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September 2006 Edition

This Issue, we introduce to you :

Stephen Mahle, Attorney at Law, is an Economist as well as a trial lawyer, experienced in the litigation of technical issues, and as such has become recognized as an expert on Daubert challenges. In this article, which we have reprinted from his website (www.daubertexpert.com) and with his permission, Mr. Mahle tells us how a properly raised Daubert Challenge, can be used as an effective tool
against Junk Litigation.

The Daubert Solution to SHAKEDOWN LITIGATION

A Quick Recap of the Received Doctrine of Junk Litigation.

Law reviews discuss the economic incentives for a brand of shakedown litigation that requires only (1) a plaintiff with a story about a potential defendant corporation that has under performed, sometimes dramatically, in the estimation of the plaintiff and (2) a damages "expert" to place the "loss" in the hundreds of millions of dollars. As commentators and law reviews see this, even absent any damages, if the "expert’s" damage calculation is large enough, even a 10% chance of winning a verdict incentivizes entrepreneurial lawyers and plaintiffs to file suit in hopes of shaking down a nuisance settlement. Symmetrically, a 10% chance of suffering a ruinous verdict has had the power to coerce rational, value-maximizing corporate managers into multi-million dollar settlements of abjectly non-meritorious claims.

That the damages testimony is the cornerstone of this strategy can be seen most easily by recognizing that, because junk litigation is junk, there is only a small chance that the plaintiff can litigate it to a verdict. As the Law & Economics received doctrine explains it and the example below shows, even if there is only a small chance of a verdict, if the potential verdict is very large, then the resulting small chance at a huge verdict incentivizes junk plaintiffs and their lawyers to file junk litigation. The models show why rational corporate managers often stand ready to settle such matters rather than undertake the cost of defending them, and this incentivizes such litigation further.

Until now.

Because now, a Daubert motion in limine can knock out the damages expert testimony that is the critical central element of this shakedown strategy.

The Daubert Solution to Shakedown Litigation.

To oversimplify for ease of exposition, continue to imagine an utterly baseless claim as described supra and that there exists a mere 10% chance of litigating that claim to a $100 million outcome by putting on an expert who will testify that damages are $100 million. A 10% chance at $100 million is worth $10 million. Fundamental financial analysis instructs that if the prosecution of such claims to such outcomes can be done for less than $10 million, then litigating this nonmeritorious claim to settlement is what financial analysis calls a positive net present value project. There is sufficient history of similarly motivated litigation that law reviews publish sophisticated versions of this model (hereinafter, the "junk-litigation model"). But that is all old news; the received doctrine, so to speak.

What is interesting here is that this same law review model generalizes immediately to finding the value of a sophisticated Daubert motion filed in response to such a claim.

So, proceeding with the same claim, if a Daubert motion to exclude the junk expert testimony has only a 10% chance of successfully disposing of the matter, the Daubert motion is a positive net present value undertaking to the defendant if it can be done for under one million dollars (ten percent of ten percent of $100 million). This condition on the cost of the motion is almost always met, and usually by many (perhaps nine and a half) hundreds of thousands of dollars, making the Daubert motion what financial analysts (and more importantly, your sophisticated clients) call a positive net present value project (hereinafter a "positive NPV project"). Your sophisticated clients will have learned in business school that this simply means that its expected value exceeds its expected cost. They will have also learned that undertaking positive net present value projects increases the value of their firms and its stock.

The beautiful intellectual irony in this is that, modeled in this way, the Daubert motion is shown to be a positive NPV strategy that is precisely symmetric to the positive NPV strategy that incentivized the junk litigation in the first place. In other words, the exact same financial arithmetic that makes junk litigation a financially attractive cottage industry makes Daubert motions to exclude the junk testimony upon which the junk litigation is based a financially compelling undertaking to the target of the junk litigation.

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