Economic Expert Report

-By Stan V. Smith, Ph. D. with Kyle Lauterhahn

At times, attorneys are hesitant to pursue the full possible damages for their clients due to concerns that the damages would be deemed “speculative.”  This concern often arises when prior earnings are sparse, or related to new business startups, and in many other instances.  Attorneys should be rightfully alert about presenting sufficient basis in claims for damages – it is the plaintiff’s burden to do so, but a sparse or even non-existent past record need not deter a claim.

Let’s review the idea of speculative damages.  Speculation is an estimate based on conjecture versus knowledge or evidence.  A useful discussion of the definition of speculative damages can be found in Sherrod v. Berry, 629 F.Supp. (159 N,D.Ill 1985).  This opinion, upheld on appeal, and later re-endorsed in a unanimous embank rehearing, was written by the late Honorable Judge George Leighton of the Northern District of Illinois, one of the most highly regarded district court judges in the well-renowned Seventh Circuit. The court’s standing is based on its members reputation for critical thinking in the area of law and economics; a heritage started by former Chief Justice Richard Posner.  Judge Leighton was so respected for his service to the law that the Cook County criminal courthouse in Chicago has been named in his honor.

“Damages are speculative when the probability that a circumstance as an element of compensation is conjectural. The rule against recovery of ‘speculative damages’ is generally directed against uncertainty as to cause rather than uncertainty as to measure or extent. That is, if it is uncertain whether the defendant caused the damages, or whether the damages proved flowed from his act, there may be no recovery of such uncertain damages; whereas, uncertainty which affects merely the measure or extent of the injury suffered does not bar recovery.”

In other words, damages are speculative when it cannot be well-determined that an event has caused harm.  Once it is determined that some harm or damage has been caused, the damages are no longer speculative.  They may at times be precisely measured, or the measurement may be imprecise, depending on the circumstances, but imprecision does not bar recovery, and imprecision does not imply speculation.  All too often there is confusion on this.

Another court opinion that looked at the standard for damages is the Sixth Circuit Court of Appeals in the case of Granthan and Mann, Inc. vs American Safety Products, 831 F2d 596 (1987).  Here, Judge Anthony Celebrezze, another colossus of the law here in the Midwest (the Federal building in Cleveland bears his name), writes that the rule against speculative damages “serves to  preclude recovery however, only where the fact of damages is uncertain, i.e. where the damage claimed is not the certain result of the wrong, not where the amount of the damage alone is uncertain. Once the existence of damages has been shown, all that an award of damages requires is substantial evidence in the record to permit a factfinder to draw reasonable inferences and make a fair and reasonable assessment of the amount of damages.”

Here again, speculation refers to whether damages flowed from the alleged cause, not as to the degree of precision of the extent. “Substantial evidence” does mean years and years of data.  A business plan for a company yet to be developed can constitute substantial evidence, when combined with the skills and experience of the person implementing the plan.

Since damages must still be based on facts, a qualified economist can make a fact-based projection based on sound data.  An economist can study the past trend of growth in a firm to determine the growth in sales but for a fire which damaged the firm’s entire inventory.  Relying on government data for occupational earnings, an economist can point to the level of earnings a young person can expect to earn over a full career.

Consider the example of a 12-year-old who may have been likely destined to graduate college, whose parents are both college graduates, but who may never work due to a brain injury.  Government statistics can provide guidance as to average earning of a college graduate, evidence commonly used by economists to project life-long earnings absent any actual career earnings.   Once the evidence that such a person cannot work is adduced, the damages are no longer speculative.  Of course, one can never know the precise career path of a 12-year-old after later earning a college degree, but a fair, neutral and unbiased statistical estimate of career earnings can be provided within a reasonable degree of economic certainty, following standard principles of economics.

Consider another case where a person has sustained a back injury but returns to work with difficulty sitting and standing.  The fact the person is still working does not at all preclude recovery of future losses.  As an example, a jury would certainly understand that a person wrongfully irradiated for a false-positive cancer diagnosis will have future problems that do not show up as a current damage.  A car whose front wheel has hit a pothole which bends the axel may still be driven, with a “shimmy,” which will shorten the treadwear of the tires, and ultimately lower the lifetime expected mileage of the car.  So too, when someone sustains an injury that causes some degree of impairment, resulting in difficulty walking for example, that impairment has a statistical reduction in a person’s future worklife and also possible wage rate.  The person still walks, but with a “shimmy.”  Government statistics exist on people with various disabilities that provide the statistical wage and employment impact that can be used to estimate future lifetime income impact. You do not have to be so injured as to have lost your job to have future wage and employment losses.

Of course, to recover damages, liability and harm must be established. But once liability and harm are determined, and there is evidence that the harm has caused damages, the measurement of such damages is no longer speculative.

Stan V. Smith, Ph.D., is VLM’s Quarterly Economics Columnist and president of Smith Economics Group, Ltd., headquartered in Chicago. Trained at the University of Chicago (one of the world’s pre-eminent institutions for the study of economics and the home of the law and economics movement), Smith has also taught at the university and co-authored the first textbook on the subject of economic damages. A nationally-renowned expert in economics who has testified nationwide in personal injury, wrongful death and commercial damages cases, Smith has assisted thousands of law firms in successful results for both plaintiffs and defendants, including the U.S. Department of Justice. To that end, Smith also developed the first course in forensic economics at DePaul University, and pioneered the concept of “hedonic damages,” testifying about the topic in landmark cases. His work has been featured in the ABA Journal, National Law Journal, and on the front page of the Wall Street Journal. Kyle Lauterhahn is a Senior Economic Analyst at Smith Economics Group in Chicago. Smith Economics Group, Ltd., is located at 1165 N. Clark Street, Suite 600, Chicago, IL, 60610. Dr. Smith may be reached at 312-943-1551, and at