often in a position to provide analyses to the trier of fact that can assist in deciding whether the causal link has been proven by the plaintiff.

At first glance, causation appears to be a simple concept. Did the defendant’s alleged wrongful conduct create, or cause, the damages suffered by the plaintiff? Ultimately, the answer to that question is left to the trier of fact. In certain cases, the causation is self-evident, such as when the defendant runs a red light and injures a pedestrian crossing the street. Other such situations, however, may not be as obvious. For example, if the defendant vendor breached a supply agreement, did it cause the plaintiff manufacturer to lose business, or are there some other factors at work such as external competitive forces that can explain the drop in business?

In most matters, the financial expert will, at least to some degree, assume that the plaintiff will prevail on its liability case. After all, if the plaintiff does not prove liability, no damage remedies are available to the plaintiff. In instances where the financial expert is asked to assume liability, does the financial expert need to consider the issue further? Is it enough for the expert to assert that he or she was simply asked to assume causation? The answer to these seemingly straightforward questions are not always so clear.

It is not unusual that damage testimony by financial experts is often challenged on the basis that the expert has failed to properly consider causation. Numerous court decisions have discussed and upheld this concept. Motions to exclude financial experts can be successful if the calculations presented by the financial expert do not explain or account for the asserted claims or defenses. If an expert does not adequately trace the economic damages to the appropriate claim or defense, the expert’s testimony may very well be excluded. At the same time, financial experts opining on damages are offering opinions that could be considered “relevant” or “instructive” to causation, but should not be reaching a summary conclusion about liability resulting from the defendant’s actions.

Courts have well established that “the damages…must be reasonably certain and directly traceable to the breach, not remote or the result of other intervening causes.” ¹ Therefore, financial expert testimony that does not sufficiently tie damages to the alleged wrongful conduct may be excluded on the grounds that it has not provided evidence of causation. For example, in a case where the expert assumed that the defendant was liable for all counts brought by the plaintiff and ignored other factors that may have contributed to lost profits, the court excluded the expert’s testimony.

For this reason, tracing damages to a defendant’s alleged misconduct is a critical step for the financial expert. While damages are often measured by lost profits, declining profits can also be caused and explained by many factors including, but not limited to: increased competition, rising costs, patent expiration, product obsolescence, regulatory constraints, legal issues, economic trends and/or industry changes.

Therefore, it is important for the financial expert to be able to rule out these intervening factors as causes for losses. Neglecting to consider industry or economic factors that otherwise would have caused – or at least contributed to – the plaintiff’s performance during the period of damages can lead to problems for the admissibility of the expert’s testimony. For example, the Seventh Circuit noted in a pre-Daubert case that “expert testimony may be excluded where the expert failed to consider other causes for the lost profits such as market saturation and reduced prices of alternative products” ² For this reason, the plaintiff’s experts cannot ignore whether the plaintiff’s damages were caused by the defendant’s conduct or other events.

With all of this in mind, financial experts (as well as good cross-examining attorneys) need to be aware of and prepared to answer the following types of questions in deposition and at trial:

1. Are you offering an opinion on causation?
2. Are you an expert in this industry? What qualifies an accountant to testify about what motivates a purchase decision in this industry?
3. How do we know that the calculations you have performed do not simply capture correlation, but without causation?
4. Do you know with reasonable certainty what caused the revenue decline?
5. Do you know that the alleged breach of contract is the only explanation of why the plaintiff did not earn profits at the level you estimate would have been earned in the but-for world?

The financial expert that attempts to “sidestep” the issue of causation and any potential factors giving rise to causation may create a more difficult situation for himself or herself. Rather, showing that his or her analysis considered the other factors that impacted the plaintiff’s sales and profitability will only enhance the expert’s credibility with the court. According to literature regarding best practices in expert witness testimony, the expert retained to measure damages must understand and explain:

1. The defendant’s wrongful conduct;
2. How the plaintiff alleges the defendant’s wrongful conduct caused damages to the plaintiff and how the defendant alleges that it did not cause damages;
3. The logic that connects the defendant’s alleged wrongful conduct and the plaintiff’s damages;
4. Other factors that could have caused or exacerbated the plaintiff’s damages; and
5. Whether the plaintiff’s damages were reasonably expected to result from the defendant’s alleged wrongful conduct. ³

In the end, it is important that the expert thoroughly evaluates whether the damage analysis is linked to the wrongful events in question. However, in establishing the linkage between the wrongful conduct and the damages, remember that the financial expert is not called on to serve in the role of advocate in that capacity. While a financial expert witness is not hired to prove or disprove the plaintiff’s case on liability, the expert is responsible for analyzing economic damages and attributing the damages to the alleged wrongful conduct. If the financial expert cannot explain how damages flow from the cause of action, the expert’s opinion may be discredited and vulnerable to exclusion.