W000625
Monday, November 26, 2001 9:03 PM
Comments RE Victim Compensation Fund Rules
The attached Word file contains what I would like to make public as my
comments regarding the proposed rulemaking. Additional comments were
made during my meeting at DOJ on November 5 and in my company's
contribution to the proposal submitted by Dombroff & Gilmore. While I
understand the reason why the written proposal was not considered, I
also believe there are serious issues that few can address. These are
addressed in the attached comments. Please know that I sincerely wish
you all the very best.
Individual Comment
Attachment 1:
Dear Attorney General Ashcroft:
I would like to comment on the proposed rulemaking regarding the September 11 Victim Compensation Fund of 2001.
Four points need to be made. First, before it can write the rules, the Department of Justice must decide what the alternative to the fund is. While it might appear to be litigation, this really is not an alternative if there is no money available. Any alternative should be clearly defined before determining the fund's procedures. Second, because there is no "defendant" per se, the Special Master, acting as judge/jury, cannot rely on the correct number being bracketed by the plaintiff's estimate of damages (which will be at the high end of the range) and defendant's damages estimate (which will be at the low end). The Special Master must somehow determine the "correct" assessment of damages without relying on the plaintiff's experts. Third, the Department must be very careful to avoid supporting the approach used by most litigation economists. Their approach is quite literally to use any technique imaginable for calculating damages, as long as it can be "justified" by them. This approach, while common in a court of law, is not derived from accepted economic principles. Moreover, it assumes away forty years of economic research in the area of human capital economics, including work by economists who received the Nobel Prize in economics. An individual's economic loss from death or injury is measured by their "human capital". In a nutshell, human capital represents an individual's discounted expected lifetime earnings, with proper adjustments. The methodology developed by economists who specialize human capital measurement should be used to estimate damages in personal injury and wrongful death cases. Those techniques are not generally employed in the courtroom. Finally, whatever the loss found by the Special Master, its compensation should be made at minimum cost to taxpayers. This means awards should be made through periodic payment of damages. However, it does not mean that lump sum awards should be "structured".
The Alternative to the Fund - On the one hand, the fund was created as an alternative to litigation. Generally, this would mean that both economic and noneconomic damages would be calculated and argued, both by plaintiff and defendant. The jury would typically find a number in between. All other things equal, filing with the fund gives the advantage of speed and eliminates the liability requirement. On the other hand, the litigation alternative does not exist if there is no money available. Given the extent of the damages, including non-personal injury damages, and the limit of airline liability equal to the amount of available insurance, there may be no money at the conclusion of litigation. If that alternative is not available, the DOJ must decide whether to proceed as if there were. With litigation as an alternative, the courtroom scenario can and should serve as the model for evaluating claims. Without it, some are arguing that the fund is simply a social program with no obvious guidelines. In reality, the fund would still have guidelines, as it must retain the willingness of plaintiffs to file. If they do not, and instead file against the airlines, the limit on liability may be revisited by Congress. Consequently, designing the procedures for the fund as if a true litigation alternative were available is likely the best course to follow.
Special Master Determining the Correct Number - Even though the fund should operate as if litigation were a valid alternative, there is one significant difference. This is that there is literally no "defendant" advocate or representation. Consequently, there is no place for a plaintiff economist to present a high number and a defense economist to present a low number, with the Special Master picking a number in between, as would usually occur with a jury. In the typical courtroom situation, there is usually no effort to present "the right number". Rather, counsel for plaintiffs puts on as high a number as he or she believes the jury will buy, and defense counsel puts on a lower number. Neither counsel seeks the "right" number. Rather, they assume the jury will, by finding a number in the middle, provide the "right" number. The Special Master's number must be that "right" number, as there will not be two numbers between which he or she can find a compromise.
Given this, the Special Master should essentially disregard any testimony of a plaintiff's economist. The Special master should apply the same methodology to each case, both for consistency and because they cannot all be correct. Yet the methodology of the plaintiff will differ by the economist involved. Furthermore, the Special Master should use one set of assumptions regarding inflation, productivity, interest rates and the like for every case. Yet, again, the set of assumptions used by plaintiffs will differ by economist. The only relevance economic-related testimony can have on a case-by-case basis is to clarify certain case-specific issues, such as exactly what the replicable earnings of the decedent were at the time of death.
DOJ Must Do No Harm - Due to the adversarial nature of contested proceedings, there is often little reward for the "right" number. This means there is little reward for the "right" approach. Two identical factual situations, in terms of factors which impact economic damages, each tried before the same jury with the same lawyers, can lead to drastically different results, not because the economists involved make different assumptions, but because they use totally different techniques. This is inconsistent with accepted, legitimate economic theory, which, while clearly supporting different assumptions, supports a single approach to projecting, for example, an individual's future earnings. This fundamental tenet of economic science is taught even at the most introductory level. Unfortunately, legitimate economic theory usually does not find its way into the courtroom. While no lawyer would substitute a cardiologist for an ob/gyn as an expert in a birth trauma case, it is quite common to find lawyers using economists who are totally unfamiliar with the economics of human capital to testify about economic loss. As a result, most witnesses present their own particular methods for arriving at measures of economic loss, ignoring techniques developed in mainstream economics.
While the Department of Justice is not likely to address the proper method for evaluating the economic damages in injury and death cases, it should, at a minimum, strive to "do no harm". It must be careful to avoid explicitly or implicitly endorsing the notion that any economist can address economic loss simply by applying a method he or she has created and used in the courtroom. A court of law is not the proper venue for evaluating what is or is not sound economic theory. Due to the nature of litigation, the methodologies used by personal injury economists in court are not subject to the usual evaluation by peers. The Special Master should utilize the techniques in human capital economics literature to avoid supporting one of the myriad methodologies typically used in the personal injury courtroom. Moreover, unless a different technique is going to be used on each case, applying one from the myriad different "courtroom techniques" will guarantee that it will be inconsistent with all other "courtroom techniques". The DOJ must avoid adding to an already confusing hodgepodge of courtroom economics. To do otherwise would put the government's stamp of approval on armchair economics. For example, it makes no sense to allow testimony regarding so-called "hedonic damages" or "loss of enjoyment of life" even though a witness can provide a quasi-economic explanation for doing so. If the typical courtroom techniques are applied, the degree to which a particular plaintiff is over-compensated or under-compensated will be measurable and predictable. Undoubtedly, then, it will become public and a redress likely demanded.
By using the techniques of human capital economics, the Special Master will have documented support for the decisions made. It will guarantee that identical facts will lead to identical results. Disagreement occurs over assumptions, but the reinvention of techniques on every case by each expert is inexcusable.
Minimum Cost to Taxpayers - The periodic payment of future damages should be used to minimize the cost of the fund to taxpayers. This does not mean that periodic payments through an annuity should be the option for the plaintiff after a lump sum award is determined. While that would benefit plaintiffs, it would not benefit taxpayers.
Typically, the year-to-year loss of an individual's economic contributions, whether to the survivors or to the estate, are reduced to a present value using a rate of return (discount rate) assumed available to the recipient of a lump sum award. This necessitates a conversion by the Special Master of a future stream of dollars into a lump sum, via this assumption, then a conversion of that lump sum back to a future stream of dollars by the recipient. It is far more efficient and much cheaper to pay the stream of loss directly through an annuity. This fully compensates the plaintiff without having to reverse the discounting process, regardless of the interest rates available now or in the future. It also reduces the cost to taxpayers by fifteen to twenty-five percent. Moreover, it eliminates the public outcry that families are being "made rich" when they hear of large cash awards.
To implement this more efficient approach, the cost of the annuity must be made part of the damages evaluation system. Since damages from year to year do not vary in a smooth or constant manner, the annuity cost has to be determined on a year-by-year basis. This should be done as part of the damages projection which is a relatively easy process. Discounting applies a calculated factor to the loss in each future year. Each year, that factor is calculated using the assumed rate of interest and the year in question. Similarly, the cost of an annuity to pay the loss is calculated by a predefined annuity premium for each year and the loss in that year.
If it is felt that the taxpayers should not receive all the savings from a more efficient process, an award that falls between the annuity cost and the discounted value could be made, with the annuity purchased actually paying more than the loss. The taxpayers would still pay less than with a lump sum award and the plaintiff would receive more than if simple discounting were used. In this way, both plaintiff and taxpayers would gain from the more efficient approach to paying compensation. However, the discounting and annuity cost would both have to be determined as part of the damages analysis as it would not be possible to separate them.
There is no reason for taxpayers to pay more than necessary to compensate plaintiffs for future damages with a lump sum. If living, workers do not have an option to receive their future net earnings as a lump sum, determined by discounting with risk-free rates of return. The loss of that net income should be replaced as it occurs. To do otherwise is literally to overcompensate victims at the taxpayers' expense.
As for attorney fees, they could be paid periodically or in a lump sum. If a plaintiff is to pay 20 percent of the present value of the recovery to counsel, it makes no difference whether the remaining 80 percent is paid to the plaintiff as a lump sum or is used to purchase an annuity. Either way, the plaintiff is only being compensated 80 percent of the determined loss after fees. That is, if 20 percent is paid to plaintiff's counsel, the plaintiff invests the remaining 80 percent of a lump sum award, and only 80 percent of the loss that was discounted can be replaced. If counsel is paid 20 percent, and an annuity is purchased with the remaining 80 percent, only 80 percent of the loss is replaced. Either way, attorney fees do not affect the decision to pay damages in lump sum or periodically.
I wish you all the best in your efforts to implement this legislation.