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Apr 05

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Case provides primer on regression analysis and what can go wrong

After a jury trial, ATA Airlines (ATA) won a nearly $66 million verdict against Federal Express Corporation (FedEx). FedEx appealed that ruling. In ATA Airlines, Inc. v. Federal Express Corp., No. 11-1382 (7th Cir. Dec. 27, 2011), a distinguished panel consisting of Justices Easterbrook, Posner, and Wood criticized the complex damages analysis accepted by the trail judge and jury. The case provides some interesting illustrations and lessons in presenting complex damages calculations.

At the end of its ruling, the Appellate Court identified perhaps the most important mistake made by defendant Federal Express – FedEx presented no damages expert of its own. With a difficult-to-understand plaintiff damage presentation, FedEx made a serious mistake of having to rely solely on its cross examination of Plaintiff’s damages expert to present the Plaintiff’s errors.

Plaintiff’s calculation was painfully mechanical. In this case, Plaintiff considered ten years of data, but did not address the trend of this data over time. Stated otherwise, Plaintiff’s regression calculations ignored time, causing any such trend to be similarly ignored. Consequently, the projected costs and profits in the last/damage year bore no relationship whatsoever to what had occurred in recent years. The result was a silly conclusion that lost revenues would have caused Plaintiff’s total revenues to increase, yet total costs in that year would decrease at the same time.

Courts do not often do as good a job as this case does in explaining statistical concepts and damages calculations. The case is worthwhile for its willingness to address these topics in an understandable manner. We provide a more detailed analysis of the case in this article.

 

About the author

David Nolte

I am a founding principal of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA) and an Accredited Senior Appraiser (ASA), as well as having other professional credentials. I regularly serve as an expert witness involving damages measurement. My litigation-oriented resume is on Fulcrum's website.

Permanent link to this article: http://betweenthenumbers.net/2012/04/case-provides-primer-on-regression-analysis-and-what-can-go-wrong/

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