CLE MATERIALS & SPEAKER BIOGRAPHIES

Transcription

1 Fordham Competition Law Institute Antitrust Economics Workshop 21 September 2016 Fordham Law School New York City CLE MATERIALS & SPEAKER BIOGRAPHIES

2 ANTITRUST ECONOMICS WORKSHOP CONTENTS CLE Materials A Primer on When to Use Expert Witnesses and How to Find Them Major League Baseball and National Hockey Leage Daubert Decision Selecting The Right Testifying Expert Working Successfully with Expert Witnesses Presenting Complex Economic Theories to Judges Fosmire v. Progressive Daubert decision Mock Trial Report Mock Deposition Facts Mock Exhibits Speaker Biographies

3 Greg Eastman, Vandy M. Howell, Maria Salgado, Cornerstone Research, A Primer on When to Use Expert Witnesses and How to Expert Evidence Report January 07, 2013 Use of Experts A Primer on When to Use Expert Witnesses and How to Find Them USE OF EXPERTS CIVIL LITIGATION Expert testimony is a critical part of litigation strategy, and it is important to know when experts are most valuable, as well as the best practices in how to find and select them, say consulting experts Greg Eastman, Vandy M. Howell, and Maria Salgado in this BNA Insight. The authors offer their seasoned perspectives on how to decide if an expert is needed, the appropriate time to engage the expert, where to look, and budget considerations. By Greg Eastman, Vandy M. Howell, and Maria Salgado Greg Eastman and Vandy M. Howell are vice presidents, and Maria Salgado is a senior manager, of Cornerstone Research, which provides economic and financial analysis to attorneys in all phases of commercial litigation and regulatory proceedings. Eastman has directed a number of large case teams with multiple experts, and can be reached at geastman@cornerstone.com. Howell has extensive experience in class certification, and can be contacted at vhowell@cornerstone.com. Salgado is experienced in complex business litigation, and can be reached at msalgado@cornerstone.com. In high-stakes litigation, expert witness testimony is often a necessary and critical part of litigation strategy. Experts can offer testimony to address unique questions or facts that are central to liability issues. They are also almost universally used when it comes to quantifying damages. Because expert witness testimony can be such an important factor, there can be much at stake for litigators in the process of finding and selecting an expert. Clients, too, have recognized the importance of choosing the expert witness best suited for the case, and the expert selection process has increasingly become a joint enterprise between outside litigators and their in-house counterparts. Therefore, both in-house counsel and their outside attorneys should be informed about the best practices in finding and selecting expert witnesses. In this article, we discuss the various roles that experts can play in litigation, and some of the key issues one should consider when searching for the most effective expert, a decision that ultimately can have a significant impact on settlement negotiations and trial results The Bureau of National Affairs, Inc. All Rights Reserved. Terms of Service // PAGE 1

4 Greg Eastman, Vandy M. Howell, Maria Salgado, Cornerstone Research, A Primer on When to Use Expert Witnesses and How to Determining Whether You Need an Expert, and if So, What Kind Determining if an expert is needed, and if so, what kind, are the two questions that attorneys must address before beginning a search for an expert witness. An expert will typically be needed when the facts and issues of the case are not easily comprehensible, when the facts of the case require the trier of fact to reach an opinion or conclusion that is not easily attainable, and when the case issues are sophisticated and the judge is not well-versed in the relevant concepts. Experts play a wide variety of roles in different types of cases, and one needs to consider the specific goals for the expert testimony before starting a search. In some cases, the key liability questions revolve around a particular science or study. For example, in a monopolization case, the key liability questions might be to define the scope of the economic market and to assess whether certain behaviors in the marketplace were anticompetitive. While the law provides some structure for considering these questions, they are fundamentally economic questions. Testimony from an economist can lay the framework that should be used to assess the question based on the facts of the case. In another example, a key liability hurdle in a patent case is whether the technology at issue is actually infringing. Technical expertise may be necessary to determine how to assess and answer this question. In these situations, experts provide something different than fact witnesses for a variety of reasons. First, experts are allowed to rely on hearsay, generally distinguishing them from fact witnesses, and allowing them to consider large amounts of evidence and conduct appropriate research. Second, in doing so, the experts are in the specific role of laying a framework based on their experience and expertise, and then assessing and interpreting broad types of relevant information and facts in the case (e.g., data, deposition testimony, internal documents, etc.) using that framework. This provides the ultimate fact finders with a summary of the relevant information and guidance as to how to assess and interpret the information in the case, as well as what the facts imply given this assessment. When an expert is in this role, testifying on the central issue in the case, the testimony can cover much ground and the expert can be on the stand for extended periods of time. Frequently experts are essential to a case in a more discrete role: that of building the fact basis necessary to effectively try or defend the case. This happens when a critical fact to the liability case is not possible to discern with existing information or without expert interpretation. For example, in a trademark infringement case, one central factual question may be whether or not a company's trademark caused confusion among consumers. Marketing or survey experts are often retained to conduct surveys to collect the data necessary to address this question. These surveys would be developed following the rules of survey science in order to be reliable, but are also designed to answer the specific question at hand and provide these facts to the judge or jury. In securities fraud cases, a key fact can be whether or not allegedly withheld information was the cause of a significant change in a company's stock price. A financial or statistical expert can analyze stock prices, economic conditions, and other data and industry events, and apply a formal statistical test to answer this question, consistent with the methodologies used in their field. In these situations, the expert may be providing his or her findings of critical facts for the jury's consideration. These expert roles can be narrower in scope, but no less critical. In some cases, multiple experts are hired, providing different key opinions and an ultimate assessment of the facts. A third role that expert witnesses play one of the most commonly used in litigation is that of the damages expert. The extent of harm that can be attributed to an alleged wrongful act is almost always subject to dispute, and experts can be essential in analyzing that critical question. Damages theories can be challenging to bring to the judge or jury in the absence of an expert witness, as they more often than not require some estimation of a world but for the allegedly wrongful behavior. In that but for world, would plaintiffs have been better off? If so, by how much? In cases where liability has already been established, experts may be used only in the damages phase, as damages experts quantify the impact of the liability. They frequently have economic, financial, accounting, or statistical expertise, as well as experience in the relevant industry. It is sometimes risky to forgo using an expert, especially if the other side has one. As trial lawyers know, when the other side has presented expert testimony, you run the risk if not the likelihood that the trier of fact will accept that expert's findings, simply because you have not offered an alternative. While this list is not exhaustive, a final and important expert role is that of a consulting expert. Testifying experts, as described above, are retained to offer expert testimony that will be used in the litigation and considered by the fact finder. Parties can also engage consulting experts who play a different role. Consulting experts do not testify and their work on a case is not discoverable. Consulting experts can help an attorney consider different economic, financial, or technical complexities of a case, as well as assist in fact development by, for instance, suggesting documents or information to request, deposition questions to ask, and data to use, or by spotting important factual issues The Bureau of National Affairs, Inc. All Rights Reserved. Terms of Service // PAGE 2

5 Greg Eastman, Vandy M. Howell, Maria Salgado, Cornerstone Research, A Primer on When to Use Expert Witnesses and How to Parties can use consulting experts even where they have already engaged a testifying expert on the same issue, and there is often value in doing so. For example, consulting experts can perform preliminary analyses to assess the viability of different strategic directions for a case, without the worry of discoverability. They can also assist in preparing the testifying expert for deposition and trial and provide feedback to counsel on how the testifying expert can be most valuable to the case. Engage Experts Early Once the decision is made to use an expert, counsel must next consider when to engage the expert. With few exceptions, it should be done as early as possible for the following reasons: It increases the chance that your client will be able to retain the expert best suited for the case and that your chosen expert will not be prevented from representing your side because of a conflict of interest. Expert advice can be critical in making the most of fact discovery, as experts can be invaluable in framing discovery requests, identifying fruitful issues to investigate in depositions, and even identifying the right personnel to depose. It allows counsel to use the expert (sometimes in the consulting role) to add input on often-valuable early-stage questions, such as whether or not the value of the case is enough to make it worth litigating, potential settlement value, identification of key technical, economic, or financial concepts or issues, and whether the expert's findings and opinions have implications for other parts of counsel's legal strategy. Early participation helps the expert to develop the most effective opinion, as he or she will benefit from sufficient time to do appropriate research as well as the ability to ensure that the data and information central to the expert's opinion can be collected and made available for analysis. Finding an Expert Generally speaking, most expert witnesses fall into one of three categories: Academics with expertise and experience in a particular methodological approach (e.g., statistical analysis, valuation, assessing competition, etc.), or in the workings of a particular industry (e.g., the economics of the automobile industry). Practitioners with extensive experience in a particular industry (e.g., an experienced auditor who can testify about standard auditing practices or someone who has been on many corporate boards and can discuss the common ways that they operate). These experts are often self-employed and perform expert witness work on an ad hoc basis. Experts who work at expert consulting firms, with careers devoted to providing expert testimony in their areas of expertise (whether that be technical, statistical, or focused on particular industries). The process of finding the expert best suited for a case may seem daunting, but by consulting certain sources, litigation teams can often identify a number of candidates. First, it is always advisable for attorneys to consider their own networks: individuals they have experience working with or otherwise know personally. Trusted colleagues with relevant experience can also be helpful sources of referrals. The client's network should also be leveraged in identifying experts another reason to have the client involved in the expert selection process. A client may have a roster of experts they have worked with successfully in other litigation. While litigators should weigh the possibility that an expert frequently used by a client could be perceived as less credible by a trier of fact (who may not view the expert as unbiased), such an expert may also bring benefits in terms of built-up knowledge and familiarity with relevant technology or other facts. Well-credentialed experts and leading academics in the relevant issue area can often be found by searching publications, electronic CVs, academic citations, and conference presentations. Experts can be cited by judges or in other legal pleadings and disclosed experts in those cases can be considered as possibilities. In addition to the above, searches performed by expert consulting firms are often a valuable way to discover the expert witness best suited for a case. Expert witness consultancies regularly conduct expert witness searches, generally at no charge to attorneys. These services take advantage of the national reach and breadth of expert networks that the consultants have built up over time The Bureau of National Affairs, Inc. All Rights Reserved. Terms of Service // PAGE 3

6 Greg Eastman, Vandy M. Howell, Maria Salgado, Cornerstone Research, A Primer on When to Use Expert Witnesses and How to The benefits of conferring with a consultant go beyond identifying an expert in a particular area that an attorney believes is necessary to the case. With their extensive research and litigation experience, consultants can also help to spot issues and areas of potential expert assistance that the attorney may not have previously considered. This can be especially true if the industry or legal issues are new to counsel. For example, a litigator could start an expert search for a consumer fraud case wanting a statistical expert to assess damages. Consultants who specialize in this area might help the litigator to understand that a key factual issue in calculating damages (e.g., the degree to which consumers changed their behavior due to the alleged fraud) is not possible to assess through existing data, and that a marketing survey expert is better suited to assess the question. Consultancies have a motivation to aid counsel in identifying the experts best suited for the case, as most will make themselves available to support the expert they have identified. Attorneys should also be aware that they can use more than one consulting firm for this search in order to find the best set of options, and ultimately the most appropriate experts, for their case. Selecting an Expert Once potential experts have been identified, there are still several factors to consider before retaining them. Ensure No Direct Conflicts You will need to reveal the party you are representing to allow an upfront identification of any direct conflicts (e.g., the expert is working for the other side in the same matter or in other related litigation). There may also be conflicts in terms of the expert's availability and the case calendar. A discussion to identify direct conflicts should happen prior to any detailed or confidential discussion of your case issues. Consider Past Testifying Experience Request a list of all parties, cases, and issues on which your expert candidate has testified to ensure there are no potential issues with regard to the present case. Much of this information should be immediately available, as federal rules require experts to identify all cases in which they have testified in the preceding four years. Reviewing any previously filed expert reports, if available, as well as deposition transcripts and trial testimony, is important, and many resources such as PACER, or Bloomberg Law databases can provide at least some of that information. Here, counsel should weigh the results of the expert's previous cases, any exclusions of the expert's testimony, and any credibility-damaging aspect of his or her experience (such as only representing one party). Consider How the Expert Is Compensated If the expert is employed by another entity, counsel should also clarify the particulars of their compensation. For example, some experts have financial arrangements with the consulting firms that support or employ them. It is important to understand these relationships up front so that you are not surprised later on if they are investigated in the deposition context or used to try to establish bias. Consider the Expert's Publications in the Academic or Professional Arena Assess the expert's CV for past publications. You can ask the expert for guidance on publications most relevant to the case issues. Review relevant papers to assess whether there are any helpful or problematic positions that have been taken in the expert's prior research. Conduct a Background Check Vetting the candidate can prevent damaging embarrassments at trial. While it may seem that a university professor is competent to testify, it can be surprising what is sometimes found in the public arena. For example, an expert opinion was excluded through a Daubert motion due, in part, to the expert's blog writings, which verified that the expert was offering personal opinion rather than expert analysis. Other examples include statements made by experts in blogs or in press articles that were considered at odds with their expert opinions that significantly damaged their credibility. In deposition, experts have been found to be ex-felons, or not to have completed the PhDs claimed on their CVs. Public sources like social media profiles, blogs, and other writings are a first step, and counsel should at minimum also independently verify the credentials in the expert's CV. Check Several References Getting feedback from other attorneys who have worked with the expert before can be very helpful, and it is advisable to call 2016 The Bureau of National Affairs, Inc. All Rights Reserved. Terms of Service // PAGE 4

7 Greg Eastman, Vandy M. Howell, Maria Salgado, Cornerstone Research, A Primer on When to Use Expert Witnesses and How to at least one attorney who has previously worked with the expert but does not appear on the expert's list of references. Interview the Expert Face to Face Once the search has been narrowed, counsel should always interview experts in person or via video before engaging them, if for no other reason than to observe the expert's demeanor. Interviews allow counsel to have a back-and-forth discussion about strategic case issues, and to learn how the expert thinks and expresses opinions. Also, you can more deeply explore the relevance of the expert's prior experiences to the case at hand. While it can seem a good sign if an expert is enthusiastic about the merits of your side (as opposed to someone who is non-committal or pessimistic), it is also important to remember that for an expert to be effective, he or she must be a critical thinker and one who can fully understand the challenges in your case. The research has not yet been done, so an expert who asks important critical questions is starting in the right place. Note that, in general, a narrower expert opinion that is squarely based on facts and analysis would be expected to be more effective than an advocacy piece that will not withstand criticism. Clarify How the Research Will Get Done Frequently experts and consulting firms are hired together. Consultants who will work with the expert might attend the expert interview and help describe to counsel how they would approach the case. But if not, the interview is the right time to clarify who will be supporting the expert, if anyone. Very frequently the testifying expert does not have the time or bandwidth to conduct all the research. Working with others can lead to a better researched and supported opinion, and can also lead to cost savings (if those supporting the expert bill at a lower rate than the expert). It must be kept in mind, however, that the qualifications of those supporting the expert, or lack thereof, will ultimately reflect on the expert's work. For example, in one deposition, questioning revealed that an expert's damages model had been worked on by his daughter at home a fact that damaged the credibility of the evidence. Costs Cost is an important consideration when choosing an expert, but in complex litigation it can sometimes be difficult to predict. The expert's billing rate, and the billing rate of those that will support the expert in the litigation, should be easy to obtain. More challenging may be obtaining a clear sense of the time an expert and his or her team will require to provide the analysis necessary to create an expert report, testify at deposition and trial, and perform other essential activities. Like legal work, an expert's focus and assignment can change over time, and can often involve more complications than originally anticipated. A broad cost range can and should be established upfront. This can be guided by known factors including the type of case, the role and scope of the expert testimony, how data-intensive the work will be, etc. Most experts and consulting firms can give cost estimates by looking at the range of billings on past casework similar to the matter at hand. Attorneys should view cost estimates from potential experts critically and feel comfortable questioning the assumptions. Higher-than-expected budgets may mean that the expert and firm are less efficient, or alternatively, that they have identified some key analyses not considered by others but that are costly to perform, or that they are simply trying to offer a budget that will avoid any surprises. Lower-than-expected budgets may mean that the expert and firm do not understand the scope of what is being asked and may provide lower quality work, or alternatively, that they are more efficient, experienced, costeffective, and innovative than others. Selecting the expert best suited for your matter could necessitate identifying answers to these questions, and it is appropriate to get clarity on the reasons for both low and high estimates in order to make the best decision. It is also useful to establish up front how costs and budget will be managed as the case evolves. For example, while it is valuable to retain an expert early, attorneys can set parameters as to when an expert can bill and how much (e.g., not when a dispositive motion is pending). If budget constraints are severe, attorneys can explore changing the scope of the expert's role for example, by having an analysis be more conceptual and less empirical. And in what may be the most effective and realistic method of controlling expert costs, counsel can request regular budget updates from the expert and the team and communicate about their expectations going forward. The approach for providing budget updates should be defined in advance, as well as the type of communications that will happen if it appears that the expert work will be more costly than originally anticipated. In sum, expert witness testimony can be a critical part of litigation strategy, and it is important to know when experts are most valuable, as well as best practices in how to find and select them. As discussed above, the process of looking for the most effective expert involves deciding what kind of expert is needed (if any), determining the appropriate time to engage the expert in the litigation (preferably early), using one or more sources to identify potential experts, choosing from the candidates that were identified, and considering the budget for the expert. The process is important, as the decision can ultimately have a 2016 The Bureau of National Affairs, Inc. All Rights Reserved. Terms of Service // PAGE 5

8 Greg Eastman, Vandy M. Howell, Maria Salgado, Cornerstone Research, A Primer on When to Use Expert Witnesses and How to significant impact on settlement negotiations and trial results. The views expressed in this article are solely those of the authors, who are responsible for the content, and do not necessarily represent the views of Cornerstone Research The Bureau of National Affairs, Inc. All Rights Reserved. Terms of Service // PAGE 6

9 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 1 of 72 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK USOCSIJNY DOCUMENT ELECTRONICALLY FILED ll ~ >C #: i ' ll : DA11! it l'1ull>: r,l'i.h) ~ : THOMAS LAUMANN, ROBERT SILVER, GARRETT TRAUB, and DAVID DILLON, representing themselves and all other similarly situated, - against - Plaintiffs, NATIONAL HOCKEY LEAGUE, et al., Defendants. MARC LERNER, DEREK RASMUSSEN, and GARRETT TRAUB, representing themselves and all other similarly situated, x OPINION AND ORDER 12-cv-1817 (SAS) Plaintiffs, - against - OFFICE OF THE COMMISSIONER OF BASEBALL, et al., Defendants. 12-cv-3704 (SAS) x I. INTRODUCTION These cases challenge restraints in the market for baseball and hockey broadcasting. The essence of plaintiffs' argument is that the leagues - Major 1

10 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 2 of 72 League Baseball ( MLB ) and the National Hockey League ( NHL ) have conspired with regional sports networks ( RSNs ), who produce broadcasts for individual teams, as well as multichannel video programming distributors ( MVPDs ), who sell broadcasts to consumers, to maintain a system of territorial exclusivity that limits viewing options and inflates prices. The details of that system are described in detail in a companion Opinion, also issued today, addressing the issue of class certification. 1 This Opinion addresses the admissibility of the damages model proffered by plaintiffs expert, Dr. Roger Noll (the Daubert Opinion ). For the purpose of that task, the important background is that RSNs are currently prohibited by league-wide agreement from broadcasting their content to baseball and hockey fans who live outside an RSN s home team territory. Consequently, if a fan of an out-of-market team wishes to watch that team s games, she is forced to buy an out-of-market package ( OMP ) that contains broadcasts of all games in the league. Plaintiffs believe that this arrangement reflects an unlawful restraint of trade, and that if the league-wide agreement preventing out-of-market RSN distribution were eliminated, fans of out-of-market teams would be able to subscribe to a la carte channels, which would carry broadcasts only of the 1 See Certification Opinion. 2

11 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 3 of 72 subscriber s preferred team at a lower price than the OMP. For example, a Yankees fan living in Iowa now has to purchase an OMP if she wants to watch a season s worth of Yankees games whereas in the but-for world envisioned by plaintiffs ( BFW ), the same fan would have the option of purchasing an OMP or getting an a la carte subscription from the Yankees RSN. According to plaintiffs, the absence of a la carte options in the actual world has insulated the OMPs from competition, allowing the leagues, the RSNs, and the MVPDs to command super-competitive subscription fees leading to overcharge. The purpose of Dr. Noll s model is to model the extent of that overcharge, by comparing the price of OMPs in the actual world to the projected price of OMPs in the BFW, once the territorial restraints are lifted, and the supply chain is reconfigured accordingly. Defendants have moved pursuant to Rule 702 of the Federal Rules of Evidence ( FRE ) to exclude Dr. Noll s expert opinions, alleging that his model suffers from numerous methodological flaws that render his opinions unreliable as a matter of law. For the foregoing reasons, defendants motion is GRANTED in part and DENIED in part. II. LEGAL STANDARD The proponent of expert evidence bears the initial burden of 3

12 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 4 of 72 establishing admissibility by a preponderance of the evidence. 2 For expert testimony to be admissible under FRE 702, the witness must be qualified as an expert by knowledge, skill, experience, training, or education[.] 3 The court must then compare the area in which the witness has superior knowledge, education, experience or skill with the subject matter of the proffered testimony. 4 To be admissible, the proposed expert testimony must be based on a reliable foundation. 5 In assessing reliability, the trial judge should consider whether: (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has reliably applied the principles and methods to the facts of the case. 6 Although the Supreme Court has instructed district courts to focus on [the] principles and methodology employed by the expert and not on the conclusions that they generate, 7 nothing in either Daubert v. Merrell Dow Pharmaceuticals United States v. Williams, 506 F.3d 151, 160 (2d Cir. 2007). Fed. R. Evid United States v. Tin Yat Chin, 371 F.3d 31, 40 (2d Cir. 2004). 5 Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 597 (1993). Accord Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137, (1999). 6 7 Fed. R. Evid. 702 (emphasis added). Daubert, 509 U.S. at

13 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 5 of 72 or the Federal Rules of Evidence requires a district court to admit opinion evidence that is connected to existing data only by the ipse dixit of the expert. 8 Indeed, [a] court may conclude that there is simply too great an analytical gap between the data and the opinion proffered. 9 For this reason, even where an expert s methodology is reliable, if the analysis is not based upon relevant and reliable data, the expert s opinion will be inadmissible. 10 District courts are charged with acting as gatekeeper[s] to exclude invalid and unreliable expert testimony, 11 and are given broad discretion to make such determinations. 12 However, trial courts must consider only the admissibility of expert evidence rather than its weight or credibility. As the Supreme Court has explained, [v]igorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional 8 9 Kumho Tire, 526 U.S. at 157 (quotation marks and citations omitted). General Elec. Co. v. Joiner, 522 U.S. 136, 146 (1997). 10 Johnson Elec. N. Am. Inc. v. Mabuchi Motor Am. Corp., 103 F. Supp. 2d 268, 283 (S.D.N.Y. 2000). 11 Baldwin v. EMI Feist Catalog, Inc., 989 F. Supp. 2d 344, 349 (S.D.N.Y. 2013) (quoting Bickerstaff v. Vassar Coll., 196 F.3d 435, 449 (2d Cir. 1999)). 12 Davis v. Carroll, 937 F. Supp. 2d 390, 413 (S.D.N.Y. 2013). Accord Amorgianos v. National R.R. Passenger Corp., 303 F.3d 256, 265 (2d Cir. 2002). 5

14 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 6 of 72 and appropriate means of attacking shaky but admissible evidence. 13 Finally, it is often the case that some, but not all, of an expert s opinions will meet the criteria of FRE 702. Indeed, it is routine for a party to retain a single expert to opine on a variety of issues that, while related, can be analyzed independently under the Daubert standard. In such cases, the court, as gatekeeper, has discretion to decide which opinions are reliable and which are not, from which it follows that a court may exclude portions of an expert report while admitting other portions. 14 III. PLAINTIFFS EXPERT Dr. Noll, a nationally-recognized sports economist, has submitted an expert report explaining why the prices of baseball and hockey broadcasts would decrease in the BFW. 15 In support of this expert report, Dr. Noll designed an economic structural model to simulate how consumers and RSNs would behave if 13 Amorgianos, 303 F.3d 256 at 267 (quoting Daubert, 509 U.S. at 596). 14 See, e.g., Louis Vuitton Malletier S.A. v. Sunny Merch. Corp., No. 13 Civ. 5242, 2015 WL , at *17 (S.D.N.Y. Mar. 31, 2015) (striking some, but not all, of a single expert s opinions); Federal Hous. Fin. Agency v. Nomura Holding Am., Inc., No. 11 Civ. 6201, 2015 WL , at *3 (S.D.N.Y. Feb. 16, 2015) (same). 15 Defendants do not challenge Dr. Noll s academic or professional qualifications. 6

15 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 7 of 72 territorial restrictions were lifted. 16 Dr. Noll claims that his model is based on a similar study conducted by Drs. Gregory Crawford and Ali Yurukoglu (the C&Y Model ), which measured how the hypothetical unbundling of cable television packages would impact consumer welfare over the short-run. 17 How closely Dr. Noll s model follows the approach of the C&Y Model is the subject of major disagreement among the parties, but at least one difference between the two models is undisputed: in Dr. Noll s model, unbundling reduces prices for the consumer; in the C&Y Model, it does not. In broad strokes, both models are built on the interplay between consumer demand and preferences for content (the Demand Side ) and the supply chains that distribute that content (the Supply Side ). In attempting to predict future outcomes in a hypothetical universe, the models depend both on existing data in the actual world and assumptions about how consumers and distributors 16 See 2/23/15 Corrected Reply Declaration of Roger G. Noll ( Dr. Noll Reply Decl. ); 9/19/14 Supplemental Declaration of Roger G. Noll ( Dr. Noll Supp. Decl. ); 2/18/14 Declaration of Roger G. Noll ( Dr. Noll Decl. ). For reasons explained below, Dr. Noll twice tweaked the model he offered in his first declaration in response to criticism from defendants experts. Yet all of these models are considered interim models the Court did not require a final model at this early class certification stage of the litigation. 17 See Gregory S. Crawford & Ali Yurukoglu, The Welfare Effects of Bundling in Multichannel Television Markets, 102 Am. Econ. Rev. 643 (2012) ( C&Y ). 7

16 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 8 of 72 will behave in the BFW. Defendants attack Dr. Noll s methodological approach to constructing both the Demand Side and the Supply Side, arguing that design flaws in each constitute independent bases for rendering his model unreliable as a matter of law under FRE 702 and Daubert. 18 In support of their motion, defendants retained several experts to vet both sides of Dr. Noll s model, all of whom along with Dr. Noll were examined and cross-examined over the course of a three-day Daubert hearing. 19 On the Demand Side, defendants primary concern is that Dr. Noll did not rely on sufficient data about fan preferences in estimating what their demand would be for products in the BFW. On the Supply Side, defendants grievance centers on Dr. Noll s conceptual assumptions; they argue that Dr. Noll has not justified all the building blocks of his structural model. In this Opinion, I separately discuss the Demand Side and the Supply Side of Dr. Noll s model. 18 See generally Memorandum of Law in Support of Defendants Joint Motion to Exclude Opinions and Testimony of Plaintiffs Expert, Dr. Roger Noll ( Def. Mem. ); Reply Memorandum of Law in Support of Defendants Joint Motion to Exclude Opinions and Testimony of Plaintiffs Expert, Dr. Roger Noll ( Reply Mem. ). 19 See 3/17/15 Transcript of Proceedings, Dkt. 339 ( Day 1 Tr. ); 3/18/15 Transcript of Proceedings, Dkt. 341 ( Day 2 Tr. ); 3/19/15 Transcript of Proceedings, Dkt. 343 ( Day 3 Tr. ). The hearing concluded with summations by counsel for plaintiffs and defendants addressing both the reliability, or lack thereof, of Dr. Noll s model and how the Court s decision on the Daubert challenge bears on class certification. See Day 3 Tr. 8

17 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 9 of 72 IV. DEMAND SIDE A. Summary of Dr. Noll s Opinions 20 The price of the league bundles and a la carte channels in the BFW is driven by consumer demand. 21 To predict those prices, Dr. Noll s model follows a two-step approach. First, he captures a mathematical curve of consumer demand in the actual world, with territorial restrictions, based on observed consumer and producer behavior and various corresponding assumptions, by designing mathematical equations designed to replicate the observed behavior. 22 Second, he simulates markets in the BFW using consumer demand as determined by the estimates in the first step. 23 The general idea, according to Dr. Noll, is to us[e] a demand estimate [] derived from the status quo to analyze another counterfactual world that has territorial restrictions removed. 24 Determining how Dr. Noll arrives at these step-one estimates is critical to analyzing the reliability of the 20 As mentioned above, Dr. Noll ultimately made two adjustments to his original model in designing the Demand Side in response to criticism from the defendants experts. The most recent version of Dr. Noll s model, outlined in his February 23, 2015 declaration, was the primary focus of the Daubert hearing. It is this third version I will analyze here, unless otherwise noted See, e.g., Day 1 Tr. at See id. at 66. See id. Id. at 67. 9

18 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 10 of 72 Demand Side. At bottom, these estimates are predicated on the notion that consumers derive welfare, or utility, from spending time watching the live telecasts of their preferred teams, but only to a certain point especially in light of price considerations and the corresponding utility of doing things other than watching televised sporting events. 25 Therefore, the Demand Side requires a large sample of consumer viewing data across the channels in a bundle... to calculate the means and standard deviations of time spent viewing each sports channel and engaging in other activities. 26 The viewing data on which Dr. Noll relies is drawn from subscriber information for the OMPs provided over the Internet and through DirecTV for the 2012 MLB season and for the OMPs provided over the Internet for the NHL season. 27 Dr. Noll then uses this data to estimate statistical distributions of consumers preferences for each team in the bundles. 1. The Underlying Data Before delving into the technicalities of the statistical analysis See Dr. Noll Decl. at 100. Id. 27 See Dr. Noll Supp. Decl. at 5. Dr. Noll states that the data that the MVPD providers for the NHL OMP produced were too fragmentary to support estimating the same model. Id. 10

19 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 11 of 72 underpinning the Demand Side, it is important to review the underlying consumer viewership statistics the observed, real-world data buttressing the demand component of the model in greater detail, as well as some corresponding assumptions Dr. Noll makes using that data. Because there is no observable data about consumer behavior in the BFW, utilizing real-world information is paramount in estimating otherwise unknown consumer preferences. 28 For its MLB OMP ( MLB Extra Innings ), DirecTV records the time and duration of a single session of viewing a channel for each subscriber. 29 This amounts to 1,178,100 viewing records for 3,236 subscribers over the course of the season. The DirecTV data does not include the location of the subscriber or the specific package that the subscriber purchased there is some variation in price among packages, in part due to discounts for purchasing them a certain amount of time in advance of the start of the season. 30 MLB s Internet OMP ( MLB.tv ) provides substantially more data points, totaling 64,562,268 viewing records of 521,352 unique subscribers, but those records do not record the total time spent See Dr. Noll Decl. at 100. See Dr. Noll Supp. Decl. at See id. at 26. For the purposes of modeling, Dr. Noll assumes that all subscribers paid the price of the most popular package. See id. 11

20 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 12 of 72 viewing each game. 31 Accordingly, Dr. Noll estimated the mean viewing time for each team by multiplying the number of that team s games viewed by the MLB.tv subscriber by the average viewing duration for that team in the DirecTV data. 32 As with DirecTV, MLB.tv package prices vary slightly, so Dr. Noll used the price of the most popular package for estimation purposes. 33 For the NHL Internet OMP ( NHL GameCenter Live ), Dr. Noll s data set included 4,166,577 records for 99,966 subscribers for the season. 34 This data includes information regarding viewing time and subscriber location for each game. 35 Finally, for both the MLB and NHL OMPs, Dr. Noll calculates relevant market shares as the number of subscribers to the services divided by the number of U.S. households that watched that sport s championship series, assuming the latter figure to be an upper bound of the potential market for the package. 36 Dr. Noll uses this viewing data and various assumptions stemming from it to build the foundation of the Demand Side. Notably, as defendants are 31 See id. at See id. at See id. See id. See id. See id. at

21 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 13 of 72 quick to point out, this foundation lacks any significant additional information regarding consumer demand and preferences. For instance, in modeling demand, Dr. Noll admits that he (1) never sought to obtain demographic data or other personal characteristics about OMP subscribers or baseball and hockey fans more generally, (2) never conducted or attempted to conduct any type of survey of subscribers or non-subscribers regarding viewing preferences or tastes for new products (to wit, a la carte offerings), (3) never sought to obtain specific information regarding price sensitivities of consumers, and (4) that he ignores information regarding package price variation. 37 Similarly, based on the observed data for baseball, only four percent of all World Series watchers Dr. Noll s assumed upper bound of the market actually subscribed to an OMP; lacking additional preference data, it follows that all Dr. Noll knows concretely about ninety-six percent of fans in the potential market is that they did not buy a package Recovering the Demand Curve So, how does Dr. Noll use the observed data and his assumptions to estimate demand? This is where things get complicated. According to Dr. Noll, See, e.g., Day 3 Tr. at , 512. See Day 1 Tr. at

22 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 14 of 72 [t]he goal of the econometric estimation is to recover the distribution of consumer preferences for live telecasts of the games of each team [] as well as consumer preferences for viewership and price sensitivity. 39 To accomplish this task, he builds a structural model which originates with sample mathematical equations that are meant to replicate the actual data reflecting the behavior of participants in a market on both the supply and demand sides. Included in those equations are unknown mathematical variables, which can be estimated by attempting to match them to existing viewership data. 40 In economic terms, these variables are referred to as parameters. 41 The parameters the model seeks to estimate measure the responsiveness of the consumer to price, the value they place on having access to the bundle, and the value they place on viewing time of each of the teams or RSNs that they view. 42 Put differently, the parameters gauge the relative utility a consumer derives for each out-of-market channel as compared to all other nonsports-watching activities, which can then be applied to predicting outcomes in the BFW Dr. Noll Supp. Decl. at See Day 1 Tr. at See id. at 68. Id. 14

23 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 15 of 72 These parameters are ultimately determined using the Generalized Method of Moments ( GMM ), an estimation procedure commonly deployed by economists to study demand in markets with differentiated products. Without going into great mathematical detail many pages of Dr. Noll s declarations consist almost entirely of complex equations beyond the comprehension of the Court or the lawyers in this case GMM works by using an iterative process in which experimental values are assigned to these parameters with the goal of getting the sample equations to produce results as close as possible to the actual, observed data. 43 In other words, and at the risk of oversimplifying it, the GMM component of the model essentially runs through a series of sixty-six mathematical formulas over and over again, each of which predicts moments (measures of the statistical distribution) of data relating mainly to viewing time, until the moments predicted by a given, experimental formula nearly replicate the actual moments of viewing data collected from MLB Extra Innings, MLB.tv, and NHL GameCenter Live, described above. 44 When the GMM process concludes, and the predicted moments 43 See id. at See id. at 69. Because a perfect match between predicted moments and observed moments is impossible, the GMM procedure stops once the match is as close as possible. The moments themselves characterize the shape of the statistical distribution of a particular variable. See id. at They are calculated by using the means and standard deviations of viewing data, bundle market share, and price-cost margin. 15

24 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 16 of 72 closely match the observed ones, the demand parameters of the model are established. Dr. Noll s predicted moments come close to matching the actual moments drawn from the observed data in the existing world. Consequently, Dr. Noll concludes that the explanatory power of the model to replicate the data from which it is estimated is high. 45 While there is some variation in match accuracy across individual teams, Dr. Noll insists that what is actually important is the power of the model itself to explain all of the data, not just the results for specific teams. 46 After recapturing the demand curve, Dr. Noll turns to the second step of the model predicting prices in the BFW. To do so, Dr. Noll uses data about demand in the actual world to simulate demand in a market where out-of-market RSNs are available a la carte Categorizing Fans and the Logit Error One of the realities of the BFW, assuming bundles continue to exist, is that fans will have the choice between purchasing one or more a la carte channels Part IV. Id. at 80. Id. See id. at 82. For a detailed discussion of the Supply Side, see infra 16

25 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 17 of 72 or a traditional OMP. To simulate this competition on the Demand Side, Dr. Noll s model sorts potential subscribers into one of three categories: (1) singleteam fans, (2) two-team fans, and (3) multi-team fans. 48 Single-team fans subscribe to a bundle for access to only one team. These are fans that do relatively little viewing of any other team. 49 Two-team fans are those who subscribe to OMPs because they have an interest in two teams for example, a husband and a wife who have different favorite teams. 50 Multiteam fans are interested in watching anywhere between three teams and the maximum number available to them. 51 Dr. Noll relies on the mathematical estimation procedures driving the GMM to help him sort fans into various categories. 52 Significantly, these 48 See Day 1 Tr. at 91. His first two models did not distribute fans in this manner. The adjustment in the third model responded to critiques of defendants Demand Side expert, who demonstrated that Dr. Noll s second model was unresponsive to drastic changes in viewership patterns, producing the same results regardless of those changes. See Dr. Noll Supp. Decl. at Therefore, the fan categories of the third model attempt to account for a wider range of viewership patterns. 49 Day 1 Tr. at See id. 51 See id. 52 See id. at 137 ( [T]he proportions of people who are one, two, and many are determined by the estimation procedure to maximize the explanatory value of the three-way categorization. ). 17

26 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 18 of 72 categories comprise simulated fans whose preferences are not directly corroborated by any actual, observable data instead, they are driven by moments of viewing time. 53 To put this in perspective at the Daubert hearing, defendants counsel and Dr. Noll addressed the process of classifying a hypothetical fan who watches one team ninety percent of the time but still derives significant value from the ability to view other games from time to time. 54 Dr. Noll would likely classify that fan as a single-team fan. 55 In essence, while a fan with a primary allegiance to a single team may in fact have a strong preference to watch other teams as well, Dr. Noll admits that those preferences are zeroed out in his model. 56 Dr. Noll insists that this type of viewing utility is accounted for by a mathematical component built into his model called the logit error. The term logit error does not connote a mistake; rather, the error is a random component of the model that seeks to capture factors bearing on the utility a fan derives from 53 See id. at See id. Imagine a die-hard Yankees fan who spends ninety percent of his baseball-watching time viewing only Yankees games, but ten percent of the time, he might want to check in on games featuring the Yankees division rivals perhaps even more than ten percent of the time if the division is particularly competitive that season See id. at 138. Id. 18

27 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 19 of 72 watching a specific team beyond simply the time spent viewing that team. 57 According to Dr. Noll, the logit error is a random component value factored into the Demand Side to account for the fact that there are forms of utility from the bundle other than pure viewing time. 58 So the logit error adds to the model a random distribution of utility to provide, per Dr. Noll, a shock that isn t measured by what is already in there. 59 But, as Dr. Noll admits, [t]here is no additional information about [fans ] preferences other than the logit error that measures the departure of the utility from the expected value Results of the Model Dr. Noll s model yields significantly reduced prices of bundles in the BFW. Specifically, the average monthly price of the MLB.tv package would decrease from $20.05 to $ The average monthly price of NHL GameCenter Live would decrease from $26.28 to The average monthly price of MLB See id. at 140. Id. at 171. Id. at 175. Id. at 179. See Dr. Noll Reply Decl. See id. 19

28 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 20 of 72 Extra Innings would drop from $33.59 to $ Central to evaluating the reliability of those findings are the specific results Dr. Noll s model yields for fans preferences between a la carte channels and bundles in the BFW. For both the MLB and the NHL, the following pattern holds true. Of the three fan types in Dr. Noll s model, the fans classified as single-team fans the ones primarily interested in watching one and only one team are the most likely to purchase the league package, and the least likely to purchase an a la carte channel. 64 Further, the fans most likely to purchase an a la carte channel are those that are interested in the greatest number of teams. 65 These multi-team fans almost universally reject the opportunity to purchase a league bundle in the BFW. 66 The relevant data demonstrating this pattern is reflected for MLB.tv in the chart below. 63 See id. 64 See Defendants Demonstratives and Exhibits ( Def. Demonstratives ), Tab 8, at See id. Of course, there is a limit to the number of a la carte channels that a fan would purchase once the number of a la carte channels a fan is interested in purchasing exceeds the price of the bundle, or is about the same, the fan would be better off buying the bundle. 66 See id. 20

29 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 21 of 72 Chart 1: Purchasing Decisions by Fan Type in the BFW - MLB.tv 67 Fan Type % Purchasing Standalone % Purchasing Bundle Single-Team Fan Two-Team Fan Multi-Team Fan 99 1 B. Defendants Key Modeling Criticisms Defendants insist that these results are absurd and counterintuitive, signaling that something is amiss about Dr. Noll s model. After all, common sense would suggest that the opposite of Dr. Noll s model should hold true fans interested primarily in one team would buy an a la carte channel, and fans interested in several teams would buy a bundle. To that end, defendants rely on their own expert, economist Dr. Daniel McFadden, to highlight methodological flaws on the Demand Side. 68 Dr. McFadden offers a number of criticisms of Dr. Noll s model, ultimately characterizing it as junk science. 69 All of the 67 See id. 68 See Day 2 Tr. at Dr. McFadden won the Nobel Prize for developing methods to study discrete choice situations where consumers have to choose between one product or another. See id. According to Dr. McFadden, Dr. Noll is using discrete choice models and analysis at the core of his demand analysis. Id. at 360. Plaintiffs do not challenge Dr. McFadden s credentials as an expert. 69 Id. at

30 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 22 of 72 independent, perceived flaws that inform Dr. McFadden s conclusion fit one common theme: the Demand Side relies too heavily on mathematical assumptions and random error, and too little on actual data about consumers and their preferences. 70 To illustrate this problem, Dr. McFadden closely examines the process by which Dr. Noll simulates the behavior of consumers. As noted above, only four percent of all World Series watchers Dr. Noll s assumed upper bound of the market actually subscribed to an OMP. 71 This means that Dr. Noll has no data for ninety-six percent of consumers in the potential market, other than that they chose not to buy the package in the actual world. To design simulated consumers (or avatars ), Dr. Noll starts with real demand data on fans that subscribed to league packages in the actual world but these fans constitute only a very small 70 At the beginning of his testimony at the Daubert hearing, Dr. McFadden offered three guiding principles for evaluating the reliability of the demand component of structural models. First, when modeling demand, you should be using data on consumer behavior rather than say, for example, mathematical assumptions. Id. at 362 (emphasis added). Second, the model s predictions should be falsifiable, such that the model should not yield certain kinds of results in situations where different demand inputs are used to alter the expected predictions. See id. Third, the model should be consistent with observed consumer behavior[,] particularly on dimensions that are important for that application. Id. (emphasis added). 71 The same method is applied to the NHL and viewers of its championship series, the Stanley Cup. 22

31 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 23 of 72 subset of the total BFW population. To account for the overwhelming majority of BFW consumers, about which he knows very little based on the actual world, he is forced to, in Dr. McFadden s words, assign[] a mathematical DNA to these avatars using assumptions to essentially fill out the DNA which will determine how these people make choices and behave. 72 Ultimately, the behavioral properties of these avatars are not based directly on anything in the real data that [Dr. Noll] has. 73 As a result, while Dr. Noll is able to match predicted viewing times in the BFW to observed viewing times in the actual world with some precision through the GMM procedure, his model s estimates about viewer preferences are inaccurate. 74 To prove this point, Dr. McFadden compares the actual league subscriber data to the predicted habits of Dr. Noll s avatars. The results of that comparison are reflected in the chart below Id. at 366. Id. at 369. See id. at

32 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 24 of 72 Chart 2: Comparison of Subscriber Behavior - NHL 75 Subscriber Behavior Actual % Dr. Noll s Model % Watches a single RSN Watches two RSNs Watches more than two RSNs This simple fitting test reveals major differences between viewers tastes as defined by the actual, observed data and those predicted by the GMM. As another example, Dr. McFadden runs a different test to show that Dr. Noll s model underpredicts the popularity of individual RSNs within league bundles across the board. The general pattern is that bundle subscribers watch a lot more teams, and a higher share of them watch every team [or] any team than Dr. Noll s model predicts. 76 In fact, for all but two teams in the NHL, Dr. Noll s model predicts that a lower percentage of subscribers watch a given team than what was observed in the actual data for package subscribers. 77 This discrepancy is particularly noteworthy, according to Dr. McFadden, because it represents a departure from the C&Y Model, which imposed as part of [its] moments the 75 Def. Demonstratives, Tab 8, at 9. Testimony regarding similar MLB data was stricken from the record because Dr. McFadden s MLB charts were not disclosed to plaintiffs in advance of the Daubert hearing. See Day 2 Tr. at Day 2 Tr. at 377; see also Def. Demonstratives, Tab 8, at 12. See Day 2 Tr. at 377; Def. Demonstratives, Tab 8, at

33 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 25 of 72 condition that these actual and predicted shares had to match. 78 This is not the only instance of Dr. Noll s model failing to replicate the C&Y Model on the Demand Side. At a more general level, Dr. McFadden testified that an important difference between Dr. Noll s model and that of Crawford and Yurukoglu is that the latter was built on substantially more data. 79 Dr. Noll conceded as much during the Daubert hearing. 80 testified that When asked how he would remedy this problem, Dr. McFadden [t]he standard procedure would be to try to get data... from the entire population... certainly first to go look and see if someone else has already collected it. But if you can t find that, it would [be] common procedure [] to collect your own data, do your own survey, find out who is, for example, in this case who s a fan and who is not, and perhaps also find out more about what their tastes are, whether they would consider buying or not at various suggested prices Day 2 Tr. at 377. See id. at See Day 1 Tr. at In their study, Crawford and Yurokoglu based their model on a variety of sources of information, including surveys of random samples of consumers about media usage, consumer behavior, and demographics. See C&Y at 653. The information they gleaned factored into their GMM estimates. See id. at Day 2 Tr. at

34 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 26 of 72 He added that collecting surveys is almost a standard in market research where this problem of estimating demand for new product arises something that firms deal with all the time, and there is now a long tradition and a long history of using survey techniques to understand what s going on and [to] make predictions. 82 According to Dr. McFadden, the dearth of data in Dr. Noll s model culminates in nonsensical results namely those reported in Table 1 which are driven by the logit error. Specifically, Dr. McFadden contends that Dr. Noll s use of logit error in his model is inappropriate in this circumstance because of what is known as the red bus/blue bus problem a function of the logit error that forces an overprediction of how many consumers will buy standalone RSNs instead of the bundle in the BFW. 83 The red bus/blue bus problem a known characteristic of logit error models draws from a hypothetical decision commuters face: whether to travel by car or by a red bus. In the first instance, one assumes that a commuter chooses between these options with equal probabilities. Then, add to the hypothetical a third option a blue bus, in addition to a red one. In theory, the additional color choice should not affect the probability of whether a Id. at 368. Id. at

35 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 27 of 72 commuter chooses to commute by car or by bus, generally. But the potential flaw of the logit error is that introducing the third option, a different type of bus, spreads the odds evenly between car, red bus, and blue bus. As a result, the odds of choosing to commute by car drop when they really should remain the same. The more colors of buses that are added, the more likely a commuter will ultimately choose a bus. 84 In this case, the logit error flaw becomes apparent by substituting cars and buses for bundles and a la carte channels the logit error decreases the probability of choosing the former as more types of the latter are added. 85 Dr. Noll never tested whether this problem affected his model, despite the fact that, according to Dr. McFadden, [i]t s a limitation of the model which people are warned against and for which there are tests. 86 Above all else, Dr. McFadden notes that this problem is exacerbated by Dr. Noll s heavy reliance on mathematical assumptions and equations to derive properties of avatars. Dr. McFadden concludes that, from a scientific point of view, the red bus/blue bus problem shows that the Demand Side of Dr. Noll s model is very badly specified. 87 Dr. Noll s results violate[] common sense See id. See id. at Id. at 381. Id. at

36 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 28 of 72 because he s making a mathematical inference on how choice behavior is going to look without going into any real data on it[,] and that is itself simply unreliable. 88 C. Dr. Noll s Response Dr. Noll claims that his model does not suffer from data deficiencies, and moreover, that the seemingly counterintuitive results of his model make economic sense in that they reflect differing price sensitivities among categories of fans. According to Dr. Noll, the parameters [] estimate[d] produce the result that the multi-team [fans] are the most price sensitive. 89 This is because the viewing time moment in his model is a mechanism that picks up the degree to which teams are substitutes for each other, and when you finally get to the multi-team fan, you have lots of teams that are perfect substitutes, and so you can distribute your time. 90 Expanding on this explanation, Dr. Noll offered a hypothetical during his rebuttal testimony: Suppose you are a Yankees fan. You couldn t care less what the price of the Houston Astros channel is. Right? You are going to buy the Yankees you re pretty price sensitive to it. All right? Now instead suppose you re someone who just likes baseball[,] and you don t care whether it s the Houston Astros or the New York Yankees Id. at 383. Day 1 Tr. at 182. Id. at

37 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 29 of 72 You are more likely to look at the relative price of those two to decide which channel to subscribe to. 91 Therefore, Dr. Noll insists that his model produces the result that for multi-team fans price sensitivity outweighs preference for diversity. During Dr. Noll s rebuttal testimony at the Daubert hearing I asked whether, in simply enjoying watching the game of baseball or hockey, multi-team fans would buy a package instead of one or two RSNs, which would heavily restrict the number of teams they could watch on any given day. Dr. Noll asserted that the coefficient in the regression in the utility function of his model part of the logit error accounts for that possibility. 92 In support of that contention, Dr. Noll dismissed Dr. McFadden s conclusion about the effects of the red bus/blue bus problem on the model s logit error as inaccurate. 93 Defending his use of the logit error, Dr. Noll stated: The red bus/blue bus problem is not a problem of the model. The problem of the model is, in fact, in certain circumstances, the logit error is driving results or is affecting I shouldn t say driving it is one of the factors producing results. The right way to say it is [the logit] introduces heterogeneity in consumer behavior. And 91 Day 3 Tr. at Id. at 444. Dr. Noll does not actually know the value for this parameter but assumes the lowest possible value to be conservative. See id. 93 Id. at

38 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 30 of one of the ways to change the results that is going to make this look better, if you cared about it is, to make assumptions that reduce the effect of the logit error. 94 Dr. Noll also attempts to rebut defendants more pointed criticisms regarding the data on which he relied, or failed to rely, in designing the Demand Side. Mainly, he insists that it would have been impractical for him to do a survey. 95 This holds true as well for a conjoining analysis a smaller type of survey that reduces the sample size. 96 Conjoining analyses are frequently performed by companies that seek to introduce new products into the market. 97 But Dr. Noll concludes that in this case, performing such an analysis would require too large of a sample size to be practical. 98 Dr. Noll also attempts to show that Dr. Ariel Pakes, one of defendants Supply Side experts, relied on similar quantities and types of data in constructing avatars for a 2004 study estimating the demand for automobiles. 99 In Id. at 494. See id. at 480. See id. See id. 98 See id. 99 See id. at 430; Steven Berry, James Levinsohn, and Ariel Pakes ( BLP ), Automobile Prices in Market Equilibrium, 63 Econometrica 841 (1995). 30

39 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 31 of 72 that paper, Dr. Pakes constructed demand for automobiles with a potential market size of over one hundred million consumers even though the average annual sales of automobiles in his actual world sample were slightly above ten million. 100 Thus, Dr. Noll asserts that Dr. Pakes knew next to nothing about a huge percentage of the potential market other than that they did not purchase an automobile. 101 However, as Dr. Noll acknowledged on cross-examination, Dr. Pakes model relied on demographic data from the census as well as random surveys conducted of over thirty-seven thousand actual purchasers regarding automobile preferences. 102 Further, the ultimate results of Dr. Pakes model were that less than one percent of people in the potential market for automobiles became purchasers, as opposed to forty-three percent of the potential market in Dr. Noll s study. 103 Finally, in response to Dr. McFadden s observation that Dr. Noll s model underpredicts the number of channels bundle subscribers view, Dr. Noll insists that the time spent viewing a channel is more important than the number of overall channels a subscriber watches. According to Dr. Noll, the ability of the model to predict should be evaluated on the basis of the ability to predict viewing See Day 3 Tr. at 430. See id. at 431. See id. at 476. See id. at

40 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 32 of 72 time, not [on the basis of] whether a bunch of subscribers [] spent very little time watching that channel. 104 Thus, Dr. Noll asserts that his model s predictions for viewing time by team do match up very closely to the observed data. 105 D. Dr. Noll s Demand Side Opinion Must Be Excluded Calculating damages on the basis of predictions about hypothetical, counterfactual scenarios is not an easy task. Further, estimating damages in antitrust cases is especially challenging because causes and effects in the realm of economics are not nearly as clear-cut as they are in other disciplines. 106 It is against this backdrop that plaintiffs bring an unusually complex and sweeping class action lawsuit, premised on the theory that access to out-of-market baseball and hockey telecasts would be cheaper in a counterfactual world without territorial restrictions. Unless plaintiffs can prove that there is a scientifically-reliable way to predict with some precision the prices of those telecasts in the future, they cannot recover damages for being overcharged in the past. There is no question that this task is enormously challenging, even for the most seasoned and distinguished of experts. But it is not impossible it has 104 Id. at See id. at In re Se. Milk Antitrust Litig., No. 08 Civ. 1000, 2010 WL , at *2 (E.D. Tenn. Dec. 8, 2010). 32

41 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 33 of 72 been done before in similar circumstances. 107 More importantly, the law is clear: expert opinions are inadmissible if they are not based on sufficient facts or data, or on a reliable application of scientific methods to those facts or data. 108 This is true no matter how burdensome or difficult collecting relevant data or devising methods to apply to that data may be. 109 Dr. Noll s modeling of demand in the BFW is unreliable because the Demand Side is largely untethered from the actual facts of this case. 110 Defendants offer a number of independent criticisms of the Demand Side, accusing Dr. Noll of committing methodological flaws ranging from making inaccurate assumptions about estimating market size to inappropriately using logit error in determining the value fans derive from league bundles. Some of defendants criticisms are very technical, none of which would be independently sufficient to win a Daubert 107 See C&Y at (explaining how demand for individual channels was estimated, using a combination of existing viewership data and demographic data). 108 Fed. R. Evid See, e.g., Fishman Transducers, Inc. v. Paul, 684 F.3d 187, 195 (1st Cir. 2012) (excluding expert who failed to undertake difficult, time-consuming and expensive efforts to obtain direct testimony from customers, [or] market research surveys of [product] purchasers as to their reasons for purchases, noting that, without them, [the expert s] report was merely a basis for jury speculation ). 110 See Fed. R. Evid

42 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 34 of 72 challenge. 111 The problem for plaintiffs is that, at bottom, all of the examples defendants and Dr. McFadden point to, and all of the tests they run on Dr. Noll s model, expose the same underlying problem, which is quite fundamental and fatal: Dr. Noll s estimates do not rely on sufficient data about consumer tastes and preferences. Instead, time and time again, Dr. Noll substitutes actual, readilyobtainable information for mathematical assumptions in determining how hockey and baseball fans will behave in the BFW. For these reasons, I conclude that Dr. Noll s expert opinions on forecasting demand in the BFW must be excluded. And because a structural model is only as reliable as its component parts, Dr. Noll s model cannot be admitted to calculate damages on plaintiffs theory of overcharge. As explained below, the actual data on which Dr. Noll relies to extrapolate consumer demand in the BFW is simply too sparse to survive defendants challenge under FRE 702 and Daubert. In the antitrust context, economists are frequently asked to confront problems of 111 For instance, defendants complain that Dr. Noll s model relied on average monthly prices of the most popular league bundle subscriptions instead of inputting a variety of subscription prices into the model to account for consumers tolerance to price variation. See Dr. McFadden Decl. 38. In isolation, this modeling shortcut does not bear too heavily on the reliability of the overall model. The cause for concern is that without surveys of consumers preferences for products at various suggested price points, or additional data reflecting such preferences, it is virtually impossible to gauge reliably how price sensitivities would affect demand in the BFW, or how important it would be to build the differing package prices into the model. 34

43 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 35 of 72 extraordinary complexity. In such studies, it is standard operating procedure to rely on more data than Dr. Noll did here in attempting to measure consumer demand in a counterfactual world The Foundation of the Recaptured Demand Curve Lacks Sufficient Data It is easy to detect the symptoms of Dr. Noll s over-reliance on mathematical assumptions, and under-reliance on actual data, in the initial demand curve he derives through the GMM procedure. Dr. Noll s approach to recapturing this demand curve is casual, at best. In fact, his benchmark for estimating demand is essentially a hodgepodge of data sets varying in their levels of completeness and detail from MLB Extra Innings, MLB.tv, and NHL GameCenter Live, combined with an assumption about the size of the market for OMPs. 113 That is it. And, as noted above, the prices Dr. Noll assigns to these OMPs are actually average monthly prices no price variation data is taken into account, despite the fact that prices vary significantly depending on when consumers purchased the package See, e.g., C&Y; BLP. 113 See Dr. Noll Decl. at See Dr. McFadden Decl. 38 (noting that 47 percent of NHL GameCenter Live subscribers, 73 percent of MLB.tv subscribers, and 34 percent of MLB Extra Innings subscribers pay a different price from the one assigned by Dr. 35

44 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 36 of 72 This perfunctory approach impugns the overall reliability of the GMM estimation, on which his entire model is built. For instance, Dr. Noll offers no principled reason, and points to no actual data regarding fan preferences, for his important assumption that the total number of viewers of a sport s championship series should constitute the upper bound of the market for that sport s OMP. He may be right, and this one assumption on its own does not necessarily sink the model, but that is besides the point. For demand to be reliably estimated, Dr. Noll needs a data-driven basis for his underlying assumptions, including those pertaining to the important issue of market shares. If a swath of baseball fans had been surveyed in some form, Dr. Noll might have gained a helpful insight into whether setting the upper bound of the market at the total number of World Series viewers was an appropriate assumption. Such survey data could have corroborated his approach, or it could have caused him to refine it. Either way, without preference data, the reliability of an important assumption driving demand in the BFW remains in question. This type of unsupported assumption is all the more problematic when the actual data sets Dr. Noll relies on are not as robust as they could be. Some of these data sets contain subscriber location; others do not. Some contain information about exactly how much time a fan spent viewing each team; Noll). 36

45 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 37 of 72 others do not. While Dr. Noll cannot be faulted for not being provided with certain information, in constructing a reliable model, he must do his best to fill the gaps The Preferences of Dr. Noll s Avatars Are Heavily Impacted by the Logit Error, Not Actual Data Instead, Dr. Noll s lack of reliance on actual data compounds the potentially harmful impact of his unsupported assumptions. Consider Dr. Noll s sorting of consumers into single-team, two-team, and multi-team fans. Dr. Noll categorizes fans through a mathematical estimation procedure tied to viewing time. Acknowledging that fans may not distribute perfectly across these categories on the basis of viewing time alone, Dr. Noll relies on the logit error to provide a shock that isn t measured by what is already in there. 116 By Dr. Noll s own admission, [t]here is no additional information about [fans ] preferences other than logit error that measures the departure of the utility from the expected value. 117 This is quite problematic, especially considering that Dr. Noll has no real world data for ninety-six percent of the consumers in the potential market for OMPs. Worse still, the logit error he relies on to compensate for his lack of See Fishman Transducers, Inc., 684 F.3d at 195. Day 1 Tr. at 175. Id. at

46 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 38 of 72 preference data is susceptible to reliability issues because of the red bus/blue bus problem. While the Court is not nearly proficient enough in econometrics to evaluate the extent to which the red bus/blue bus problem might throw off Dr. Noll s predictions, this much is clear: if Dr. Noll had leaned more heavily on actual preference data, he could have reduced his reliance on logit error and enhanced the reliability of his model. And, at minimum, he could have tested his model more thoroughly to ensure that the logit error was not muddying his results. 118 Indeed, Dr. Noll admits that the logit error has an important impact on his model, stating during the Daubert hearing that [t]he problem of the model is, in fact, in certain circumstances, the logit error is driving results or is affecting I shouldn t say driving it is one of the factors producing results The Results of Dr. Noll s Model Demonstrate Its Unreliability Actual preference data would have enabled Dr. Noll to distribute fans into his three categories, and to evaluate the importance of viewing time as compared to other measures of potential bundle utility, in a much more reliable fashion. To prove that point, the Court need look no further than the questionable, hotly-debated results of his fan sorting experiment. For ease of reference, Chart 1, See Day 2 Tr. at Day 3 Tr. at

47 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 39 of 72 which illustrates those results, is reprinted below. Chart 1: Purchasing Decisions by Fan Type in the BFW - MLB.tv Fan Type % Purchasing Standalone % Purchasing Bundle Single-Team Fan Two-Team Fan Multi-Team Fan 99 1 The parties thoroughly disagree over the meaning of these results, and the role the logit error plays in driving them. To a layperson even one who does not watch sports this distribution of results makes no sense: the more teams a fan is interested in watching, the more likely he would be to buy a package of the telecasts of all teams instead of the telecasts of only one team. Dr. Noll has an explanation for this. Assuming his model s assumptions about viewing preferences by category are correct, then the model s results are economically sensible in that they are informed by the respective price sensitivities of the categories of fans. But, as with so many other opinions Dr. Noll offers on the Demand Side, the real world data to support his price-sensitivity conclusion is nowhere to be found in the model. As Dr. McFadden points out, if an expert modeler lacked such information, it would [be] common procedure [] to collect your own data, do your own survey, find out... who s a fan and who is not, and perhaps also find 39

48 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 40 of 72 out more about what their tastes are, whether they would consider buying or not at various suggested prices. 120 Only then could consumer demand start to come into focus. That is why Crawford and Yurukoglu relied on substantial real world preference information and survey data, including demographic data, in their study. 121 And, what s more, the emphasis on collecting real world data and integrating it into the C&Y Model was hardly that model s innovative feature, just as Dr. Pakes use of surveys in his study was perfectly ordinary. Indeed, Dr. McFadden stated that economists now follow a long tradition and a long history of using survey techniques to understand what s going on and [to] make predictions. 122 By contrast, Dr. Noll s Demand Side model is so far removed from actual viewer preferences and tastes that a finder of fact could only speculate as to Day 2 Tr. at See C&Y at Day 2 Tr. at 368. Dr. Noll s excuses for not conducting surveys or attempting to incorporate additional information are unconvincing, especially considering that his failure to do so seems to be a stark departure from the industry norm. Additionally, throughout the course of expert discovery and the various iterations of his model, Dr. Noll and plaintiffs were on notice of defendants concern that the Demand Side was not sufficiently tied to viewer preferences, but they stood by the sparse data in Dr. Noll s model anyway. Dr. Noll s declarations speak to the infeasibility of separating fans into 435 categories, but not to doing a survey of a relatively small group of people using a conjoining analysis. See Day 3 Tr. at

49 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 41 of 72 the reasons for the model s seemingly nonsensical results. Dr. Noll claims that multi-team fans are more price-sensitive because the model of their demand behavior... kicks out that result. 123 But the very model that produces that result is unreliable because Dr. Noll never conducted any surveys or collected and incorporated any additional data regarding viewers tastes. Doing so could have enabled his model to predict more reliably the price sensitivities of various categories of fans. For instance, with some extra legwork, Dr. Noll might have uncovered data that multi-team fans supposed price sensitivity would actually tend to drive them out of the market altogether after all, cable subscribers can watch a local baseball game almost every night during the season without paying extra for an out-of-market option. 124 Or maybe he would have uncovered and incorporated preference data into his model that reflected the opposite trend that multi-team fans genuinely value diversity to a greater degree than the logit error provides, and 123 Day 3 Tr. at Indeed, one can envision a number of ways in which a price-sensitive fan even a non-cable-subscriber could get his baseball or hockey fix without paying for a standalone RSN or OMP. Fans can read about every play of every game online in real time and watch extensive highlights of every game on MLB.com or NHL.com. They can also watch games at a bar or at the residence of a friend who subscribes to cable. Many baseball games each season are broadcast locally over-the-air such that a cable subscription is not even necessary. All of these options may be preferable to paying for an a la carte channel. 41

50 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 42 of 72 strongly desire the option to watch any team on any given night, not just one team. 125 It is also possible that real-world data supports his price-sensitivity claim. 4. Under FRE 702, Dr. Noll s Testimony About Consumer Demand Must Be Excluded Whether any of these possibilities are accurate is irrelevant what matters is that Dr. Noll s failure to obtain information about consumer tastes and preferences and failure to study baseball and hockey viewing patterns more thoroughly create too great an analytical gap between the data and the opinion 125 It may be that a non-negligible percentage of multi-team fans are fans not of many teams, but of many players across different teams. To this end, it might have been useful to seek data regarding the impact of the rise of fantasy sports on OMP subscriptions, including the growing trend towards daily fantasy sports. In this context, fans are interested in observing the performance of a collection of players across a range of different teams each night, as opposed to the performance of only one or two teams. Participants in daily fantasy sports, who pay to play, consume forty percent more sports content across all media, including television once they begin playing. See Brent Schrotenboer, Leagues See Real Benefits in Daily Fantasy Sports, USA Today (Jan. 1, 2015), anduel-draftkings-nba-nfl-mlb-nhl/ / (noting that daily fantasy sports consumption will have a steroid effect on television revenue, because nobody watches live sports on television quite as intensely as fans with money at stake ). But the teams they support and are interested in watching change every night; they might only view a given game for a very short window of time, just to check in on the at-bat of a single player. Fantasy sports aside, a multi-team fan may wish to view games of different teams each night based on intriguing pitching match-ups or other player-specific interests. Dr. Noll s model does not incorporate any real data regarding consumer tastes to account for any of these possibilities, which may or may not have a significant impact on estimating demand. 42

51 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 43 of 72 proffered. 126 FRE 702 requires expert testimony to be based on sufficient facts or data. Dr. Noll s testimony about consumer demand is based on insufficient facts and data. His Demand Side opinions are even less reliable in that they are not the product of any significant, independent research or study, but have instead been developed for the sole purpose of bolstering plaintiffs position in this litigation. 127 For all of these reasons, the model must be excluded. Without a reliable way to estimate demand in the BFW, plaintiffs cannot demonstrate with any precision the potential monetary damages class members incurred as a result of defendants alleged overcharging for OMPs. V. SUPPLY SIDE A. Summary of Dr. Noll s Supply Side Analysis Because territorial restraints would no longer exist in the BFW, RSNs 126 Joiner, 522 U.S. at 146. Because the underlying demand data is the same for the third model as it is for Dr. Noll s first two, it is unnecessary to examine the first two models more closely, to the extent that plaintiffs believe they are still viable. All versions of Dr. Noll s model suffer from the same fatal data sufficiency flaw on the Demand Side. 127 See Daubert v. Merrell Dow Pharms., Inc. (Daubert II), 43 F.3d 1311, 1317 (9th Cir. 1995) (noting that in determining whether proposed expert testimony amounts to good science, we may not ignore the fact that a scientist s normal workplace is the lab or the field, not the courtroom or the lawyer s office ); see also Awad v. Merck & Co., 99 F. Supp. 2d 301, 304 (S.D.N.Y. 1999), aff d sub nom. Washburn v. Merck & Co., 213 F.3d 627 (2d Cir. 2000) (noting that in determining reliability under Daubert, a significant consideration is whether research was conducted independently or for the sole purpose of litigation ). 43

52 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 44 of 72 would be able to sell their content in a la carte form directly to out-of-market consumers. According to Noll, this change would spark a reconfiguration of the overall market for sports broadcasting, leading to greater consumer welfare. 1. The Supply Side in the C&Y Model The C&Y Model, as described earlier, is a framework for assessing the result of unbundling television distribution i.e., of moving from (1) a distribution chain in which consumers are required to purchase bundled packages (of television channels) from MVPDs to (2) a distribution chain in which consumers may either purchase bundled packages or purchase a la carte channels. The C&Y Model examined the effects of unbundling on all broadcasting, not just sports broadcasting. They were interested in determining whether consumers would be better off in a world where they could pick and choose among individual networks The History Channel, and Arts and Entertainment Network, and so on instead of being forced to purchase a bundled cable package. The C&Y Model documented two effects of unbundling. First, greater consumer choice, resulting from the existence of a la carte options, spurred competition, and tended to push prices down in the BFW. Second, the Supply Side bargaining that would transpire in response to unbundling introduced new costs 44

53 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 45 of 72 into the supply chain, which tended to push prices up in the BFW. 128 The reason for this second finding as Dr. Pakes explained is that unbundling resulted in a [smaller] amount of money [] go[ing] back to each [network], which meant that to avoid go[ing] out of business networks were forced to negotiate higher fees from MVPDs, which in turn meant that MVPDs would charge consumers higher prices for each a la carte network. 129 The end result was that in the BFW, consumers ended up slightly worse off than they were in the actual world of exclusively bundled options. 130 In short, the C&Y Model concluded that the unbundling of television channels had two different effects, pulling in opposite directions, on the market for television distribution. The synthesis of these two effects is to restore consumers to essentially the same position as they were in before unbundling See C&Y at 4 ( There are two countervailing forces that largely determine our results. First, for fixed input costs, unbundling unlocks consumer surplus.... Allowing renegotiation, however, increases costs [and] [p]rices follow suit, making the average consumer indifferent [to unbundling]. ) Day 2 Tr. at 298. Id. 131 See id. at 315 (where Dr. Pakes explains that the C&Y Model did not result in a statistically significant increase in prices). This is true, at least, with respect to prices. It is still possible (indeed, it seems quite likely) that some consumers would be better off in the BFW, even taking for granted the C&Y Model s assumptions about bargaining, depending on their specific preferences. For example, a consumer that only wanted The History Channel a rough 45

54 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 46 of Dr. Noll s Basic Deviation from the C&Y Model The crude way to summarize Dr. Noll s analysis and the essence of defendants criticism is that he adopted the first half of the C&Y Model while ignoring the second. Following the C&Y Model, Dr. Noll posits that the unbundling of sports broadcasts i.e., the availability of a la carte RSNs would have a downward effect on prices. But from there, Dr. Noll parts ways with the C&Y Model. Dr. Noll s analysis does not include a Supply Side bargaining dynamic that results in MVPDs imposing mark-ups when distributing either a la carte channels or OMPs to consumers. Absent this bargaining dynamic, the second effect documented in the C&Y Model the increased price of each particular RSN s content does not occur in Dr. Noll s analysis. Accordingly, unlike in the C&Y Model, whose end result was neutral for consumers, Dr. Noll s analysis shows an obvious benefit to consumers choices multiply, and prices drop. Dr. Noll has a rationale for this deviation. According to Dr. Noll, there is no need to model bargaining between RSNs and MVPDs in the BFW, because internet delivery [of RSN feeds] is a competitive substitute for delivery analogue to the single-team fan would no doubt prefer the unbundled world, even if the price per channel was substantially higher than it was in the bundled world. 46

55 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 47 of 72 over an MVPD. 132 Assuming this premise is correct, MVPDs would have no power to mark up prices above a profit-maximizing equilibrium. If they did raise prices, consumers would migrate to Internet products. Therefore, Dr. Noll concludes that it is unnecessary to model the agreements between [] buyer[s] and [] seller[s] at an intermediate stage in the supply chain i.e., the agreements between RSNs and MVPDs because there is no way that such agreements will affect [the] final price. 133 With respect to the bargaining issue, there is a notable mismatch between what Dr. Noll has done and what defendants have accused him of doing. Defendants experts repeatedly argue that Dr. Noll s analysis ignores bargaining in the BFW. 134 This is misleading. Whether or not Dr. Noll s deviation from the C&Y Model is ultimately justified, it is important to understand the nature of his deviation. By assuming that it is unnecessary to model bargaining between RSNs and MVPDs in the BFW, Dr. Noll is not suggesting that no bargaining between the RSNs and MVPDs would occur. He is suggesting that to capture the results of Noll Decl. at 102. Day 3 Tr. at For example, Dr. Pakes testified that [t]he MVPDs don t enter Dr. Noll s model at all. They re just not there, and likewise, that Dr. Noll doesn t assume anything about the MVPDs. Day 2 Tr. at 299. Accord Reply Mem. at

56 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 48 of 72 bargaining between RSNs and MVPDs in the BFW, it is unnecessary to model the process of bargaining. It is appropriate to assume that any bargaining will result in profit-maximization for the RSNs because the RSNs hold the power to control the distribution of their content. 3. Other Assumptions Built into Dr. Noll s Analysis In addition to the deviation from the C&Y Model, Dr. Noll s analysis also rests on three methodological assumptions all contested by defendants that propel the conclusion that consumers will be better off in the BFW. First, Dr. Noll assumes that RSN distribution in the BFW will not be subject to (or subject only to de minimus) double marginalization, and therefore, that it is unnecessary to account for double marginalization in the projection of BFW prices. Second, Dr. Noll assumes that individual RSNs will pledge their content to the OMP in exchange for one-thirtieth of the overall profit from OMP subscriptions (in baseball) i.e., Dr. Noll assumes that the RSNs will share in OMP profits equally, such that no individual RSN, regardless of its market power, will be able to negotiate for a higher share of the OMP profits vis-à-vis other RSNs. Third, Dr. Noll assumes that the prices of a la carte channels will be set independently from the price of the OMP, and vice versa. In other words, he assumes that the league and the teams will price their broadcasts competitively at arm s length not as 48

57 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 49 of 72 a joint venture. B. Dr. Noll s Supply Side Analysis Meets the Daubert Test 1. The Lack of Bargaining Between RSNs and MVPDs Is Justified Defendants attack the exclusion of a bargaining dynamic from Dr. Noll s analysis on three grounds. First, defendants argue that bargaining was the central innovation of the C&Y Model, 135 which means that when Dr. Noll decided to eschew bargaining, he deviate[d] from the only peer-reviewed or otherwise reliable methodology that his analysis conceivably relied on. 136 Second, defendants argue that Dr. Noll s rationale for why it is unnecessary to model bargaining between RSNs and MVPDs that [i]nternet delivery is a competitive substitute for delivery over an MVPD 137 is implausible. Third, defendants argue that Dr. Noll has not justified the assumption running through his entire analysis that RSNs would continue to exist in the BFW. a. Deviation from the C&Y Model Is Not Ipso Facto Problematic Defendants first argument is, in essence, an appeal to authority 135 C&Y at 2. Accord Def. Mem. at 15 (arguing that Dr. Noll eschewed the core of the C&Y Model) Def. Mem. at 13. Noll Decl. at

58 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 50 of 72 because C&Y included a bargaining model, Dr. Noll should have as well. But plaintiffs have pointed to numerous reputable papers that use structural models but do not include a bargaining dynamic. 138 This makes it hard to sustain the claim that by jettisoning bargaining, Dr. Noll s analysis lost its foundation in peerreviewed or otherwise reliable methodolog[ies]. 139 Ultimately, the implicit premise of defendants position is that bargaining is always essential to the integrity of a structural model. Plaintiffs have offered more than sufficient evidence to question that premise. It would be more accurate to say that bargaining is often but not always essential to the integrity of a structural model, depending on the specific features of an industry. Here, the parties disagree about whether sports broadcasting is such an industry. The details of that disagreement are not material to defendants Daubert challenge. Plaintiffs argue that modeling bargaining is not called for where 138 See Memorandum of Law in Opposition to Defendants Joint Motion to Exclude Opinions and Testimony of Plaintiffs Expert Dr. Roger G. Noll ( Opp. Mem. ), at 11 n.7 (noting that since C&Y was published, there has been a significant number of papers by well-known economists in top-tier journals that employ structural models without bargaining and listing examples). It is also worth noting that Dr. Crawford and Dr. Yurukoglu, the creators of the C&Y Model, worked with Dr. Noll in crafting his analysis. See 10/22/14 Letter from Plaintiffs to the Court, at 2 (Dkt. No. 273). 139 Def. Mem. at

59 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 51 of 72 products are relatively similar. 140 And as a conceptual matter, defendants agree. As Dr. Pakes explained during the hearing, if there s only one good that the producer is producing and there s only one good that the [distributor] is marketing, then it makes sense... to devise a contract where we maximize the joint profits from the endeavor and split it somehow between the two. 141 When products are similar, it can be assumed that actors at different levels of a vertical supply-chain (such as RSNs and MVPDs) will negotiate fee-splitting arrangements that replicate acting in concert, which means from the perspective of consumers and for the purpose of assessing consumer prices no bargaining model is required. The real issue, then, is not whether it is sometimes permissible to jettison bargaining from a structural model, but rather, whether plaintiffs were right to do so in this case. And that is a question that deserves [v]igorous crossexamination at trial. 142 b. Dr. Noll s Assumption About Internet-TV Substitution Is Plausible Defendants second argument while more promising goes to the weight, not the reliability, of Dr. Noll s analysis of the Supply Side. For analytic Opp. Mem. at 12. Day 2 Tr. at 304. Amorgianos, 303 F.3d at 267 (internal citations omitted). 51

60 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 52 of 72 purposes, Dr. Noll s rationale for jettisoning bargaining can be expressed in conditional form if (1) the Internet distribution of baseball and hockey broadcasting is a competitive substitute for the television distribution of such broadcasting, then (2) MVPDs will lack bargaining power in the BFW. Defendants dispute both steps of this logic. First, they argue that Dr. Noll has not proven his factual hypothesis he has not shown that Internet distribution serves as a competitive substitute for television distribution. Furthermore, even if Dr. Noll has proven his hypothesis prospectively that plaintiffs are correct that Internet distribution increasingly will serve as a competitive substitute for television distribution it did not do so during much of the class period. 143 Defendants are correct plaintiffs have not convincingly shown that Dr. Noll s assumptions regarding Internet distribution were true at all points during the class period. But this observation is only relevant for the purpose of damages, not for the purpose of injunctive and declaratory relief. 144 With respect to the latter, Dr. Noll s assumption carries its burden. In light of the way content distribution across industries has evolved in recent years and continues to evolve, it is plausible that Internet distribution will increasingly serve 143 See Def. Mem. at See Certification Opinion (certifying an injunctive class under Rule 23(b)(2), but not a damages class under Rule 23(b)(3)). 52

61 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 53 of 72 as a competitive substitute for television distribution. This is not to say that Dr. Noll s premise is ultimately correct. But it is sturdy enough to survive a Daubert challenge. Second, defendants also take issue with the conclusion of Dr. Noll s argument regarding Internet distribution. Assuming, arguendo, that Internet distribution and television distribution would serve as competitive substitutes from the perspective of consumers, it does not follow, in defendants view, that MVPDs would lack bargaining power. For support, defendants point to the fact that in the actual world, the RSNs [] business model is premised upon negotiating for carriage [of the content they produce] on MVPDs. 145 In other words, RSNs receive most of their revenue today from carriage fees paid by MVPDs in exchange for the right to distribute baseball and hockey broadcasts. According to defendants, it therefore strains credulity to conclude that RSNs negotiation for carriage on MVPDs, a key source of revenue today, would disappear entirely from the BFW. This argument is a red herring. The observation that RSNs currently derive much of their business from carriage on MVPDs, though true, sheds no light on the contours of the BFW. In the actual world, RSNs are effectively forced to 145 Def. Mem. at

62 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 54 of 72 derive business from carriage on MVPDs. The whole point of plaintiffs legal theory is that in the BFW, RSNs would have another way of making profits by selling directly to consumers via the Internet. If RSNs made a greater share of their profits by selling directly to consumers, it follows logically that they would make a lesser share of their profits from carriage fees. But this observation, on its own, does not help defendants position. They argue that MVPDs will not pay [the same] carriage fees they do in the actual world, if, in the BFW, consumers can bypass the MVPDs and obtain the same programming [online]. 146 While true, all this implies is that in the BFW, RSN profits would have a different composition that a greater ratio of profit would come from Internet distribution as a result of a new equilibrium in the market for baseball and hockey broadcasting. From that, however, it does not follow that MVPDs will have bargaining power in the BFW. On the contrary, the upshot of Dr. Noll s analysis is that whatever equilibrium emerges in the BFW, it will be the product of Supply Side renegotiations in which RSNs have a much stronger bargaining position. c. The Existence of RSNs in the BFW Finally, defendants argue that Dr. Noll has not justified his threshold 146 Id. 54

63 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 55 of 72 assumption that RSNs would exist in the BFW. According to defendants, this is hardly a foregone conclusion, for it is not clear what role, if any, [RSNs] would have in the BFW given that RSNs are by definition regional and fundamentally a byproduct of [territorial restraints]. 147 Indeed, in a world with no territorial limitations i.e., in the BFW popular clubs seeking national distribution could exercise leverage by threatening to negotiate deals directly with national networks or [] MVPDs. 148 If so, then RSNs, far from having more bargaining power in the BFW, would have virtually none. The problem with this argument is that the issue of who produces baseball and hockey broadcasts has no bearing on how those broadcasts are priced. When Dr. Noll describes the BFW in narrative form, defendants are correct that he identifies RSNs as the producers of baseball and hockey broadcasts. But Dr. Noll s invocation of RSNs is simply a holdover from the actual world, not an essential feature of his analysis. The point is that whoever produces the broadcasts, Dr. Noll s prediction is that the broadcasts will end up being distributed to consumers at lower prices than in the actual world i.e., that the supply chain in the BFW, however it is precisely configured, will settle to a competitive, profit Id. at 18. Id. 55

64 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 56 of 72 maximizing equilibrium. That prediction may end up being wrong. But if so, it will be wrong for reasons that have nothing to do with what entity RSNs, other production outfits, or the clubs themselves, producing broadcasts in-house is responsible for creating content in the BFW. Not surprisingly, defendants have made no effort to connect their observation that clubs could bypass RSNs in the BFW to a claim about prices in the BFW. No such connection exists. 2. Dr. Noll s Other Assumptions Go to the Weight, Not the Reliability, of His Supply Side Analysis a. No Double Marginalization First, defendants fault Dr. Noll for failing to account for the phenomenon of double marginalization, which, according to defendants, stems from the fact that independent businesses in vertical supply relationships here, RSNs and MVPDs each set a price to earn a profit. 149 This complaint mirrors defendants complaint about the lack of bargaining, in that defendants are essentially taking the position that all supply-chains with tiered mark-ups result in double marginalization just as they take the position that all structural models should incorporate bargaining while plaintiffs maintain that only some supplychains with tiered mark-ups result in double marginalization. Plaintiffs have the better of this argument. Double marginalization 149 Reply Mem. at 9. 56

65 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 57 of 72 refers to the adverse economic consequences that flow from a supply chain in which two monopolists command super-competitive prices in vertical sequence. When this occurs, the result is that prices rise so high, and output diminishes so much, that (1) consumers lose out, but also (2) both monopolists are worse off than they would be if they acted in concert. In this sense, double marginalization is bad for all parties involved producers as well as consumers because prices are marked up to super-competitive levels twice over, which causes demand to plummet, curbing overall profit. Accordingly, producers always have an incentive to avoid double marginalization whenever possible. This observation alone disposes of defendants argument. Given that producers have a natural incentive to avoid double marginalization whenever possible, the question is whether it is possible, in this particular market, for producers to avoid double marginalization. That is an issue of fact, not one of methodological integrity. As such, it does not support a Daubert challenge. Plaintiffs argue that in the BFW, RSNs and MVPDs would not tolerate any significant amount of double marginalization, and that they would use profitsharing mechanisms mechanisms already established in the industry to circumvent double marginalization. 150 To this, defendants respond that certain 150 See Opp. Mem. at 14 nn and accompanying text (explaining how, in the actual world, contracts between clubs, RSNs, and MVPDs are designed 57

66 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 58 of 72 features of the sports broadcasting industry are likely to frustrate the circumvention effort. 151 There is room for reasonable disagreement about which side has the more compelling view of the sports broadcasting industry. 152 At this stage, suffice it to say that Dr. Noll s decision to assume the existence of an outcome that generally works to the benefit of all interested parties does not warrant the exclusion of his testimony under Daubert. b. Feeds to the OMP Second, defendants believe Dr. Noll has made the implausible assumption that RSNs would pledge their broadcasts to the OMPs in exchange for one-thirtieth of the OMPs overall profits (in baseball). According to defendants, to avoid double marginalization). Accord Day 1 Tr (Dr. Noll discussed the mechanisms currently in use, and that would continue to be used, to avoid double marginalization in sports broadcasting e.g., setting mandatory retail prices). 151 See Reply Mem. at Accord Day 2 Tr. at (explaining why, when down-stream distributors here, MVPDs sell different products, double marginalization can occur as a consequence of every up-stream supplier here, every RSN maximizing its profits). 152 In passing, it bears note that even the authors of the C&Y Model Crawford and Yurukoglu appreciated this feature of the television broadcasting industry. See C&Y at 14 n.43 (acknowledg[ing] that their pricing assumptions are often considered unrealistic due to the availability of means to circumvent double-marginalization). 58

67 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 59 of 72 more popular clubs e.g., the Yankees would have an incentive to demand more than one-thirtieth of the overall share, because their broadcasts are comparatively more valuable than other clubs broadcasts. In short, why would clubs like the Yankees not simply withdraw from the bundle and sell their content exclusively a la carte? To this, plaintiffs offer two responses. First, they point out that in the actual world, teams are prohibited by league rules from withdrawing from the bundle. In this sense, Dr. Noll is simply making the modest assumption that current league rules would stay intact. Second, plaintiffs argue that even granting defendants premise that the league rules could change in the BFW there is no economic reason to think they would change. Because plaintiffs first response disposes of the Daubert question, it is unnecessary to address the second. Regardless of whether Dr. Noll was ultimately right to assume that league rules would stay constant in the BFW, the assumption is not an economic one. Rather, it is a factual assumption about the leagues as institutions. That this assumption has economic implications potentially quite significant ones does not change its nature. Assuming that current league rules will stay intact in the BFW is akin to assuming that in the BFW, the baseball season will continue to be one hundred and sixty-two games, or 59

68 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 60 of 72 that baseball playoffs will continue to consist of three rounds (rather than as is the case in hockey four). In principle, there is nothing stopping the league from modifying the length of the season, or changing the format of playoffs; just as, in principle, there is nothing stopping the league from reforming its rules regarding RSN feeds. To hypothesize that the status quo will persist, however, is not an unreasonable factual assumption, even if it is a factual assumption that ends up being wrong. The thrust of defendants argument to the contrary is that economically, there are reasons to think that current league rules will not stay intact in the BFW because it would be in the interest of many clubs to dissolve the rules and permit deviation from the bundle. Plaintiffs disagree. 153 But 153 Defendants argue that if the Yankees were to withdraw from the OMP in the BFW (assuming the parameters of the BFW set by Dr. Noll s analysis), all teams would be better off making the result economically rational. See Reply Mem In response, plaintiffs suggest that this result, though accurate, is misleading. Every lucrative club would have an incentive to withdraw, to the point that the OMP, having lost its most valuable content, would cease to exist. According to plaintiffs, it is well-established that, on balance, the OMP is lucrative i.e., the clubs would prefer that the OMP exist. Given this, and given the fact that allowing individual clubs to withdraw from the OMP would result in the OMP s demise, plaintiffs reason that the league would decide to preclude individual clubs from peeling off just as it does today. As Dr. Noll put it, this problem [] is always true of collaborations [] in a world in which there is revenue sharing, because it s always the case that the most valuable member of the collaboration doesn t have a private incentive to participate but [will] still agree to [collaborate] because it s in their collective interests to do so. Day 3 Tr. at In plaintiffs view, in other words, the league-mandated inclusion of feeds for 60

69 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 61 of 72 regardless of which side is ultimately correct, the important point at this stage is that defendants argument is not only an economic claim; it is also a claim about how the leagues operate. Specifically, defendants argument rests on the premise that individual clubs economic interests determine the content of league rules. This is not necessarily true. Leagues self-govern in different ways, with any number of motivations. The economic impact of league rules on individual clubs is one motivation but hardly the only one. At trial, defendants are free to argue that the league rules would change in the BFW. But that argument will bear on the weight of Dr. Noll s testimony, not its admissibility. In a sense, defendants argument about league rules falls prey to the same problem as their argument about double marginalization. In each setting, Dr. Noll has made an assumption that, even if it proves unconvincing on the facts, is facially plausible indeed, a good deal more plausible than the contrary assumption. First, Dr. Noll has assumed that RSNs and MVPDs will take steps to circumvent an outcome double marginalization that typically undermines the interests of all actors within the market. Second, Dr. Noll has assumed that current league rules will stay intact. For the reasons just discussed, this position may turn out to be wrong. But it strains credulity to suggest that this assumption is so the OMP solves a collective action problem. And it would continue to do so in the BFW. 61

70 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 62 of 72 unreliable as to merit discarding Dr. Noll s Supply Side analysis. c. Joint Venture Pricing Third, and finally, defendants argue that Dr. Noll erred in assuming that in the BFW (1) the price of the OMPs and (2) the prices of a la carte channels would be set competitively as though the league and its clubs operate at arm s length. According to defendants, the more accurate model of the leagues and its clubs would be that of a joint venture. If so, the proper framework for predicting prices would be a multi-product pricing model a framework whose economic viability is uncontested, and whose application would result in higher prices for the two products at issue here, the OMPs and the a la carte channels. 154 Plaintiffs response is simple. If the league and the clubs were to set prices as a joint venture, according to a multi-product pricing model, that itself would be collusive. Put simply, the reason Dr. Noll assumed that prices would be set competitively in the BFW is that to assume otherwise would be, in effect, to allow the leagues [to] replace the current anticompetitive prices (and inflated prices) with other anticompetitive prices in the BFW. 155 This is a legal argument, not an economic argument but it is a legal argument that, in Dr. Noll s view, Reply Mem. at 12. Opp. Mem. at

71 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 63 of 72 sets the parameters of legitimate economic modeling. 156 Indeed, when defense counsel pressed Dr. Noll during the hearing about his decision to model prices competitively, the following exchange ensued: Dr. Noll: [Your experts] think it s perfectly fine for a standalone joint venture to act in a way that attempts to maximize the horizontal competitors joint profits. That s fine. I don t think that s a legitimate way to model it; your experts do. Defense Counsel: Are you saying it s unlawful? Dr. Noll: I don t know whether it s unlawful. I m simply saying I believe that it s illegitimate as [an] economist to have cooperative price-setting among horizontal competitors as the way you try to figure out damages in an antitrust case. I think that s not [correct]. 157 In response, defendants argue that Dr. Noll has overlooked the fact that in the BFW, each club would have a unilateral incentive to take into account the effect on the related party i.e., the league when setting price[s]. 158 In other words, multi-product pricing would occur as a natural byproduct of the fact that the clubs and the league have intertwined interests; no top-down coordination would be necessary. It is one thing to hypothesize that the clubs would take into account the effect of their prices on the league, and on the OMP. It is quite Day 3 Tr. at 505. Id. Reply Mem. at 12 (emphasis in original). 63

72 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 64 of 72 another to model prices in the BFW the same way that to borrow an example from defendants expert, Dr. Pakes a car company ( GM ) sets the prices of two different brands that it owns ( Chevy and Pontiac ). If Chevy and Pontiac were owned by different companies, the prices of both cars would naturally settle at a competitive equilibrium just as Dr. Noll argues that prices of the OMP and the a la carte channels would. But what happens if Chevy and Pontiac are [both owned by] GM? According to Dr. Pakes: [N]ow GM is setting the price for both. They own both products. They get the profits from both products. So [GM would] increase the price of the Pontiac by one dollar. It gets a dollar from everybody who stays, and some people leave, but [unlike in the scenario where Chevy is owned by another company] they don t lose the mark-up on everybody who leaves. Why? Because some of the people who leave go to the Chevy because it s also a family-sized car. So they ll keep increasing the price more until that equilibrium is established again. So that s what s going on in multiproduct pricing. [And] [y]ou can... show [mathematically that] it has to increase pricing. 159 Dr. Noll decided that analyzing BFW prices this way would violate legitimate principles of economic modeling in essence, because he thought it would reflect collusion. Defendants respond that Dr. Noll is wrong on the law; that in fact, multi-product pricing would occur in the BFW without [] 159 Day 2 Tr. at

73 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 65 of 72 collusion. 160 But this does not dispose of the legal question it begs the legal question. The Supreme Court has made it quite clear that joint ventures are not immune from the antitrust laws. In this setting, they are subject to Rule of Reason analysis. 161 Whether or not the particular type of multi-product pricing hypothesized by defendants would survive Rule of Reason scrutiny is unclear. It presents a complicated legal question. What is clear is that Dr. Noll can hardly be faulted, at this stage, for failing to incorporate into his analysis a collusive practice that he [] believes is illegal. 162 For now, the assumption about competitive pricing stands. 3. Dr. Noll s Testimony About the Supply Side, Extracted from the Damages Model, Is Admissible 160 Reply Mem. at See American Needle, Inc. v. National Football League, 560 U.S. 183, (2010) (explaining that joint ventures, insofar as they give would-be competitors cover for collusive action, trigger antitrust scrutiny). See also Starr v. Sony BMG Music Entm t, 592 F.3d 314, 327 (2d Cir. 2010) (noting that the activities of joint ventures are subject to the Rule of Reason). For further background on the Rule of Reason itself, see Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 885 (2007) ( The rule of reason is the accepted standard for testing whether a practice restrains trade in violation of 1 [of the Sherman Act].... Under this rule, the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition. ) (citing Continental T. V., Inc. v. GTE Sylvania, 433 U.S. 36, 49 (1977)). 162 Day 3 Tr. at

74 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 66 of 72 The final question is whether the Supply Side analysis can be analytically severed from Dr. Noll s damages model. The answer is yes. Because the damages model lacks a solid foundation in existing data, it does not reliably demonstrate whether, and how much, class members were overcharged for OMPs. But nothing about that defect spills over to Dr. Noll s Supply Side analysis. The shortcoming of Dr. Noll s Demand Side analysis and the unreliability of his damage calculations holds true whether or not the Supply Side is properly configured. The admissibility of Dr. Noll s Supply Side analysis stands (or falls) on its own. For the reasons set forth above, I conclude that Dr. Noll s Supply Side analysis, extracted from the damages model, survives scrutiny under Rule 702. Some or all of Dr. Noll s assumptions about the Supply Side may end up being unconvincing which would weaken plaintiffs case on the merits. But that issue must be resolved by a fact-finder. It would be inappropriate for the Court to exclude Dr. Noll s Supply Side analysis at this stage. VI. CONCLUSION For the reasons set forth above, defendants motion to exclude the opinions and testimony of Dr. Roger Noll is GRANTED in part and DENIED in part. The Clerk of the Court is directed to close this motion, Dkt. No. 277 in 12 66

75 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 67 of 72 Civ. 1817, and Dkt. No. 354 in 12 Civ SO ORDERED: Dated: May 14, 2015 New York, New York 67

76 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 68 of 72 For Plaintiffs: Edward A. Diver, Esq. Howard I. Langer, Esq. Peter E. Leckman, Esq. Langer Grogan & Diver, P.C. Three Logan Square, Suite Arch Street Philadelphia, Pennsylvania (215) Kevin M. Costello, Esq. Gary E. Klein, Esq. Klein Kavanagh Costello, LLP 85 Merrimac St., 4th Floor Boston, Massachusetts (617) Michael Morris Buchman, Esq. John A. Ioannou, Esq. Motley Rice, LLC 600 Third Avenue New York, New York (212) Marc I. Gross, Esq. Adam G. Kurtz, Esq. Pomerantz, LLP 600 Third Avenue New York, New York (212) Robert LaRocca, Esq. Kohn, Swift & Graf, P.C. One South Broad Street Suite Appearances - 68

77 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 69 of 72 Philadelphia, Pennsylvania (215) J. Douglas Richards, Esq. Jeffrey Dubner, Esq. Cohen, Milstein, Sellers & Toll, PLLC 88 Pine Street New York, New York (212) Michael J. Boni, Esq. Joshua D. Snyder, Esq. Boni & Zack, LLC 15 St. Asaphs Road Bala Cynwyd, Pennsylvania (610) For Defendants Office of the Commissioner of Baseball, Major League Baseball Enterprises Inc., MLB Advanced Media L.P., MLB Advanced Media, Inc., Athletics Investment Group, LLC, The Baseball Club of Seattle, L.L.P., Chicago White Sox, Ltd., Colorado Rockies Baseball Club, Ltd., The Phillies, Pittsburgh Baseball, Inc., and San Francisco Baseball Associates, L.P. : Beth A. Wilkinson, Esq. Samantha P. Bateman, Esq. Paul, Weiss, Rifkind Wharton & Garrison LLP 2001 K St. NW Washington, D.C (202) Bradley I. Ruskin, Esq. Helene Debra Jaffe, Esq. Jennifer R. Scullion, Esq. Colin Kass, Esq. Proskauer Rose LLP 11 Times Square New York, New York

78 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 70 of 72 (212) Thomas J. Ostertag, Esq. Senior Vice President and General Counsel Office of the Commissioner of Baseball 245 Park Avenue New York, New York (212) For Defendants National Hockey League, NHL Enterprises, L.P., NHL Interactive Cyberenterprises, LLC, Chicago Blackhawk Hockey Team, Inc., Comcast-Spectator, L.P., Hockey Western New York LLC, Lemieux Group, L.P., Lincoln Hockey LLC, New Jersey Devils LLC, New York Islanders Hockey Club, L.P., and San Jose Sharks, LLC: Shepard Goldfein, Esq. James A. Keyte, Esq. Paul M. Eckles, Esq. Matthew M. Martino, Esq. Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York (212) For Defendants Comcast Corporation, Comcast SportsNet Philadelphia, L.P., Comcast SportsNet Mid-Atlantic L.P., Comcast SportsNet California, LLC, and Comcast SportsNet Chicago, LLC: Arthur J. Burke, Esq. James W. Haldin, Esq. Davis Polk & Wardwell 450 Lexington Avenue New York, New York (212) For Defendants DIRECTV, LLC, DIRECTV Sports Networks, LLC, DIRECTV Sports Net Pittsburgh, LLC a/k/a Root Sports Pittsburgh, DIRECTV Sports Net Rocky Mountain, LLC a/ka/a Root Sports Rocky 70

79 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 71 of 72 Mountain, and DIRECTV Sports Net Northwest, LLC a/ka/a Root Sports Northwest: Louis A. Karasik, Esq. Andrew E. Paris, Esq. Stephanie A. Jones, Esq. Alston & Bird LLP 333 South Hope Street, 16th Floor Los Angeles, California (213) For Defendant New York Yankees Partnership: Jonathan Schiller, Esq. Alan Vickery, Esq. Christopher Duffy, Esq. Boies, Schiller & Flexner LLP 575 Lexington Avenue New York, New York (212) For Defendants The Madison Square Garden Company and New York Rangers Hockey Club: Stephen R. Neuwirth, Esq. Deborah Brown, Esq. Richard I. Werder, Jr., Esq. Quinn Emanuel Urquhart & Sullivan, LLP 51 Madison Avenue, 22nd Floor New York, New York (212) For Defendant Yankees Entertainment Sports Network, LLC: John E. Schmidtlein, Esq. Kenneth Charles Smurzynski, Esq. James Harris Weingarten, Esq. William Jefferson Vigen, Esq. 71

80 Case 1:12-cv SAS Document 431 Filed 05/14/15 Page 72 of 72 Williams & Connolly LLP 725 Twelfth Street, N.W. Washington, D.C (202)

81 Selecting "The Right" Testifying Expert and Best Practices for Getting the Most Out of Your Expert During the Pretrial Phase of the Litigation Brian R. Booker, Esq. Quarles & Brady LLP Phoenix Karen M. Engstrom Alvarez & Marsal Global Forensic and Dispute Services, LLC Phoenix Sonya Kwon Navigant Consulting Los Angeles Edward M. McDonough Alvarez & Marsal Global Forensic and Dispute Services, LLC Phoenix Suzanne L. Montgomery AT&T Services, Inc. Dallas I. Selecting an Expert Selecting the right testifying expert witness can sometime be the most important decision a litigator makes in a case. The testifying expert witness will be the person who makes sense for the jury or judge of complex scientific or technical matters, and explains how these complex matters fit into the party s theory of the case. A bad expert witness can lead to confusion or worse sway the trier of fact to rule against the party. Standard Factors to Consider There are many factors that should be considered when selecting an expert; some are general and some are case-specific. Typically, the following factors will be standard in selecting an expert in any case: Skills. Does the expert have the skills necessary for the opinions required, such as medical, engineering, financial, real estate, etc., as well as any specific case issues? Published by the American Bar Association Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

82 Knowledge. Does the expert have the requisite knowledge, not only of the general area in which he or she practices, but also knowledge of the industry, market, economy, and relevant emerging technology? Does the expert have specialized knowledge of the specific product, project or other matter at issue in the case? Education. Does the expert s education match the areas at issue in the case? Does he or she have advanced degrees and continuing education in the area of expertise? Credentials. Are credentials, board certification, and licensing an important distinction in the expert s field (e.g. CPA, PE, CFA, MAI, CPCU, MBA, PhD, etc.)? Training. What specialized training, including ongoing continuing education, does the expert have? Professional Experience. What is the expert s actual experience, both in the subject matter, as well as the industry? Is the expert involved with national or international standards committees? Is she involved in Involved in relevant community or industry organizations? Testifying Experience. What is the expert s experience testifying? How has the expert handled testifying in the past? Was she able to handle tough cross-examination? Was he personable and knowledgeable on direct testimony? Communications Skills. Can the expert communicate complex issues in a manner that can be readily understood by a jury or trier of fact? Is the expert readily available and responsive? Style. What is the expert s management/work style? Does the expert take on a handson and detail-oriented approach, or more of a big picture or conceptual approach? Which approach is best for the case? Understanding of Litigation Process. Does the expert understand the litigation process, such as time constraints, the purpose and nature of depositions, the adversary process, cross examination, discovery, non-privileged communication, etc.? Competitive Concerns. Does the expert work for a competitor of a party to the case? Will he have access to business strategy or product design if retained as an expert? Typically in-house counsel or corporate client will be more sensitive to these issues. Due Diligence When selecting an expert, the attorney should conduct sufficient due diligence to determine not only whether the expert has the qualifications necessary but also the expert s prior work history, both professionally and as an expert witness. Questions that should be asked include: Has the expert s testimony been excluded as a result of a Daubert challenge, or some other challenge as to the methodology the expert utilized, or the use of unreliable data? Has the expert failed to be qualified? Does the expert appear to have a bias, such as only working on behalf of plaintiffs or defendants? Has the expert testified previously on similar matters and was the approach similar to the approach he would use in the current matter? Has the expert worked for/against the opposing counsel or the adverse party in the current case? If so, what position did he take then? Has the expert written any articles or provided prior testimony taking a position that would adversely impact the case? Published by the American Bar Association Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

83 Are there any negative facts in the expert s personal life that could negatively impact the jury (e.g. been involved in litigation, been terminated by an employer, convicted of a crime, such as DUI)? Counsel should review the expert s web page and social media to determine position taken in the past, as well as all past articles and speeches and available testimony. Counsel should contact attorneys that the expert has worked with and against in order to gain an understanding of the expert s management/work style, the persuasiveness the expert s testimony, and the expert s demeanor at trial and deposition. Also, how responsive was the expert to the time demands of litigation, and what is their overall assessment of the expert s strengths and weaknesses? Has the expert posted recommendations of individuals or comments to specific articles that could be used against them? Role of In-House Counsel in Selecting and Managing Expert Witness Increasingly, in-house counsel are becoming more involved in litigation and litigation is becoming more and more become complex. Cases such as patent litigation, product liability claims, mass tort, antitrust and RICO cases can be highly technical and often difficult for a trier or fact or outside counsel to understand, particularly at the start of the case. The in-house counsel can be a key partner with an outside counsel in selecting an expert witness. The inhouse counsel will likely have a better understanding of the exact nature of the problem and the type of specialist needed for the case. The in-house counsel may have dealt with the issue before or even simultaneously in another jurisdiction, and will typically have more robust experience, expertise, and knowledge than the outside counsel. Before an expert is formally retained to provide testimony, the in-house counsel, outside counsel, and the expert should meet and review the expert s preliminary opinions and conclusions. The in-house counsel s more intimate knowledge of the issues and facts can aid in selecting the expert, including ensuring that the expert s opinions are consistent with the client s positions. A final consideration is whether the expert might give an opinion that could be damaging to the client in another case or in its business plans. The in-house counsel will likely be more sensitive to these issues that her outside counsel counterpart. In-House Experts Before selecting and hiring an expert, the lawyer should determine whether an employee of the corporate party can serve as the expert. If the employee has the requisite expertise, there may be advantages to selecting an in-house expert. She may have intimate factual knowledge of the subject matter of the lawsuit or the project, product, issue in the case. An expert coming in after the fact did not live through the issue, and there is sometimes a learning curve that cannot be or is difficult overcome. For example, if there is litigation over a delayed construction project, it may be useful to use an expert who lived through the delays and can explain them with personal knowledge. An in-house expert is usually more knowledgeable about the bigger pictures issues impacting the business and the role of the case in the larger context of the corporate party s business. Similarly, he will likely be more sensitive to the potential impact of his testimony on the company s business operations or other pending litigation. On the other hand, there are disadvantages to using a party s employee as an expert witness. The employee will have an obvious bias or motive, and will likely be viewed as having a duty of loyalty to her employer. As an employee of a party, the person may have a financial interest in the lawsuit, such as her salary or bonus, or may be a shareholder. The employee is unlikely to have the same academic credentials as a retained expert and may understand the litigation process. Experienced versus Inexperienced Witness Published by the American Bar Association Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

84 Similarly, counsel should weigh the benefit of having a potential expert who has testified numerous times and may practice full time as an expert witness, versus having a well-qualified individual who has never testified, or has testified sparingly. An experienced witness brings a range of prior experience, which may be valuable, and an understanding of the litigation process (e.g. discovery, depositions, etc.). In addition to the experience, the experienced witness may have developed persuasive methods to explain complex technical facts to a jury and is aware of the sense of urgency needed to respond to the unpredictable demands of litigation. However, the experienced expert may look like a hired gun and may have a long history of testimony in other matters that could be harmful to the present case. An inexperienced witness, although well qualified, may require more of the attorney in educating the witness as to the process and may not be able to withstand tough cross-examination. An inexperienced witness may have a shorter track record of prior testimony, providing less ammunition for cross-examination and possibly mitigating the appearance of a hired gun. Similarly, counsel should consider whether for a particularly case an academic in the role of expert would be preferable to a professional expert who testifies frequently. Matters that Involve Multiple Experts Often, the litigation matter has several prevailing issues that may need multiple experts to address. Multiple experts can be used in a variety of litigation matters and at different phases of the litigation lifecycle. If you have a strong in-house expert but are worried about bias, you might consider pairing her with an outside expert witness. Although having multiple experts could potentially allow for more arguments or potential points of attack from the other side, it allows for each expert to focus on their specific areas of expertise. It also allows a party to take inconsistent positions without putting an expert in the middle of that legal strategy. For example, a party may use an expert to strenuously argue that it has no liability, but also present an expert to proffer an alternative damages model to present to the jury if liability is found. Multiple experts might minimize the possibility of the opposing side discrediting a potential expert for straying outside her area of expertise. Although the experts are handling different areas, their overall arguments should be consistent and the experts opinions should all synergize with counsel s arguments. Legal counsel should be aware of how one expert s opinion may impact another s approach or methodology. For example, how does the class certification expert s opinion influence the damage expert s model? How does the damage expert s opinion square with the liability expert s opinion? II. Preparing and Developing the Expert Opinion Documents and Data There are a wide variety of documents that are useful to an expert. Experts should be provided with the complaint, answer, any counterclaims, and all relevant deposition transcripts, discovery responses, and disclosure. Other case documents, including correspondence, should also be provided to the extent relevant to the expert s analysis. It is important that the expert be retained early in the case so she can advise counsel what documents are needed from the opposing side that will be critical for her analysis. If the expert is retained too late in the case, there may not be sufficient time to serve the necessary discovery request in advance of the expert report deadline. Published by the American Bar Association Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

85 When it comes to analyzing damages of a company, an expert will nearly always want to review financial statements, including the income statement, balance sheet, statement of cash flows, and any footnotes to the financial statements. To the extent that the company has audited financial statements, those should be provided. Depending on the complexity of the business and the underlying case, the expert may want to review just annual statements but may be interested in quarterly or monthly statements as well. The expert may also want to review some or all of the following: Contracts and agreements Management reports Business plans Budget/variance analyses Margin analysis Minutes for Board meetings Price lists Customer lists Sales invoices Sales commission reports Marketing materials Customer surveys Market and industry data Engineering studies Alternate product designs Let your expert guide you on the documents that are important to her analysis. If the expert asks for a particular document, counsel should supply it unless there is an overpowering reason not to. The expert will inevitably be asked at deposition whether she wanted to see a document that was not provided. When in doubt, counsel should consult with the expert to determine the relevancy of particular documents. All documents that may be either helpful or harmful to an expert s analysis should always be disclosed to prevent the expert from seeing a document for the first time in deposition or trial without having a chance to consider how the document might impact his or her opinion. In a data intensive case, the data involved could be very voluminous and very often beyond the capabilities of a simple tool, like MS Excel, to warehouse and analyze. Opposing counsel will need to work together to ensure that the data is produced in a format that is capable of being understood and used by both sides. The testifying or consulting expert will be a useful partner in this exercise, and will be helpful in preparing counsel for the discovery meet and confer discussions on the production of the data. Before she retains the expert, counsel will need to confirm that the expert is able to handle large datasets. Does the expert or his staff know how to properly extract the information and are they able to properly track their procedure from going from raw data to the warehouse on their system. Do they use best practices for maintaining the structure of the data? What tools do they use to manage the data? Are these tools industry standard? A consulting expert might be useful here to help counsel understand whether the testifying expert is using the data properly and in a defensible manner. Along with several issues regarding data and data management, how the data is analyzed is also critical. Does the issue require statistical modeling and does the expert have the proper credentials to not only properly execute the model, but to also properly opine on what the model means in a concise and clear manner? Does the expert have a history of complicated models or simple ones? For the particular issue which type of model makes the most sense to put on in front of the trier of fact? Published by the American Bar Association Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

86 Causation Opinions To award damages, courts require that a defendant s wrongful conduct actually caused the damages alleged by the plaintiff. Experts can assist in showing causation, such as an engineer or scientific expert that can show how a product s design led to an equipment failure, or an economist can analyze data and develop statistical models that show the relationship between independent variable and the dependent variable revealing the cause and effect of the alleged actions. Like any expert opinion, an expert addressing causation must base her opinion on the relevant expert standards in your jurisdiction and may be subject to the Daubert or Frye challenge if it does not have the necessary foundation. The causation expert must base her opinion on sufficient facts or data, a product of reliable principal and methods, the principles and methods are reliably applied to facts in the case. Sometimes the damages expert will proffer an opinion on damages causation and sometimes the damages expert will be asked to assume causation, and counsel will rely on a different expert for the causation issue in the case. Even in the cases when counsel instructs the damages expert to assume causation for purposes of his analysis, an expert retained to measure damages must, as noted in the Litigation Service Handbook, Fourth Edition, understand and be prepared to explain the following: plaintiff s theory of the defendants wrongful conduct how the plaintiff alleges that the defendant s wrongful conduct caused damages to the plaintiff, and/or how the defendant alleges that it did not cause the damages whether the plaintiff s damages could reasonably be expected to have flowed from the defendant s wrongful conduct other factors that may have caused and/or exacerbated the plaintiff s damages. Damage Theories There are a number of different damage theories which can drive an expert s damage calculation and methodology. During the early stages of consulting with an expert, counsel should explore the different damage theories, and collaboratively decide which theory best matches both the facts in the case and the legal theory. In a breach of contract case, three separate damage theories should be considered: expectation damages, reliance damages, and restitution or rescission damages. Expectation damages provide the plaintiff with the benefit of achieving the position that would have expected to receive had the contract been performed by the defendant. Reliance damages calculate the losses caused by a plaintiff s reliance on a contractual obligation. Finally, restitution or rescission damages seek to return the plaintiff to their pre-contract position. In a typical breach of contract or lost profits analysis, the expert will consider whether the damages suffered are truly lost profits, indicating a temporary loss to the business, or are more of an overall loss in the company s value, reflecting a permanent impairment to the business. The expert s damage model will differ depending on the extent of the loss to the future of the company. The damages expert will be a critical partner to counsel in assessing this important theme in the case and which type of damage the company truly suffered. A plaintiff s expert might help counsel and the client understand the full scope of the damages which counsel extend far beyond the loss profits for sales for a particular widget for a limited period of time, where a defendant s expert may help counsel to explain why loss profits is a more appropriate damages analysis than loss business value or reputational losses. Another consideration for an expert and counsel is to identify areas for actual but for damages separately from any consequential damages. Consequential damages compensate a plaintiff for losses other than those directly tied to the defendant s contract breach. For example, a Published by the American Bar Association Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

87 defendant s failure to deliver a certain component part within the time required may have prevented the plaintiff from launching a consumer product in advance of the holiday selling season. The plaintiff in this scenario may have also lost sales for other related products. In certain instances, an expert may also be useful in addressing punitive damages. As an example, an expert can review the financial condition of a defendant company to assess whether a certain level of punitive damages would be material in affecting the viability of a defendant company on a go-forward basis. Or, the expert can provide an opinion on what punitive damages amount will truly punish the defendant for its bad conduct. III. Expert Reports Whether the case is in federal or state court may determine the extent of the disclosure or report required of an expert. In federal cases, the Federal Rule of Civil Procedure 26(a)(2)(B) requires a specially retained expert to prepare and sign a written expert report. The requirements of an expert report for federal court include a complete statement of all opinions to be expressed and the basis thereof, the data or information considered by the expert, the expert s qualifications and compensation, and a list of other cases in which the expert has testified in the prior four years. State courts may only require a more limited disclosure of the expert s opinions without a full expert report, and in some states you need only disclose the identity of an expert and her opinions if specifically requested in discovery. Of course, in those circumstances, you may consider disclosing the expert and providing a report to ensure that the expert will not be barred from testifying at trial. While individual practice varies by expert, generally an expert s report should be detailed and should stand on its own, permitting a reader to fully understand all of the opinions and the bases for the opinions. While some experts might simply limit their expert report to the bare requirements, it is often helpful for an expert to truly tell the story at the basis of the expert s opinion. Thus, a damages expert will want to include a robust explanation of how a party has (or has not) been damaged, supporting the analysis with case documents, deposition testimony, and sometimes external authoritative literature. The expert s damage theory and opinions should be reasonable and should conform to commonsense given the supporting facts and documents of the case. An expert should also ensure that the opinion, process and/or model utilized is based upon generally accepted methodologies, and it is often helpful for the expert to cite or reference an authoritative source which describes the selected methodology. Counsel should always review the expert s report prior to issuance to confirm the expert s opinions are sound and are consistent with the factual evidence in the case. In federal court, counsel will have a strong basis for arguing that this review and any exchange regarding the report between counsel and the expert is protected work product. In 2010, the Federal Rules of Civil Procedure were amended to add work product protect to communications between a party s counsel and its expert witnesses. Specifically, amended Rules 26(b)(3)(A) and (B) protect communications between the party s attorney and any witness required to provide a report under Rule 26(a)(2)(B), regardless of the form of the communications, except to the extent that the communications: (i) relate to the compensation for the expert s study or testimony; (ii) identify facts or data that the party s attorney provided to the expert and that the expert considered in forming the opinions to be expressed; or (iii) identify assumptions that the party s attorney provided to the expert and that the expert relied on in forming the opinions to be expressed. (Of course, the rules will likely be different in state court, so it is important to check the rules of procedure and evidence in the state where your case is pending before engaging in written communication with your expert.) Published by the American Bar Association Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

88 With the increasing role of in-house counsel in litigation, a key question has arisen as to whether communications between the in-house counsel and experts are protected communications under the 2010 amendments to Rule 26. This can be particularly a concern with an in-house counsel who is active in the litigation, but is not counsel of record in the case. Parties, of course, often have many attorneys, including in-house counsel, outside general counsel, national coordinating counsel, and counsel in other cases dealing with the same or similar subject matters. The drafters of the amended Rules recognized this reality and addressed it in a Committee Note to Rule 26(a)(4)(C). That note recognizes that the work product protection should be applied in a realistic manner, and that there be a pragmatic application of the rule to apply to communications with these broader groups of counsel, when appropriate. If an in-house expert is being used as a testifying expert in the case, there is an open question whether she must prepare a report under the federal rules. Rule 26(a) requires written reports from experts who are retained or specially employed to provide expert testimony, as distinguished from party employees do not regularly involve giving expert testimony. An inhouse expert witness might be specially employed and required to provide expert report pursuant to Rule 26(a)(2)(B) if the witness was retained primarily to testify on behalf of the employer, rather than performing a job for the employer as a business. Factors to consider include the following: Was the in-house expert engaged in the issue before there was anticipation of litigation? Does the in-house expert have independent factual knowledge about the matter? What percentage of time does the in-house expert spend testifying on behalf of the employer v. percentage of time doing a role for the employer s business? If a witness will be proffering expert testimony but is not required to provide a report, Rule 26(a)(2)(C) mandates counsel-prepared disclosures, which must state the subject matter on which the witness is expected to present evidence and a summary of the facts and opinions to which the witness is expected to testify. Although there is caselaw that holds that this disclosure requirement applies to all non-retained persons giving expert evidence, including parties, when in doubt the better practice is to have the expert prepare a Rule 26(a)(2)(B) report. IV. Use of Experts in Addition to Trial Testimony The assistance that expert witnesses can provide to counsel goes beyond solely the anticipated trial testimony. Among other things, expert witnesses can assist by: Educating counsel on complex concepts in the expert s field. Providing insight into industry/business issues Identifying the critical issues in the case Identifying sources of financial, technical or scientific information for discovery requests Helping to develop discovery requests and interpreting responses Analyzing damage assessments Identifying other potentially culpable parties (additional defendants, indemnitors, counterclaim defendants) Identifying strengths and weaknesses of the case Assisting with developing theory and theme of the case Analyzing causation Identifying individuals to depose Preparing deposition questions Assisting in mediation Published by the American Bar Association Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

89 Preparing exhibits and demonstrative evidence By helping in these areas, a credible expert can assist in settling a case even before it goes to trial. With complicated cases, it is even more critical to retain competent expert witnesses at the initial stages of the case. When deciding whether to retain a liability expert, for example, consider whether a specific analysis is needed to determine causation. A competent expert is critical in complex litigation. Even if a case does not go to trial, a credible expert can help counsel and the client understand the case, assess liability and/or damages, and assist in the eventual disposition of the case. Consider for example, the many uses of a financial expert. At a threshold level, a financial expert is necessary when the value of the item is not easily measurable by a lay person or to help the trier of fact make sense of monetary issues. The financial expert is used to quantify monetary damages in accordance with counsel s legal theories and to rebut the opposing expert s damage calculations. But, a financial expert can be useful far beyond the damages testimony in a lawsuit. She might be able to get facts before the trier of fact that might otherwise be difficult to get it into evidence since an expert can rely on hearsay and other documents customarily used by an expert. When a financial expert has prior experience with the client s line of business or industry, that expert s knowledge may be particularly useful in a case. A financial expert can also assist with establishing a connection (or lack thereof) between the cause of action and the damage suffered, and the expert s analysis can be used to prove that a plaintiff did or did not incur a financial loss which can be helpful in supporting or opposing summary judgment motions. Depending on the circumstances of a particular case, counsel should also consider the use of a consulting expert. A consulting expert can advise counsel in many of the same areas noted above but without providing testimony and without being disclosed to the opposing party. The advantage of utilizing a consulting expert is that the work product is subject to attorney work product privilege and will not have to be produced to opposing counsel. A consulting expert can help you identify an independent expert; the consultant knows the field, will have recommendations on who to retain, and will know what questions to ask potential testifying experts when you are interviewing them. Sometimes it is useful to explore damage theories with a consulting expert prior to discussing such theories with a testifying expert witness. A consultant role might be a useful role for an in-house expert, who might be perceived as having too much of a bias to designated as a testifying expert. Of course, if the in-house expert is a fact witness for the particular case, this would not be a good choice because he might be subject to deposition or trial testimony in his fact capacity and it would be difficult if not possible to shield his work for counsel from production. Depositions The expert can help identify individuals at a company that may have information that bears on damages; such as a controller or chief financial officer, on issues as to liability; a product marketing manager who is responsible for profit and loss of the product at issue in the case; the project manager on a construction project; or a V.P. of engineering or research and development. The expert can also assist in identifying documents that can be used, such as projections, management analysis, marketing plans, and results of scientific trials. Finally the expert can assist in identifying areas of inquiry for the opposing expert s deposition and other relevant parties. Counsel may also want their expert to sit in on the deposition of the opposing expert or other key witnesses. The expert will be a useful partner in discussing the testimony with counsel during breaks and in helping formulate follow-up questions, particularly when areas arise at the deposition that may not have been anticipated. Published by the American Bar Association Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

90 Mediation An expert, acting in the capacity of a consultant, can assist counsel in developing various damage calculations based on different theories of the case using differing assumptions, and a range of potential damages can be evaluated. This will help the defendant client understand its liability exposure in determining settlement authority, or the plaintiff client in understanding its actual damages and likelihood of recovery in determining what settlement amount it will accept to avoid the risk of trial. If the damage model is extremely complex, the consulting expert may be asked to attend the mediation to 1) explain the key assumptions to the mediator if necessary, and 2) run various iterations of the damage model during the mediation. Counsel might consider having the expert might preview the testimony and presentation she will make at trial to induce the opposing party to more fully consider the settlement offer or demand. Arbitration Experts can also be used in arbitration. Recent Supreme Court decisions such as AT&T Mobility v. Concepcion, American Express v. Italian Colors Restaurant and D.R. Horton, Inc. v. N.L.R.B., as well as the increased recognition of the propriety of dispositive motions in arbitrations, will have the effect of potentially pushing matters that would normally be litigated in trial court going to arbitration, even complex commercial cases. Experts can be utilized in arbitration and there is often more flexibility with how the expert is selected. If an expert can offer credible testimony to the issues at hand then the expert can be used. There is no specific requirement that an expert qualify under specific evidentiary rules. Additionally, the arbitrators are often subject matter experts themselves so the burden of having to explain complex issues in a simple manner to a jury is much less of a concern. Thus, the expert can focus on highly complex issues because it is likely that the arbitrator will understand the foundational issues. Because of the stricter control of discovery in arbitrations as compared to court proceedings, counsel will have more flexibility with his expert. Privileged consultants likely are not needed in arbitration because disclosing work product to an expert in arbitration is usually not an issue. Similarly, counsel can play a more active role in assisting in crafting the expert report and expert opinion. It is likely that the opposing party will not know the identity or opinions of the expert until the written direct testimony is produced and thus counsel has some freedom and flexibility in how and when the expert s opinion is disseminated to arbitrator or the opposing party. Published by the American Bar Association Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

91 Expert Evidence Report Reproduced with permission from Expert Evidence Report, 13 EXER 103, 02/18/2013. Copyright 2013 by The Bureau of National Affairs, Inc. ( ) USE OF EXPERTS CIVIL LITIGATION Working Successfully With Expert Witnesses BY GREG EASTMAN, VANDY M. HOWELL, AND MARIA SALGADO E xpert witnesses can be important contributors to the legal team, offering analysis, insights, and ultimately opinions and testimony that can impact both case strategy and case outcomes. An expert can Greg Eastman works on cases involving financial, securities, tax, and breach of contract issues. He has experience as a testifying expert, and can be reached at geastman@ cornerstone.com. Vandy M. Howell is the head of Cornerstone Research s San Francisco office, and works on antitrust, intellectual property, marketing, and breach of contract matters. She also has experience as an expert witness, and can be contacted at vhowell@ cornerstone.com. Maria Salgado works on cases involving marketing, intellectual property, and antitrust, especially in the pharmaceutical and healthcare industries, and can be reached at msalgado@cornerstone.com. play many roles, from bringing important facts to the litigation through de novo research and analysis to interpreting the existing facts in the record using the tools from his or her fields of expertise. While the expert brings existing knowledge and expertise, it is rare that any expert comes to the litigation with all the information necessary to offer a relevant opinion in a specific matter. Supporting an expert in writing a meaningful expert report and offering effective trial testimony that communicates relevant and well-supported opinions involves many steps. How litigators work with their experts in this process lays the building blocks of success. A thoughtful and professional relationship between counsel and expert will increase the effectiveness of the all-important presentation of the expert s testimony at trial, but even before that stage, can benefit the factgathering process, the drafting of the expert report, the expert s effectiveness at deposition, and counsel s pretrial motions. Of course, each case is unique, and counsel will need to decide how to best work with their experts in each particular case. This article details some best practices that can aid counsel in working most productively with their expert witnesses from the inception of a case through trial. COPYRIGHT 2013 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ISSN

92 2 Be Realistic About Defining Successful Outcomes An expert witness can affect the outcome of litigation in many ways. For example, experts can help counsel with: s Identifying appropriate content for discovery requests; s Assessing early the merits of the case through an expert lens; s Creating and identifying key, necessary facts through expert research, surveys, and analysis; s Interpreting the other side s expert opinions and analysis; s Sponsoring opinions, declarations, or expert reports; s Testifying at deposition; and s Testifying at trial. A successful outcome is having the most effective experiences in these dimensions, conditional on the particular fact pattern in the particular case. One example of success is when an expert s analysis shows that arguments central to the case are supported by the relevant data, and the expert testifies successfully to this at trial. But another example of success is when an expert s analysis shows that some arguments central to the case are not supported by the relevant data, and counsel learns this early enough in the litigation to adjust their litigation strategy appropriately. Communicate Early and Often Good communication is critical to getting the most out of any given relationship with an expert. Indeed, not only should counsel and expert communicate often, but it is best if they do so from an early stage in the case. Engage the Expert Early Engaging and communicating with the expert early has many benefits. It gives the expert the time necessary to develop and support the expert opinion he or she will ultimately express in the matter. This includes the time to identify and review relevant background materials, such as document productions and depositions. Early engagement allows the expert to conduct any interviews or studies necessary to forming an expert opinion, as well as to request, receive, and process any data relevant to that opinion or to the litigation as a whole. It also allows counsel to fully understand the expert s opinion and evaluate its implications for the overall legal strategy. Communication is not just a one-way street: The early stages of litigation are a critical time for counsel to be receiving information from the expert as well. Communicating early with the expert, for instance, allows counsel to craft more effective document requests, deposition questions, and requests for admissions from the other side. Counsel can also adjust their legal theory of the case based on the early analysis by their expert witness. If this early communication does not take place ideally, it should occur before the start of discovery some important value from the expert witness s engagement can be lost. Define and Communicate Expert s Role Clearly Expectations about the expert s role and scope of opinion should be clarified early on. In this process the expert can convey initial thoughts about the appropriate research agenda, a communication process which can help the expert and counsel come to an agreement with respect to the scope of the opinion. In initial conversations, counsel and experts should come to an understanding on (i) the issues on which the expert will be expected to give an expert opinion; (ii) issues on which the expert may be asked to give an expert opinion; and (iii) the roles of other experts in the case, if any, so that the expert does not mistakenly step into those roles. In defining an expert s role in a matter, counsel should obtain feedback from the expert who is the ultimate authority on what roles he or she is comfortable playing. Counsel should also make a realistic assessment of their expert and his or her expertise, and refrain from pushing the expert to play a larger or different role than the expert reliably can. Share Relevant Information This responsibility falls heavily on counsel, as counsel can affect discovery and the information that the expert will have available for his or her analysis. While counsel often will be eager to share with the expert any information that supports their legal theory, it is equally important to share information in the record that may appear to contradict or challenge that theory the sooner the better. Negative facts tend to come out eventually, and it is best to let the expert know all the facts early on and to understand how those may affect his or her opinion. Failing to share significant information, good or bad, with the expert can negatively impact the outcome of the case, both by diminishing the expert s credibility therefore impacting counsel s legal strategy directly and by causing a breakdown in the trust between the expert and counsel. It can also introduce unnecessary costs, including the extra expense of revising an expert report to account for facts that could have been shared and accounted for earlier. Counsel should also consider how the information will be shared with the expert. For example, does the expert prefer to receive information electronically or in hard copy, directly or through his or her support personnel? To ensure that information is getting to the expert as necessary, counsel should consider designating an individual on the litigation team with direct responsibility for this process. Creating this contact point will ensure the necessary information gets to the expert and assure the expert that his or her role is valued and that there is a clear channel of communication to obtain the information the expert needs to be effective. The views expressed in this article are solely those of the authors, who are responsible for the content, and do not necessarily represent the views of Cornerstone Research COPYRIGHT 2013 BY THE BUREAU OF NATIONAL AFFAIRS, INC. EXER ISSN

93 3 Lay a Solid Foundation Because the effectiveness of a testifying witness is directly related to the quality of the expert analysis, a strong, well-supported expert report and/or analyses are critical to successful deposition and trial testimony. Expert opinions must comport with the facts of the case, the available data, and the rules and methods of the expert s field. (This is part of the Daubert standard.) Sometimes, because the understanding of case facts evolves, what counsel originally hoped for in terms of opinions and results is not what is ultimately supportable. The process of working closely with an expert to discern what testimony he or she can reliably offer is an integral part of the process through which counsel can assess the merits of the case. Because the expert report usually defines the boundaries of what the expert is allowed to testify to at trial, counsel should consider the ultimate trial strategy when retaining an expert and defining the scope of his or her report. The desire to make an expert report as inclusive as possible in order to preserve options for trial testimony is understandable, but counsel should consider that pursuing this strategy may make the expert s opinions vulnerable to attack if the report encompasses areas outside his or her expertise. Conversely, a narrow opinion can be effective if it serves the strategic goals of the case, but carries the risk that as the case evolves counsel may find it unduly limiting at trial. It is critical, therefore, to anticipate, before filing the report, the full scope of issues on which an expert can offer valuable insights. Identifying the right ground to ask an expert to cover will help lay the proper foundation for the expert to be effective at trial. Deposition and Trial Preparations By the time the expert comes before opposing counsel (at deposition) and the trier of fact (at trial), it is important that counsel and the expert are prepared and know what to expect from each other. There are several things that counsel and the expert can do to make sure this happens. Know the Expert Knowing the expert well will aid counsel in successfully working with him or her throughout the litigation. This includes knowing the expert s opinion well including the precise boundaries, facts, and details of his or her opinion but also much more than that. Perhaps most fundamentally, it is important that counsel understand how experienced the expert is in developing and testifying to expert conclusions in the context of litigation. This knowledge will enable counsel to offer appropriate guidance and support that is most likely to lead to successful expert testimony. In addition, counsel should be aware of how much attention the expert needs in preparing for deposition and trials. Some experts expect a lot of attention from counsel when preparing, while others prefer to be left alone. It is also valuable to know the expert s working style whether the expert prefers phone conferences, videoconferences, in-person meetings, or s; how much advance notice they require for scheduling; what other professional activities they are engaged in; and the extent to which an expert prefers to rely on support personnel. If counsel does not know and account for these factors, misunderstandings may arise, and time and other resources can be wasted. Finally, while high-quality analysis is the key to expert success, counsel must also consider how the expert s personality will be perceived by the fact-finder. Efforts to change an expert s personality are unlikely to be successful in fact, it is a mistake to try. But counsel should know and acknowledge the expert s personality when considering how to best prepare the expert for the adversarial process. For example, counsel might encourage a teaching style for the expert, especially if he or she is an academic and a well-regarded teacher. Ultimately, an expert can at most be expected only to be his or her best self anything else will be transparently artificial and sacrifice the authenticity that is key at both deposition and trial. Make Sure the Expert Knows His or Her Role at Deposition and Trial Counsel should explain to the expert the deposition and trial process, including how much time is expected from him or her at these stages. In addition to providing his or her own testimony, for instance, will the expert be expected to listen to the other side s expert testimony? Will the expert be expected to be available throughout trial for consultation on other aspects of the case? Is the expert providing testimony in the beginning or end of a trial? Before or after the opposing side? What is the expert s role vis-à-vis the other experts in the case? All of this will help the expert be prepared and provide more valuable perspective at deposition and trial. Context Matters There are important differences in the types of questioning that an expert will encounter at deposition, direct trial testimony, and cross-examination, and counsel should make sure that the expert understands these differences and the reasons for them. Deposition is a time where opposing counsel may explore a wide range of subject matter with the expert. Counsel should make sure that the expert is well prepared for this. Opposing counsel could ask very detailed questions about the expert s calculations or assumptions. The expert should be prepared to explain in detail how his or her opinions are supported by facts and analysis. Counsel should also discuss with the expert how his or her opinion fits into the current legal strategy. This context will help an expert to understand the questions that are being asked and therefore to provide appropriate answers. Counsel should discuss with the expert the themes that have become important in the litigation, as well as any areas of his or her testimony that are more likely to be misunderstood or taken out of context. Because it is not unusual for opposing counsel to ask deposition questions on topics not covered directly in the expert s report, counsel can discuss with the expert different approaches to responding to this type of questioning. In direct trial testimony, effective communication and presentation is key, and counsel should remind the expert to abstain from using technical jargon, to focus on exposition that juries can understand, and to take the time to teach and explain. Direct testimony does not need to cover every detail or topic that was in the expert report. And in most court settings, the expert is in a position to create demonstratives for trial that allow him EXPERT EVIDENCE REPORT ISSN BNA

94 4 or her to best illustrate and teach core opinions. Making time to discuss this process will support the expert s effectiveness at trial. Preparing an expert for the cross-examination is quite different from preparing for direct examination. The expert should know his or her opinion well, know all relevant facts, know the boundaries of his or her opinion, and be prepared to address any weaknesses of the opinion, even if already confronted in the direct exam. Often it is useful to have counsel play the role of opposing counsel in a traditional mock crossexamination to give the expert practice in responding to adversarial questioning. In summary, retaining the right expert is only the first step counsel takes in creating a successful expert experience. Timely information flow and effective communication can make the working relationship much more valuable for counsel and the case. A good relationship based on effective communication maximizes the potential for the expert to offer feedback that enhances the development of fact discovery and the evolution of case strategy, and allows the expert to develop an informed, factually supported opinion that will be most useful to counsel in trial COPYRIGHT 2013 BY THE BUREAU OF NATIONAL AFFAIRS, INC. EXER ISSN

95 Presenting Complex Economic Theories to Judges 2008

96 Unclassified DAF/COMP(2008)31 DAF/COMP(2008)31 Unclassified Organisation de Coopération et de Développement Économiques Organisation for Economic Co-operation and Development 16-Dec-2008 English, French DIRECTORATE FOR FINANCIAL AND ENTERPRISE AFFAIRS COMPETITION COMMITTEE Cancels & replaces the same document of 02 December 2008 TECHNIQUES FOR PRESENTING COMPLEX ECONOMIC THEORIES TO JUDGES English, French JT Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original format

97 DAF/COMP(2008)31 FOREWORD This document comprises proceedings in the original languages of a Roundtable on Techniques for Presenting Complex Economic Theories to Judges held by the Competition Committee (Working Party No. 3 on Co-operation and Enforcement) in February It is published under the responsibility of the Secretary General of the OECD to bring information on this topic to the attention of a wider audience. This compilation is one of a series of publications entitled "Competition Policy Roundtables". PRÉFACE Ce document rassemble la documentation dans la langue d'origine dans laquelle elle a été soumise, relative à une table ronde sur les Techniques Permettant d Exposer des Théories Economiques Complexes à des Juges qui s'est tenue en février 2008 dans le cadre du Comité de la concurrence (Groupe de Travail No. 3 sur la coopération et l application de la loi). Il est publié sous la responsabilité du Secrétaire général de l'ocde, afin de porter à la connaissance d'un large public les éléments d'information qui ont été réunis à cette occasion. Cette compilation fait partie de la série intitulée "Les tables rondes sur la politique de la concurrence". Visit our Internet Site -- Consultez notre site Internet 2

98 DAF/COMP(2008)31 OTHER TITLES SERIES ROUNDTABLES ON COMPETITION POLICY 1. Competition Policy and Environment OCDE/GD(96)22 2. Failing Firm Defence OCDE/GD(96)23 3. Competition Policy and Film Distribution OCDE/GD(96)60 4. Competition Policy and Efficiency Claims in Horizontal Agreements OCDE/GD(96)65 5. The Essential Facilities Concept OCDE/GD(96) Competition in Telecommunications OCDE/GD(96) The Reform of International Satellite Organisations OCDE/GD(96) Abuse of Dominance and Monopolisation OCDE/GD(96) Application of Competition Policy to High Tech Markets OCDE/GD(97) General Cartel Bans: Criteria for Exemption for Small and Medium-sized Enterprises OCDE/GD(97) Competition Issues related to Sports OCDE/GD(97) Application of Competition Policy to the Electricity Sector OCDE/GD(97) Judicial Enforcement of Competition Law OCDE/GD(97) Resale Price Maintenance OCDE/GD(97) Railways: Structure, Regulation and Competition Policy DAFFE/CLP(98)1 16. Competition Policy and International Airport Services DAFFE/CLP(98)3 17. Enhancing the Role of Competition in the Regulation of Banks DAFFE/CLP(98) Competition Policy and Intellectual Property Rights DAFFE/CLP(98) Competition and Related Regulation Issues in the Insurance Industry DAFFE/CLP(98) Competition Policy and Procurement Markets DAFFE/CLP(99)3 21. Regulation and Competition Issues in Broadcasting in the light of Convergence DAFFE/CLP(99)1 22. Relationship between Regulators and Competition Authorities DAFFE/CLP(99)8 23. Buying Power of Multiproduct Retailers DAFFE/CLP(99) Promoting Competition in Postal Services DAFFE/CLP(99) Oligopoly DAFFE/CLP(99) Airline Mergers and Alliances DAFFE/CLP(2000)1 27. Competition in Professional Services DAFFE/CLP(2000)2 28. Competition in Local Services DAFFE/CLP(2000) Mergers in Financial Services DAFFE/CLP(2000) Promoting Competition in the Natural Gas Industry DAFFE/CLP(2000) Competition Issues in Electronic Commerce DAFFE/CLP(2000) Competition and Regulation Issues in the Pharmaceutical Industry DAFFE/CLP(2000) Competition Issues in Joint Ventures DAFFE/CLP(2000) Competition Issues in Road Transport DAFFE/CLP(2001)10 3

99 DAF/COMP(2008) Price Transparency DAFFE/CLP(2001) Competition Policy in Subsidies and State Aid DAFFE/CLP(2001) Portfolio Effects in Conglomerate Mergers DAFFE/COMP(2002)5 38. Competition and Regulation Issues in Telecommunications DAFFE/COMP(2002)6 39. Merger Review in Emerging High Innovation Markets DAFFE/COMP(2002) Loyalty and Fidelity Discounts and Rebates DAFFE/COMP(2002) Communication by Competition Authorities DAFFE/COMP(2003)4 42. Substantive Criteria used for the Assessment of Mergers DAFFE/COMP(2003)5 43. Competition Issues in the Electricity Sector DAFFE/COMP(2003) Media Mergers DAFFE/COMP(2003) Non Commercial Services Obligations and Liberalisation DAFFE/COMP(2004) Competition and Regulation in the Water Sector DAFFE/COMP(2004) Regulating Market Activities by Public Sector DAF/COMP(2004) Merger Remedies DAF/COMP(2004) Cartels: Sanctions against Individuals DAF/COMP(2004) Intellectual Property Rights DAF/COMP(2004) Predatory Foreclosure DAF/COMP(2005) Competition and Regulation in Agriculture: Monopsony Buying and Joint Selling DAF/COMP(2005) Enhancing Beneficial Competition in the Health Professions DAF/COMP(2005) Evaluation of the Actions and Resources of Competition Authorities DAF/COMP(2005) Structural Reform in the Rail Industry DAF/COMP(2005) Competition on the Merits DAF/COMP(2005) Resale Below Cost Laws and Regulations DAF/COMP(2005) Barriers to Entry DAF/COMP(2005) Prosecuting Cartels without Direct Evidence of Agreement DAF/COMP/GF(2006)7 60. The Impact of Substitute Services on Regulation DAF/COMP(2006) Competition in the Provision of Hospital Services DAF/COMP(2006) Access to key Transport Facilities DAF/COMP(2006) Environmental Regulation and Competition DAF/COMP(2006) Concessions DAF/COMP/GF(2006)6 65. Remedies and Sanctions DAF/COMP(2006) Competition in Bidding Markets DAF/COMP(2006) Competition and Efficient Usage of Payment cards DAF/COMP(2006) Vertical mergers DAF/COMP(2007) Competition and Regulation in Retail Banking DAF/COMP(2006) Improving Competition in Real Estate Transactions DAF/COMP(2007) Public Procurement The Role of Competition Authorities in Promoting Competition DAF/COMP(2007) Competition, Patents and Innovation DAF/COMP(2007) Private Remedies DAF/COMP(2006)34 4

100 DAF/COMP(2008) Energy Security and Competition Policy DAF/COMP(2007) Plea Bargaining Settlement of Cartel Cases DAF/COMP(2007) Competitive Restrictions in Legal Professions DAF/COMP(2007) Dynamic Efficiencies in Merger Analysis DAF/COMP(2007) Guidance to Business on Monopolisation and Abuse of Dominance DAF/COMP(2007) The Interface between Competition and Consumer Policies DAF/COMP/GF(2008) Facilitating Practices in Oligopolies DAF/COMP(2008) Taxi Services Regulation and Competition DAF/COMP(2007) Techniques and Evidentiary Issues in Proving Dominance/ Monopoly Power DAF/COMP(2006) Managing Complex Merger Cases DAF/COMP(2007) Potential Pro-Competitive and Anti-Competitive Aspects of Trade/Business Associations DAF/COMP(2007) Market Studies DAF/COMP(2008) Land Use Restrictions as Barriers to Entry DAF/COMP(2008) Construction Industry DAF/COMP(2008) Antitrust Issues Involving Minority Shareholding and DAF/COMP(2008)30 Interlocking Directorates 89. Bundled and Loyalty Discounts and Rebates DAF/COMP(2008)29 5

101 DAF/COMP(2008)31 TABLE OF CONTENTS EXECUTIVE SUMMARY... 7 SYNTHÈSE CONTRIBUTIONS and Belgium Canada Finland Germany Korea Netherlands Portugal United Kingdom United States South Africa BIAC SUMMARY OF DISCUSSION COMPTE RENDU DE LA DISCUSSION

102 DAF/COMP(2008)31 EXECUTIVE SUMMARY By the Secretariat Considering the discussion at the roundtable and the member submissions, a number of key points emerge: (1) Modern antitrust enforcement should be based on a clear and objective assessment of effects as identified or measured by sound economic analysis. The antitrust community recognises that maximisation of consumer welfare is best achieved by a competition policy centred on the analysis of the likely effects of firms conduct. It also acknowledges that effects analysis should be solidly grounded in economics. The growing acceptance of the importance of economics has been reflected not just in the enforcement practice of national competition agencies but also in the attitude of the courts. In particular, there have been increasing demands for substantial economic support for arguments advanced in a competition law context. By developing an enforcement culture based on economics at the level of the national competition authorities one encourages the acceptance of economic methodology by the courts. In antitrust cases, market definition and assessment of competitive effects may require extensive use of economics, although different analyses may apply. These analyses provide specific tools that help inform the examination of particular issues in a given case and bring complex factual settings to coherence. Economics is a framework for examining facts; it should not substitute for sound factual analysis. (2) Agencies and courts display varying degrees of sophistication when dealing with economic analyses. Some courts have experienced difficulties with basic economic assumptions and theories. Indeed, in some jurisdictions the courts have expressly conceded that the economics can be too complex to understand. There is reason to be positive about progress, however: judges want to understand the economic issues; it is not the case that they are narrow in their thinking. While judges are often anxious about the methodologies employed by economists, they nonetheless wish that they could understand better the economic debate. Divergence is particularly acute across jurisdictions concerning the extent to which they have developed rules and procedures regulating the introduction of economic evidence in particular expert witnesses in court proceedings. These rules and procedures aim to ensure the integrity and quality of economic evidence, including testimony at trial, and to persuade courts to accept this type of evidence. It is evident that these requirements are more developed in those states where litigation is a significant feature of the competition law landscape. 7

103 DAF/COMP(2008)31 (3) Reasons why courts reject economic evidence include exacting standards of proof, a lack of guidance from the authorities, a lack of understanding by the judges and ineffective presentation by the competition authorities. Practical solutions were advanced concerning judicial understanding and successful presentation of evidence. Support was voiced for educating judges in economics and economic methodology. Such training represents a positive way to develop the judges analytical skills. Given that in some jurisdictions judges may not understand the economics of the government s case and may seek out some procedural resolution in order to dispose of the case in a manner that does not require them to deal with the actual substance of the case, it is imperative that judges should be encouraged to become more sophisticated in competition economics. At the same time, judges should be informed of the limitations of economic evidence and that one that can rarely depend on uncontested data to produce a single numerical solution to a given problem. A notable limitation concerning judicial education was noted, however. Even judges with some understanding of economics are often hesitant to question economic experts, as they recognise their relatively weak economic knowledge. Developing a list of practical questions for judges to ask experts in order to assess their credibility has reportedly been successful in France, and it could be useful elsewhere too in overcoming this reluctance. These questions should focus on the issues of reliability, relevance and internal consistency, as well as on whether the advanced theory has been published. The education of judges as to what practical questions to ask helps (re)place the decision-making in the judges hands: it helps facilitate discussion and therefore improves the ability of the judge to decide whether or not the expertise offered is useful. (4) Various techniques used in court to help judges understand complex economic evidence and theories were discussed. Some of them proved more effective than others, particularly if their purpose is to make complex concepts easily accessible to non-experts and to present them in a plain and clear way. In terms of effective techniques for the presentation of complex economic evidence, it is essential that the evidence be presented to the court in a way that is credible, simple and well-supported by the facts before it. The challenge here for the competition authorities is to present economic reasoning in an understandable but not less precise way to non-experts, that is, judges. In order to ensure comprehensibility, the problem at issue should be clearly identified, and any economic argument should be put forward in such a way as to allow the reader or listener to easily follow it. Complex economic arguments should not be advanced as a smokescreen for a weak case. Remembering one s audience, and the extent of its experience with economic argumentation, is also crucial. The court should be informed of any assumptions relied upon as well as the reasons for determining parameters. Furthermore, advocates for the authorities should be ready to explain why other assumptions or parameters were not used. It is important to know and explain at trial the limits of the data that is relied upon. Any economic conclusions that are advanced at trial should be based on relevant facts and should draw on established economy theory. It is vital that the economic case is aligned with the legal case, and that any witnesses that appear are well prepared. In general, economic arguments are most effective when structured and presented in a manner that is consistent with the structure of judicial reasoning and when it is of direct practical use in their decision making. Appealing to judicial intuition and using real-life examples or analogies to back up argument also proved helpful. The usefulness of visual aids such as blackboards, 8

104 DAF/COMP(2008)31 overheads and projected pages from the expert report should not be underestimated, particularly given the fact that that some people learn better visually than they do through words. (5) Support for the use of external economic experts, by both the competition authorities and the courts, was advanced by a number of participants. There is a need, however, to be aware of the drawbacks concerning the use of such experts in the courtroom. Economic consultants retained to present economic arguments in court are more likely to be perceived as credible and impartial witnesses if they are asked to explain why a certain economic theory is sound and why it should be applied to the facts of the case, rather than plead for the application of any theory with the only purpose of serving the client's cause. They may also bring new perspectives to the table. They need, however, to have real world experience as well as expertise in testifying in court. The introduction of such experts may create some inefficiencies, particularly given the fact that when retained such experts will have to approach a given case from scratch. Budgetary restraints that face the competition authority are also an issue for concern. Court appointed experts may be appropriate when substantial, complex evidence is involved. The appointment of such experts must be impartial and transparent, and their reports should be made available to the parties so that they have the opportunity to rebut their contents. Indeed, any evidence offered by such experts, whether oral or written, should be subject to the possibility of rebuttal by the parties. The competition authorities may be able to help the court find an experienced and neutral expert. Importantly, all factual matters should be decided solely by the court and not by the appointed expert. Some participants expressed a degree of caution concerning the use of economic experts at trial. First, counsel are often more skilled at describing the economic case to the court than such economic experts; counsel in effect know how to communicate with the court. Second, new facts may emerge at trial after the submission of an economist s report, that may undermine the conclusions contained in that report. Third, the courtroom, even in adversarial systems, does not provide adequate peer review of the arguments of expert economists. Expert economists can become advocates of their clients position and can be persuaded to advance arguments that might be considered disingenuous by the rest of the economics community. Ideally, economic experts should be advocates for their own economic position on a given issue, and this position should be firmly grounded in economics. Publicity of testimony may help to inject discipline into the process, but such discipline takes time to develop. The use of amicus curiae briefs may also help to provide an extra degree of peer review. A number of important principles should be adhered to when experts are involved in a competition law trial. Economic experts should not be relied upon as fact witnesses; rather, they should focus on the economic or econometric analysis of facts that have already been introduced and established through other witnesses. Economic theories and methodologies that are advanced should already have been sufficiency tested in the economics community. Experts should not be narrowly confined in the data they analyse. Economic experts should not be advanced as industry experts, otherwise their credibility risks being significantly jeopardised during the trial. Finally, it is important to remember that experts have both an offensive and defensive role to play in a given case. 9

105 DAF/COMP(2008)31 (6) There are considerable advantages to the combined use of both oral and written economic testimony in competition law cases. Economic expert reports should be made available to the judges before the commencement of hearings so that the judges have time to think about the relevant issues. The author(s) of the reports should also be present in court. If both of these conditions are fulfilled, then when the hearings start, the judge would be well placed to ask the necessary questions of clarification. In practice, oral expert testimony has helped to confirm the robustness or legitimacy of the theoretical foundations that are being used in assessing market power or in proving the existence of consumer harm. Oral presentations have the potential to do three things: (a) to make the approach used comprehensible in a non-technical way; (b) to summarise the key findings and arguments; and (c) to provide a platform for counter arguments to be used in a constructive manner. 10

106 DAF/COMP(2008)31 SYNTHÈSE Par le Secrétariat Les débats de la table ronde, ainsi que les contributions des membres ont fait ressortir plusieurs points essentiels : (1) Aujourd hui, l application du droit de la concurrence doit reposer sur une évaluation claire et objective des effets produits, tels qu identifiés ou mesurés grâce à une analyse économique fiable. Les parties concernées par la lutte contre les pratiques anticoncurrentielles sont conscientes que le meilleur moyen de maximiser le bien-être des consommateurs est d axer la politique de la concurrence sur l analyse des effets pouvant découler du comportement des entreprises. Elles conviennent également que l analyse de ces effets doit s appuyer amplement sur les sciences économiques. Les pratiques répressives des autorités nationales de la concurrence, mais aussi l attitude des tribunaux témoignent de cette reconnaissance croissante de l importance de l économie. En particulier, les intervenants se montrent de plus en plus désireux d étayer solidement, à l aide de données économiques, les arguments avancés en liaison avec le droit de la concurrence. Le développement, au sein des autorités nationales de la concurrence, d une culture répressive fondée sur des principes économiques permet aux tribunaux d accepter plus facilement la méthodologie économique. Dans les affaires en violation du droit de la concurrence, la définition du marché et l évaluation des effets sur la concurrence peuvent imposer de recourir largement à la discipline économique, même si différentes analyses peuvent s appliquer. Ces analyses procurent des outils spécifiques permettant d éclairer l examen de questions particulières dans une affaire déterminée et donnent de la cohérence à un ensemble de faits complexe. Les sciences économiques sont un cadre qui sert à étudier les faits ; elles ne doivent pas se substituer aux analyses sérieuses des faits. (2) Autorités et tribunaux sont plus ou moins rompus aux analyses économiques. Certains tribunaux ont eu du mal à saisir des hypothèses et des théories économiques élémentaires. De fait, dans certaines juridictions, ils ont expressément reconnu que les principes économiques pouvaient être trop ardus. Il y a néanmoins tout lieu de croire que des avancées sont possibles : les juges sont désireux de comprendre les problèmes économiques ; il est faux de dire qu ils ont un esprit étroit. Même s ils sont souvent inquiets quant aux méthodologies employées par les économistes, ils souhaitent mieux appréhender le débat économique. Les divergences entre les pays sont particulièrement marquées au regard des règles et procédures développées pour réglementer l introduction de preuves économiques notamment par des témoins experts dans les actions en justice. Ces règles et procédures sont destinées à garantir l intégrité et la qualité des preuves économiques, y compris les témoignages devant la cour, et à persuader les tribunaux d accepter ce type de preuves. Il va de soi que ces prescriptions sont plus développées dans les pays où les procédures judiciaires constituent un aspect important du droit de la concurrence. 11

107 DAF/COMP(2008)31 (3) Les raisons pour lesquelles les tribunaux rejettent les preuves économiques sont notamment l existence de critères d établissement de la preuve contraignants, l absence d orientations émanant des autorités ou de compréhension des juges et l inefficacité des exposés des autorités de la concurrence. Des solutions pratiques ont été proposées en ce qui concerne la compréhension des juges et la présentation réussie des preuves. Certains participants se sont déclarés favorables à la formation des juges à l économie et à la méthodologie économique. Il s agit là d un moyen positif de développer les qualités d analyse des juges. Puisque dans certains pays, les juges peuvent ne pas comprendre les aspects économiques du dossier de l accusation et chercher à résoudre l affaire en recourant à une procédure leur permettant de clore le dossier sans avoir à s y intéresser sur le fond, il est indispensable d encourager les juges à être plus au fait des aspects économiques de la concurrence. Dans le même temps, les juges devraient être informés des limites des preuves économiques et savoir qu il est rarement possible de trouver une «solution» chiffrée unique à un problème donné en se fondant sur des données incontestées. On a cependant noté une limite notable à la formation des juges. Même ceux qui ont des notions d économie hésitent souvent à questionner des experts dans ce domaine, car ils sont conscients de la relative inconsistance de leur bagage économique. L élaboration d une liste de questions pratiques pouvant être posées par les juges aux experts afin d apprécier leur crédibilité a, semble-t-il, fait ses preuves en France et elle pourrait aussi leur servir à vaincre leurs réticences dans d autres pays. Ces questions doivent essentiellement concerner la fiabilité, la pertinence et la cohérence interne, ainsi que la publication ou non de la théorie avancée. Informer les juges sur les questions pratiques à poser contribue à (re)mettre la prise de décision entre les mains des juges : les discussions en sont facilitées et les juges sont davantage à même de statuer sur l utilité de l expertise présentée. (4) Différentes techniques utilisées à l audience pour aider les juges à comprendre des preuves et des théories économiques complexes ont été examinées. Certaines d entre elles se sont avérées plus efficaces que d autres, notamment lorsqu elles visent à mettre des concepts complexes à la portée des non-spécialistes et à les présenter de façon claire et simple. S agissant des techniques efficaces permettant d exposer des preuves économiques complexes, il est déterminant de les présenter au tribunal d une façon crédible, simple et fondée sur les faits. À cet égard, la difficulté pour les autorités de la concurrence est de présenter les raisonnements économiques de manière compréhensible, mais non moins précise, aux non-spécialistes, à savoir les juges. Pour en faciliter la compréhension, le problème étudié doit être distinctement cerné et les arguments économiques doivent être mis en avant de façon à permettre au lecteur ou à l auditeur de suivre aisément. Les arguments économiques complexes ne doivent pas servir «d écran de fumée» lorsqu un dossier est mince. Il faut également tenir compte de l auditoire et de sa connaissance de la dialectique économique. La cour doit être informée des hypothèses retenues, ainsi que des critères de sélection des paramètres. De plus, les tenants des autorités doivent être prêts à expliquer pourquoi ils n ont pas utilisé d autres hypothèses ou paramètres. Il importe de connaître et d expliquer à l audience les limites des données sur lesquelles on se fonde. Les conclusions économiques avancées devant la cour doivent reposer sur des faits pertinents et s inspirer de théories économiques établies. Il est impératif que l argumentaire économique soit calqué sur l argumentaire juridique et que les témoins qui comparaissent soient bien préparés. 12

108 DAF/COMP(2008)31 En général, les arguments économiques portent davantage lorsqu ils sont structurés et présentés en suivant la logique du raisonnement des juges et lorsque ces derniers peuvent directement s en servir dans la pratique pour prendre leur décision. Faire appel à l intuition des juges et utiliser des exemples concrets ou des analogies pour étayer des arguments peut aussi être judicieux. Il ne faut pas sous-estimer l utilité des supports visuels comme les tableaux noirs, les rétroprojecteurs et l affichage de pages tirées du rapport des experts, notamment parce que certaines personnes assimilent mieux ce qu elles voient que ce qu elles entendent. (5) Plusieurs participants se sont déclarés en faveur du recours à des experts extérieurs en économie de la part des autorités de la concurrence et des tribunaux. Toutefois, il faut être conscient des inconvénients liés à l intervention de ces experts en salle d audience. Les conseils en économie retenus pour présenter des arguments économiques devant la cour sont davantage susceptibles d être considérés comme des témoins crédibles et impartiaux quand on leur demande d expliquer pourquoi une théorie économique donnée est fiable et pourquoi il convient de l appliquer aux faits considérés que lorsqu ils plaident pour l application d une théorie quelconque avec pour seul objectif de servir la cause de leur client. Ils peuvent aussi ouvrir de nouvelles perspectives. Il leur faut néanmoins disposer d une expérience concrète et savoir comment témoigner devant les tribunaux. Le recours à ces experts peut aboutir à un manque d efficacité, notamment parce que lorsqu ils sont retenus, ces experts doivent aborder un dossier ex nihilo. Les contraintes budgétaires de l autorité de la concurrence sont également un sujet de préoccupation. Les experts désignés par les tribunaux peuvent être utiles lorsque l affaire comprend des preuves substantielles, complexes. La nomination de ces experts doit se faire de façon impartiale et transparente et leurs rapports doivent être mis à la disposition des parties afin qu elles puissent réfuter leur contenu. Les parties doivent en effet avoir la possibilité de réfuter les preuves présentées par ces experts oralement ou par écrit. Les autorités de la concurrence peuvent aider la cour à trouver un expert expérimenté et neutre. Il est à noter que l ensemble des questions factuelles doivent être tranchées par le seul tribunal et non par l expert désigné. Des participants ont exprimé une certaine réserve vis-à-vis du recours à des experts en économie lors des audiences. Premièrement, les avocats sont souvent plus aptes que ces experts à décrire l argumentaire économique à l intention de la cour, car ils savent communiquer avec les juges. Deuxièmement, il peut arriver que des faits nouveaux risquant de remettre en cause les conclusions du rapport d un économiste surgissent à l audience après la remise de ce rapport. Troisièmement, même dans les systèmes contradictoires, les arguments des experts en économie ne font l objet d aucun examen critique en salle d audience. Les experts peuvent en venir à défendre la position de leurs clients et on peut les persuader de faire valoir des arguments susceptibles d être considérés comme fallacieux par le reste des économistes. Dans l idéal, les experts en économie doivent défendre leur propre position économique sur une question donnée et cette position doit être solidement étayée par des arguments économiques. La publicité des témoignages peut contribuer à conférer une certaine discipline au processus, mais instaurer une telle discipline peut prend du temps. Le recours à des intervenants en qualité d amicus curiae peut aussi renforcer l examen critique. Lorsque des experts interviennent lors d un procès portant sur le droit de la concurrence, plusieurs principes importants doivent être respectés. Il ne faut pas en appeler aux experts en économie pour qu ils viennent témoigner des faits ; ils doivent davantage se concentrer sur l analyse économique ou économétrique des faits qui ont déjà été présentés et établis grâce à d autres témoins. Les théories et méthodologies économiques avancées doivent déjà avoir été 13

109 DAF/COMP(2008)31 suffisamment mises à l épreuve par les économistes. Dans leurs analyses, les experts ne doivent pas se limiter à certaines données. Ils ne doivent pas être présentés comme des experts du secteur, car cela risque de nuire gravement à leur crédibilité durant le procès. Enfin, il ne faut pas oublier que dans une affaire donnée, les experts interviennent à la fois à charge et à décharge. (6) Dans les affaires liées au droit de la concurrence, recourir à des témoignages économiques à la fois écrits et oraux présente des avantages considérables. Les rapports des experts en économie doivent être mis à la disposition des juges avant le début des auditions afin de laisser aux juges le temps de réfléchir aux questions pertinentes. Le ou les auteurs des rapports doivent également être présents à l audience. Si ces deux conditions sont remplies, le juge est alors en bonne posture, à l ouverture des auditions, pour poser les questions nécessaires à des fins de précision. Dans la pratique, les témoignages oraux des experts ont servi à confirmer la fiabilité ou la légitimité des fondements théoriques utilisés pour évaluer le pouvoir d un intervenant sur le marché ou à démontrer l existence d un préjudice pour le consommateur. Les présentations orales peuvent avoir trois vertus : (a) rendre la méthode utilisée compréhensible aux nontechniciens ; (b) résumer les principaux arguments et conclusions et (c) fournir un cadre permettant d utiliser les arguments contradictoires de manière constructive. 14

110 DAF/COMP(2008)31 BELGIUM What are your experiences with presenting complex economic theories or sophisticated economic evidence to courts? We regret to report that we have no experience with presenting complex economic theories to courts. Would you recommend that courts appoint independent economic consultants to supplement the parties' presentations on the economic issues involved in a competition case? Or do you believe that courts should rely exclusively on the economic arguments presented by the parties? The Court of Appeal of Brussels, having jurisdiction to review decisions of the Competition Council can ask the Competition Authority to provide additional information, including economic analysis. The Court has already done so. In view of the limited resources and the impact such question can have on the investigations conducted by the Authority, we prefer that the Court appoint independent economic consultants in case it requires expert assistance in order to analyze or supplement evidence provided by the parties. Does presentation of complex economic theory or evidence present different issues before an appellate judge as opposed to a judge who is responsible for making factual findings? The appellate judge having jurisdiction to review decisions of the Competition Council (the Court of Appeal of Brussels) judges on the facts as well as on questions of law. Judgments of the Court of Appeal can be reviewed by the Supreme Court (Hof van Cassatie/Cour de Cassation) but only on questions of law. It is therefore unlikely that the Supreme Court will have to examine complex economic theories. 15

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112 DAF/COMP(2008)31 CANADA 1. Introduction The Canadian Competition Bureau (the Bureau ) is pleased to provide the following discussion of the roundtable topic Techniques for Presenting Complex Economic Analysis to Judges. 2. Background Information on System of Adjudication for Competition Act Matters By way of background, the Bureau is an independent law enforcement agency that is headed by the Commissioner of Competition (the Commissioner ). The Bureau is responsible for the administration and enforcement of the Competition Act, Consumer Packaging and Labelling Act (non-food products), Textile Labelling Act and the Precious Metals Marking Act. The Competition Act (the Act ) contains a number of criminal offences, such as conspiracies to lessen competition unduly or bid-rigging, that are subject to prosecution before criminal courts. The Act also includes civil reviewable matters, such as mergers or abuse of dominance, that are reviewed by the Competition Tribunal (the Tribunal ). The Tribunal is a quasi-judicial body that acts as the first-instance decision-maker for civil reviewable matters. There are up to six judicial members, who are sitting judges of the Federal Court with other judicial duties, and up to eight non-judicial members. In the past, certain of the non-judicial members have been economists. Judicial members are appointed by the Governor in Council on recommendation of the Minister of Justice, and non-judicial members are appointed by the Governor in Council on recommendation of the Minister of Industry. Members typically serve terms that are between five and seven years, which may be renewed. Canadian competition laws are enforced through an adversarial system. For reviewable matters, the Commissioner may seek a remedy by application to the Tribunal. To secure a remedy in a contested proceeding before the Tribunal, the Commissioner is required to discharge the burden of establishing each of the elements of the reviewable matter on the balance of probabilities. Appeals of Tribunal decisions are made to the Federal Court of Appeal, with further appeal available with leave to the Supreme Court of Canada. Appeals to the Federal Court of Appeal are restricted to questions of law, while questions of fact can be appealed only with leave. For criminal matters, the Commissioner refers matters for possible prosecution to the Director of Public Prosecutions who may prosecute the case on behalf of the Crown before the criminal courts. In criminal proceedings, the Crown must establish each of the elements of the offence beyond a reasonable doubt. Appeals are available to the provincial courts of appeal or possibly the Federal Court of Appeal, and, with leave, the Supreme Court of Canada. Contested civil or criminal matters under the Act are often significant and complex proceedings with full rights of hearing, including the introduction of evidence, examination and cross-examination of witnesses, as well as written and oral arguments. 17

113 DAF/COMP(2008)31 3. What are your experiences with presenting complex economic theories or sophisticated economic evidence to courts? With the exception of certain matters, such as misleading advertising or deceptive telemarketing, economic evidence plays a central role in both criminal and civil proceedings under the Act. For example, in contested merger proceedings, the Commissioner and respondents submit substantial economic evidence on a number of issues, including market definition, unilateral and coordinated effects, barriers to entry and efficiencies. Similarly, in abuse of dominance cases, the parties submit economic evidence regarding various issues, such as the definition of the relevant market, whether the allegedly dominant firm has market power, the alleged anti-competitive acts and whether the impugned conduct substantially lessens competition. In certain contested proceedings before the Tribunal, the Commissioner has utilized econometric models and statistical evidence, including regression analyses. Economic evidence has also been a significant component of the evidence in numerous criminal proceedings. For example, to secure a conviction in respect of a cartel arrangement (other than bid-rigging cartels), the Crown must prove beyond a reasonable doubt that the agreement is likely to prevent or lessen competition unduly in a relevant market. As such, in contested cartel proceedings, the court considers economic evidence regarding the appropriate definition of the relevant market; whether the colluding firms are likely to or collectively have market power; and the competitive impact of the impugned agreement. 1 The experience regarding the presentation of economic evidence in Canada varies between individual proceedings. In some cases, courts or the Tribunal found that the economic evidence submitted by the Commissioner or Crown was persuasive. In other cases, the court or Tribunal refused to accept the economic evidence submitted by the Commissioner or the Crown on the basis that such evidence was not supported by the facts, the expert was not credible, the proposed economic theory was not valid, or for other reasons. For example, in a criminal cartel proceeding, the Court assigned little or no weight to the economic and industry evidence presented by an expert called by the Crown regarding the relevant product market. 2 In the Court s view, the expert lacked objectivity and his evidence was not detailed, was theoretical and failed to take into account the practical realities of the market. Courts and the Tribunal have also accepted some aspects of the economic evidence submitted by the Commissioner or Crown, while rejecting other aspects of this evidence. As an example, in a recent abuse of dominance case, the Tribunal agreed with the results of price correlations and other evidence of the Commissioner s expert regarding the issues of the appropriate definition of the relevant markets and whether the respondent was dominant in those markets. 3 However, the Tribunal did not accept the evidence of the Commissioner s expert regarding the anti-competitive effects of the alleged anti-competitive conduct. Given this varied experience, it is difficult to make general statements regarding the presentation of complex economic evidence in Canada. In respect of reviewable matters, the Tribunal has considered various forms of complex economic evidence and economic theories in determining contested proceedings. In respect of criminal proceedings, experience with the presentation of economic evidence in contested proceedings has been somewhat limited in recent years. As with other forms of complex evidence, the experience in criminal proceedings suggests that complex economic evidence is unlikely to be accepted unless it is presented in a manner that is credible, simple and well supported by the underlying factual evidence See for example, R. v. Clarke Transport Canada Inc. et al., 64 C.P.R. (3d), Clarke Transport Canada Inc., Commissioner of Competition v. Canada Pipe Company Ltd./Tuyauteries Canada Ltée., Competition Tribunal,

114 DAF/COMP(2008)31 4. Can you describe which techniques proved most effective and which did not? In contested proceedings, complex economic evidence is generally presented through one or more expert witnesses by oral testimony at the hearing, often with a written report or affidavit outlining the assumptions, findings and conclusions of the expert witness. In terms of effective techniques for the presentation of complex economic evidence, as noted above, it is critical that the evidence be presented in a manner that is credible, simple and well supported by the facts before the court or Tribunal. In addition to these general comments, we have outlined below a few specific issues relating to techniques that have been effective in the past and techniques that may be applied in the future. 4.1 Availability of Expert Reports Although expert reports are required to be filed prior to the commencement of a hearing, such reports are not available to the Tribunal members until the expert testifies, unless both parties specifically agree that they be made available. The new Tribunal rules, which are expected to be implemented in Spring 2008, allow members of the Tribunal to read the reports of expert economists when they are filed, that is ten days prior to the commencement of the hearing, unless a party objects. 4 Having the economic expert reports available to the Tribunal members prior to the commencement of a hearing is seen as critical. This is particularly the case since economic expert oral evidence does not normally take place until after fact witnesses have been heard. Economic theory, however, typically forms the foundation of competition cases. Without an economic theory of the case to which the facts can be related, there is a risk that the relevance of certain facts may be lost or misunderstood. The Bureau anticipates that having access to the expert reports in advance of the hearing will assist Tribunal members in fully understanding the economic evidence of the parties. 4.2 Economic Expert Reports The typical job of an economic expert report is to develop a coherent and appropriate economic theory that applies to the facts of a case. It must also be made understandable to the triers of fact. To this end, how much economic theory is explained versus how much is assumed, including what vocabulary is used, should be adjusted as appropriate depending on the experience of the judge or Tribunal members. For example, it might be appropriate to limit use of economic jargon or other technical expressions, or to explain such terms. As the testimony of an expert economist is largely based upon factual assumptions that are established through other witnesses or documentary evidence, to the extent possible, expert reports should identify the specific sources of any evidence relied upon by the expert. Certain types of evidence tends to be better established through particular avenues, and other types of evidence may not be relevant to the competition issue at hand. Consequently, it may fall to the expert to not only explain what evidence is critical to his or her analysis, but also to explain why other evidence is not and should not be a consideration. For example, when trying to establish customers willingness to 4 Objections are typically made on the grounds of the admissibility of the expert evidence. The case law principles on opinion evidence provide that expert evidence should only be admitted where it is (1) relevant, (2) necessary to assist the trier of fact, (3) is not excluded by an exclusionary rule, and (4) the expert is properly qualified. 19

115 DAF/COMP(2008)31 switch among products, customer fact witnesses testifying to their own willingness to switch may be of limited value. This is because it cannot be known whether a testifying customer is a marginal or inframarginal buyer. 5 Also, evidence that is compelling in its own way but is not pertinent to the competition issue at hand can, at times, be submitted. For example, the effect of divestitures on shareholder value is typically not a consideration in competition cases. 4.3 Econometric Evidence The Bureau has had some success in the use of econometric evidence, such as merger simulations, in reviewable matters before the Tribunal. For example, in one case, the Tribunal characterized econometric evidence regarding the own-price and cross-price elasticities of demand in order to estimate the impact of the merger on product prices as highly relevant to the central issue of whether a merger is likely to result in a substantial lessening of competition. 6 The Tribunal found that econometric evidence was more persuasive where it could be reinforced through multiple simulations, each yielding a consistent result. 4.4 Exchange of Reports In the case involving econometric evidence, the Tribunal applied a useful process for the exchange of expert reports in advance of the hearing. The experts for the respective parties exchanged reports, and were then entitled to submit a rebuttal report that addressed any comments made by an expert for the adverse party. As a result of this process, the experts were able to attempt to address any deficiencies in their evidence in advance of the hearing. For example, the Commissioner s expert recalculated the estimated price impacts in light of certain criticisms made by the respondent s expert, and was able to demonstrate that even if the respondent s assumptions were applied, the price increases were still likely to occur. 4.5 Oral Testimony As noted above, the Crown and Commissioner also submit economic evidence at the hearing through the oral testimony of expert witnesses. The examination-in-chief of such witnesses provides a valuable opportunity for the judge or Tribunal members to ask questions of expert witnesses or otherwise attempt to clarify aspects of their evidence which remain unclear. The new Tribunal rules will limit the examinationin-chief of expert witnesses. Specifically, an expert will continue to be examined-in-chief, but only for the purpose of summarizing or highlighting the evidence contained in his or her report. Since the new rules also make economic expert reports available to Tribunal members prior to the commencement of a hearing, it is hoped that the combination of these two changes will allow for more effective examination-in chief, and will place Tribunal members in a better position to ask relevant questions. Visual aids, such as black boards, overheads and projected pages from the expert report, are allowed as part of examination, and are felt to have been beneficial. As noted above, fact witnesses are typically heard first, followed by expert testimony, with economic expert testimony typically occurring last. This is because the testimony of an expert economist is largely based upon factual assumptions that are established through other witnesses or documentary evidence. As further noted above, the disadvantage of this approach is that the relevance of certain facts may be 5 6 In the face of a particular price increase, infra-marginal consumers are those consumers who will continue to buy the product and marginal consumers are those who will not. Customer switching as a mechanism by which price increases are thwarted typically depends on the sufficiency of switching by marginal customers. Canada (Director of Investigation and Research) v. Superior Propane, Competition Tribunal,

116 DAF/COMP(2008)31 unappreciated or misunderstood absent a theory of the case to which they can be linked. This risk is reduced by having economic expert reports available prior to the commencement of the hearing. Oral economic expert evidence at the commencement of a hearing is a further option. This evidence would differ from that which occurs at the end of the process in that its focus would be theory of the case, or the types of theories that are generally applicable in regard to certain conduct, absent any facts. This expert could also indicate the type of facts that would be relevant to determining when an anti-competitive theory is applicable. As a practical matter, there may be further benefit in dividing these two testimonies between two experts. Such a division would help assure that the first testimony, which largely amounts to an explanation of the underlying economics, is independent and impartial. Having two testifying economic experts would have to be justified in Canada given the Tribunal s commitment to streamlining the hearing process, but it may also help narrow and better define issues. Such a matter could be discussed in the context of case management. 4.6 Economists as Adjudicators As noted above, Tribunal membership is open to non-judicial members, including economists. Having an economist, particularly one with specialization in microeconomics, as a member of the Tribunal is seen as beneficial. 5. Do you think that competition authorities can be more effective in court if they retain external economic consultants to present their cases? Yes. In Canada, the Commissioner typically retains external economic experts to provide evidence and assist in the preparation of contested matters. In addition to providing considerable expertise, such external economists are independent of the Bureau and as such, are more likely to be perceived as credible and impartial witnesses. In addition, external economists are not as involved in certain aspects of the matter, such as parts of the investigative phase or settlement discussions, that should not be considered by the expert in reaching conclusions. To be effective, the external economic expert must be given adequate time to become familiar with all relevant aspects of the matter. Alternatively, it is possible to retain an expert to testify only in respect of relatively narrow or technical issues. In either case, the expert economist should not opine on matters without first appreciating all relevant information. 6. Would you recommend that courts appoint independent economic consultants to supplement the parties presentations on the economic issues involved in a competition case? Or do you believe that courts should rely exclusively on the economic arguments presented by the parties? In cases involving significant and complex economic evidence, a court-appointed expert may be appropriate to assist the Tribunal or court in reviewing and evaluating such evidence. In general, given the procedural and due process concerns that may arise, the Bureau would not recommend that a courtappointed expert be entitled to supplement the evidence of the parties. The process for appointing such an expert should be impartial and transparent. Parties should be allowed to provide comments on the appropriateness of any proposed court-appointed expert. In addition, any report prepared by the court-appointed expert should be disclosed to the parties and the parties should have an opportunity to rebut the report and/or cross-examine the court-appointed expert. Moreover, it should be clear that the responsibility of deciding factual matters is that of the Tribunal or judge, not the appointed expert. 21

117 DAF/COMP(2008)31 The new Tribunal rules permit the Tribunal to appoint an expert. Such experts are subject to examination by the parties and may also be questioned by the Tribunal during the hearing of the proceeding. Administrative tribunals, at times, also retain staff economists (for example, this is the case in Canada with the Copyright Board and the Canadian International Trade Tribunal). If this is the case, any report of such a staff person should be placed on the public record. 7. Does presentation of complex economic theory or evidence present different issues before an appellate judge as opposed to a judge who is responsible for making factual findings? In terms of the presentation of evidence, it is highly unusual for an appellate court to permit a party to introduce additional evidence at the appellate stage of a proceeding. As such, the evidence reviewed during the appeal is the evidence submitted into the record at the initial hearing. In fact, the appellate court will generally rely upon the factual findings made by the lower court or Tribunal. Typically, the arguments made at the appellate level are confined to questions of law or questions of mixed fact and law. That said, the comments above, such as the need for simplicity and well-supported economic theories, are equally applicable to appeal proceedings. This is particularly the case because questions of law in Canada, as these matters extend beyond the particulars of any one case, can entail such questions as the correct approach to defining markets or the meaning of anti-competitive acts. 7 7 See for example, Commissioner of Competition v. Canada Pipe Ltd./Tuyauteries Canada Ltée., Federal Court of Appeal,

118 DAF/COMP(2008)31 FINLAND What are your experiences with presenting complex economic theories or sophisticated economic evidence to courts? Finnish competition authority (FCA) has not relied extensively on complex economic theories in its case handling, whereas economic evidence has played a more important role and hence, the experience of FCA in presenting complex economic theories and related advanced economic evidence to courts is rather limited. More complex theories have been used more extensively at a preparatory stage, in the background analysis of competition cases and in a reactive manner, when the authority has been faced with statements of reason that are founded on economic theory. The Fortum / E-On case concerning an acquisition in the energy sector, a pending matter in Market Court, is an example of the latter. There is, however, a perception of risk in that, compared with the legal arguments put forward, the time and effort spent on economic argumentation is in rather unfavorable relation to its importance for the final court decisions. Such a view builds on rather recent experiences which have confirmed some concerns about that uncertainty, always present in and very specific to economic argumentation, be it inference of statistical estimates or of results of theoretical reasoning, makes a sole reliance on more complex economic theories a venturesome task. Complex economic theories have not been used as evidence as such or in combination with putting forward evidence to the Market Court. Recent experiences point out that relying on more complex economic theories does not necessarily strengthen the point in relation to the judicial argumentation, testimonies or evidence put forward. This view is further confirmed by recent court rulings, highlighting the challenges in presenting rather straightforward economic evidence of cartel pricing in an intuitively intelligible way. Can you describe which techniques proved most effective and which did not? The use of written testimonials is considered less effective, and standard procedure is for an expert to orally summarize a, possibly very complex, written statement during the oral hearing. The efficiency is concealed in making the approach and presentation used as comprehensible as possible to the court. The argumentation can, in general, be considered more effective when structured and presented in a way that it is in line with the structure of reasoning of judges and which is of direct practical use in their decision making. This comprises a general view of effective techniques with no reference made to any particular case. Do you think that competition authorities can be more effective in court if they retain external economic consultants to present their cases? The gain in efficiency from retaining external economic expertise has to be assessed in relation to the role and level of economic analysis in each case. The role of economic analysis and in particular of external economic expertise in improving efficiency depends on the burden of proof and how much of this is aimed to covered by economic analysis. If the claim is to fine a defendant or defendants with, say 10% of turnover, the economic evidence should constitute evidence in itself or at least significantly support any 23

119 DAF/COMP(2008)31 alternative piece of proof. This is to say that the role and expertise needed for economic analysis is largely determined by the structure of each case. Rather than presenting the cases, the expertise of external economic consultants can improve the efficiency of the Authority in form of witness testimonies, based on the results of their analytical work in cases under consideration. This may improve the setup of case presentation, emphasizing the most relevant piece of evidence in support for a right decision to be made. External consultants may also prove helpful in strengthening and sharpening the analysis already made, for example in that they are able to bring new perspectives to support the authorities claims The Neste/SEO case (FCA proposition of fines in 1993 and Supreme Administrative Court decision in 2000) concerning loyalty rebates is given as a good example, where the role and importance of external experts in providing witness testimonials was of considerable relevance. Would you recommend that courts appoint independent economic consultants to supplement the parties presentations on economic issues involved in a competition case? Or do you believe that courts should rely exclusively on the economic arguments presented by the parties? At the Market Court, competition cases are dealt with by legally qualified members together with a minimum of one or a maximum of three expert members. These expert members represent the independent expertise in field of economics. From one to three expert members can also take part in hearing market law and public procurement cases if the nature of the case requires it. The present system corresponds indirectly to the first part of the question. The system has proven to function well and FCA has neither objections to nor proposes a reform of this procedure. Although experts nominated by the Market Court have so far not been utilized, the FCA identifies some potential in the possibilities that the Act of administrative procedures provides to use such nominated experts in cases where argumentation of the parties is highly complex and especially contradictory. 24

120 DAF/COMP(2008)31 GERMANY 1. Preliminary remarks 1.1 Sound economic analysis is essential for the work of competition agencies and courts In the Bundeskartellamt s view, there is consensus that competition agency as well as court decisions should be based on sound economic analysis. In particular, stringent qualitative economic arguments and, if necessary, quantitative analysis should be used to make a case. Consequently, the antitrust decisions of competition agencies often involve a substantial body of economic analysis, e.g. economic theories, estimation methods, simulation etc. that can result in qualitative economic arguments as well as empirical findings. When an agency decision is under judicial review in court proceedings, the representatives of the agencies will have to conclusively demonstrate economic arguments. In this context agencies will have to take into account that not all judges have economic qualifications. 1.2 The debate about the degree of economisation of competition law In the context at issue it should not go unmentioned that there is considerable debate among competition law practitioners and scholars about the degree of economisation in the specific application of competition law and about consequences of wrong decisions. In the debate, a differentiation is made between two types of wrong decisions. Firstly, competition authorities can wrongly regard business conduct as abusive and as a result prohibit admissible and desirable intensive competition (type I error or over-enforcement). Secondly, the competition authority might not identify and fail to prohibit abusive behaviour as such (type II error or under-enforcement). The disadvantages of a type I error result primarily form the fact that inefficient companies are artificially kept in the market, whose business resources applied otherwise would generate greater overall welfare ( static-allocative inefficiency ). The negative welfare effects of type II error arise from the loss of consumer surplus due to insufficient competition. In addition, welfare deficits should be taken into consideration that can result from a possible squeezing-out of more efficient suppliers and from a weakening of innovative competition ( dynamic inefficiency ). The positions on the appropriate degree of economisation of competition law application reflect varying weightings of the risks and consequences of type I and type II errors. In the view of the relative low number of abuse cases in Germany and Europe there should be little evidence of considerable over-enforcement and, accordingly, of an overbalance of type I errors. 1.3 Judicial review and competition law in Germany - Parameters Organisation of courts competent to deal with competition cases Decisions taken by the Bundeskartellamt in all competition matters are subject to judicial review. Only two courts specialising in competition law rule on decisions of the Bundeskartellamt. In first instance, the Düsseldorf Higher Regional Court decides upon the findings of the Bundeskartellamt, both as 25

121 DAF/COMP(2008)31 regards facts and points of law. At the Düsseldorf Higher Regional Court, three antitrust chambers with experienced judges specialising in competition law are competent to deal with competition cases. In the second instance, the case may be brought before the Bundesgerichtshof (Federal Court of Justice) but only on points of law. One chamber of the Federal Court of Justice composed of judges highly qualified and experienced in competition law matters decide on decisions issued by the Bundeskartellamt. It should also be mentioned that both, the antitrust chambers of the Düsseldorf Higher Regional Court and antitrust chambers of the Federal Court of Justice also deal with claims of private parties based on competition law which give them a broad knowledge of competition cases as well as the underlying economics. Both, specialisation and experience with private competition claims, means that chambers well familiar with competition law and economics have evolved over time. Members of both courts also regularly contribute to the scientific discussions on competition law in the form of publications and speeches. Furthermore, as regards other courts which deal with the competition law decisions of the antitrust authorities of the Länder as well as private claims based on competition law, most of them provide for chambers specialising in commercial law matters or even in competition law Discussing competition law and economics with judges In the view of the Bundeskartellamt, promoting awareness of competition law and its application by the Bundeskartellamt in the general public is essential. Further to publishing press releases and giving speeches in public, the Bundeskartellamt fosters regular meetings with competition law experts. In this respect the Working Group on Competition Law is of great importance. For more than 40 years now the Bundeskartellamt has organised an annual meeting of the Working Group. The group consists of university professors from economic and legal faculties and judges from the antitrust chambers at the courts, who come together to discuss current antitrust issues. The Bundeskartellamt prepares a discussion paper for each meeting which serves as a basis for debate among the Working Group members 1. Furthermore, the Bundeskartellamt presents current and potentially contentious cases of its most recent practice in this forum. Further to that, every other year the Bundeskartellamt organises an international conference on competition issues (IKK International Conference on Competition). At these traditional meetings attended by competition experts from more than 50 countries, including judges and high-ranking representatives from politics, industry and academia, current problems of competition policy and competition law are discussed Presentation of economic arguments in court While preparing the presentation of a case and complex economic arguments in court the Bundeskartellamt takes the following into account. 1 2 In 2007, the Bundeskartellamt prepared a paper on The Future of Abuse Control in a More Economic Approach to Competition Law which will be available shortly at For more information and documentation of recent conferences see 26

122 DAF/COMP(2008) Presenting economic arguments in court As a general rule, complex economic arguments should be incorporated in a written submission to the court well in advance to give the court time to thoroughly prepare for the hearing. Furthermore, as with any other reasoning, economic analysis should be well structured and presented in a comprehensible manner. This means that the problem at issue should be clearly identified, and the line of argument should be presented in such a way as to enable the reader or listener to easily follow it. Also, the agency's representative should indicate the relevance for the case at issue. If the analysis is based on assumptions, these should be highlighted to the court and reasons for determining parameters should be given. The agency's representative should be prepared to explain why other assumptions or parameters were not employed in the analysis. A written as well as an oral presentation should conclude with a clear answer to the problem outlined at the beginning of the presentation. In case the presentation and the line of argument are based on data, all the figures used in the presentation should be compiled in a handout. This handout should also include references to written submissions or pages of the file that contain the relevant data. If the data can be visualized, e.g. by a graphical presentation, this will also make the argumentation easier to follow for the listener. If an argument relies on an empirical analysis conducted by the authority, the database and the calculations or estimations should be made available to the court and the parties. When opting for a computer-based presentation, the presentation should be supplemented with paper copies for each member of the court. Furthermore, in Germany, the paperwork will become part of the court file and facilitate possible appeals on points of law, if misunderstandings should occur. 2.2 The role of economic consultants For complex economic analysis, competition agencies and other parties sometimes rely on economic consultants. In Germany, courts too may appoint economists to obtain expert knowledge if necessary Experts appointed by the competition authority About 45% of the Bundeskartellamt's staff are economists that are well-trained and familiar with the relevant economic theories, methods and have experience in dealing with antitrust cases. Nevertheless, the appointment of economic experts as consultants can be very helpful. This is the case, in particular, where extensive expert opinions of other parties are to be assessed and commented on. Furthermore, it may be beneficial to outsource the development and realisation of complex models and calculations. In any case, the agency should make sure to appoint a consultant that is well experienced not only with theoretical but also with real world economics and competition policy. Most importantly, the expert should be able to present his arguments in a clear and comprehensible way. If the expert needs to give his opinion orally in court it is an advantage if the expert has experience with expert testimony in court and some knowledge of the competition law framework and proceedings. The appointment of an external expert can be particularly advisable if the opposing party has already appointed an expert. This may be even more true if this expert is distinguished and has elaborated an excellent expertise. In this case it would be important to be on equal terms with the opposing party. On the 27

123 DAF/COMP(2008)31 other hand, if the expertise presented by the opposing party is of low value it may suffice if internal economists counter the expertise at issue by pointing out methodological or other shortcomings to show that the expertise does not support its findings. In that respect it would be convenient to focus on the most obvious deficiencies of the expert opinion and treat them one by one in a presentation before the court Experts appointed by the court In case an external expert is appointed by the court, it is important to assist the court by selecting a well experienced and neutral expert. Furthermore, it is of great importance in support of the court to elaborate a precise definition of the expert's task, i.e. by formulating precise questions. Furthermore, it is necessary to define which facts and data should be employed as a basis in the analysis in order to make sure that the expert's findings can be verified. 28

124 DAF/COMP(2008)31 KOREA 1. Introduction Since competition law enforcement is a work of deriving legal outputs from economic inputs, economic analysis is critically needed to justify competition law enforcement. Furthermore, economic analysis is assuming greater importance as economic phenomenon gets more complex and stronger competition law enforcement takes hold. In Korea, the court s review is initiated when one appeals against the KFTC s decision. During the court proceedings, the plaintiff, who is dissatisfied with the sanctions imposed by the KFTC, presents various economic evidence and theories to argue illegality of the KFTC s decision, while the KFTC also presents economic evidence and theories to counter the plaintiff s claim and to prove legitimacy of its decision. Here, there are often times when the court does not fully understand the complex and hard-to-grasp economic evidence and theories presented by the two sides. This problem has triggered discussions on the effective way the competition authority can explain difficult economic evidence and theories to the court. This report will introduce how economic evidence and theories are presented in the course of administrative lawsuits filed against the KFTC s decision with actual cases where the KFTC explained such evidence and theories to the court. 2. General facts about administrative lawsuit proceedings 2.1 Legal procedure When dissatisfied with the KFTC s decision, the plaintiff files an administrative lawsuit within 30 days of receiving the KFTC s written resolution. The KFTC s decision is under the exclusive jurisdiction of the Seoul High Court, whose Special Division 6 and 7 handle related cases. Dissatisfaction with the Seoul High Court s ruling can be appealed to the Supreme Court, which then conducts judicial review mainly in the form of documentary examination. 2.1 Method of evidence examination during legal proceedings (explanation to the court) Examination of evidence in administrative lawsuits can be done in the following ways; (i) the concerned person applies for evidence examination at the court and has an examiner designated by the court carry out the examination, (ii) the concerned person commissions an economist to write a written opinion and submits it to the court as profert, (iii) the court asks related individuals or organizations, such as public institutions, schools and foreign government institutions, about facts necessary for the court proceedings (normally referred to as fact inquiry, which can by applied ex officio by the court or by the concerned individual) and (iv) the concerned person asks for witness statement to the court and let the witness testify at the trial. 29

125 DAF/COMP(2008)31 3. Introduction of actual cases and answers to the given questions 3.1 What are your experiences with presenting complex economic theories or sophisticated economic evidence to courts? At the litigation stage, the KFTC wrote in the preparatory pleadings its argument to support the legitimacy of the KFTC s decision and submitted materials that it had collected from the investigation stage with its analysis of them. However, since 2005, the KFTC has sought advice from outside experts, which has been submitted to the court in the form of written opinions (as in 2. (2) (ii)). There have been a total of fourteen such cases between 2005 and 2007 as illustrated below in <Table 1>. Table 1. Cases where the KFTC submitted to the court the advice it received from outside experts (as of Jan. 9, 2008) Plaintiff Type of violation Evidence contribution Litigation status POSCO Abuse of market dominance documentary evidence High Court: won, Supreme Court: lost Microsoft Abuse of market dominance documentary evidence lawsuit withdrawn Shinsegae Merger documentary evidence pending at the High Court Eland Retail Merger documentary evidence, attendance as a reference pending at the High Court KT Cartel documentary evidence High Court: partial win, pending at the Supreme Court Iljin Electric Cartel documentary evidence confirmed win at the High Court Tong Yang Leisure +1 Cartel documentary evidence confirmed win at the High Court SK Telecom Cartel documentary evidence Kumho Industrial +3 Cartel documentary evidence High Court: won, pending at the Supreme Court High Court: won, pending at the Supreme Court KT Cartel documentary evidence High Court, Supreme Court: partial win Samsung Life Insurance + 6 Cartel documentary evidence High Court, Supreme Court: partial win SK Networks + 2 Cartel documentary evidence, witness attendance High Court, Supreme Court: won Samsung Card Cartel Court s review pending at the High Court 30

126 DAF/COMP(2008)31 Samsung Life Insurance + 2 Constitutional appeal documentary evidence lawsuit withdrawn By type of violation, there were two abuse of market dominance cases, two merger cases, two cartel cases, seven undue subsidy cases and one constitutional appeal. So cases on undue subsidies, which is a type of violation unique to Korea, accounted for the largest share out of all cases where the KFTC submitted outside experts opinion to the court. As for evidence contribution, submission of written opinions as documentary evidence was most common, and outside experts who produced written opinions were all economics professors. Currently, the Korean court does not have in place a system to obtain advice about complex and difficult economic problems, and the court has a limited capacity to find economists suitable for determination of legitimacy of the KFTC s decision by itself. As a result, in actual litigations, evidence examination method (ii) is most widely used. In most cases (except for some cases of undue subsidies), the plaintiff submitted expert opinions to the court first, and then the KFTC responded by producing its own written opinions countering the plaintiff s claims and actively arguing for the legitimacy of its decision. Apart from cases where written opinions were submitted as profert, there are also cases where a.) the KFTC called the outside experts who wrote the written opinions to witness for examination (undue subsidy cases involving SK Networks and two other companies), b.) the plaintiff s outside expert presented himself as a witness and the KFTC only cross-examined him (Microsoft s abuse of market dominance) and c.) the outside expert presented himself as a reference and explained economic matters with presentation materials and answered the judge s questions (Eland Retail s violation of merger regulations (merger between discount stores, NewCore and Carrefour Korea)). These days, there are often times when the economist, who produced the written opinion by the above methods a.) or b.) for submission to the court, is called to the court as a witness and testifies about the written opinion, after which the other party is given the chance to counter his claims, or when the economist presents himself to the court as a reference and explains the written opinion himself. Unlike a witness, a reference does not take an oath before testifying and the counter party s right to cross-examine the reference does not need to be guaranteed, in principle. However, in reality, there is little difference between a witness and a reference since the court guarantees the opportunity for the counter party to argue against the references claims. Since 2006, the number of cases where the outside expert presented himself to the court as a reference to provide an explanation of economic data and theories (as in c.)) is growing. This is attributable to the Korean court s efforts to actually establish oral pleading, as part of which the court allowed the plaintiff and the defendant to state orally key issues in court and enabled their lawyers or reference persons to plead using presentation materials at a court equipped with computers and overhead projectors. More specifically, in the Eland Retail s case, one session of sorting out genuine issues between the two parties was followed by two presentation sessions. The first presentation was dedicated to organizing the overall arguments of the lawyers of the two sides and to hearing explanations on economic analysis from the outside expert on the plaintiff s side. Then at the second presentation session, the outside expert from the KFTC s side gave an explanation on economic analysis (economic theories and economic regressive analysis were explained by different experts). In this case, one of the controversial issues was whether outlets run by Eland Retail were included as discount stores. So instead of having the judges visit 31

127 DAF/COMP(2008)31 the outlets themselves, the KFTC videotaped the outlets itself and played the video clip in court. Between 30 minutes to one hour was given to each of the four presentations by the plaintiff and the defendant. Meanwhile, concerning the merger between E-mart and Wal-Mart (handled by Special Division 6), which is similar to the Eland merger case (handled by Special Division 7), there has not been any presentations in court, which is thought to have relations to the characteristics of the judge. d.) Next, there are also cases where the KFTC requested review of evidence to the court and an expert appointed by the court carried out the review (in the Samsung Card s undue subsidy case, the key lied in the value of the unlisted shares). Overall, there have been four wins, two wins at the High Court (pending at the Supreme Court), two lawsuit withdrawals, two partial wins, one loss and three cases pending in the court. 3.2 Can you describe which techniques proved most effective and which did not? During the litigation process, the plaintiff presents economic analysis commissioned to an outside expert. Since the court does not have enough expert knowledge in that field, the court recommends the KFTC to review and refute the analysis submitted by the plaintiff. Then the court demands the plaintiff to retort on the KFTC s refutation. Thus, it is most important to make the court recognize that the economic analysis submitted by the counterparty has faults in terms of its premises and analysis method. To this end, economic terminologies and equations must be made easy to understand for the general public, and the premise on which the economic equations are used in analyzing economic phenomenon must be explained easily. In addition, it is effective to have the expert who produced the written opinion attend the trial himself to give explanations on the submitted opinion to the court and to answer the court s questions. 3.3 Do you think that competition authorities can be more effective in court if they retain external economic consultants to present their cases? In all of the fourteen cases introduced above, outside experts (or economic consultants), not the KFTC officials, conducted economic analysis, whose results were submitted to the court. At present, the KFTC does not have enough manpower capable of economic analysis, and the court tends to trust the statement by an objective third party rather than the staff members of the KFTC, who might give statements favorable to the KFTC. For this reason, outside experts are called in when explanations are needed in the litigation process. When getting help from outside experts, problems arise concerning inefficiency of having to review the given case again from scratch, the KFTC s budget shortage and the plaintiff s prior occupation of excellent outside experts. In response, the KFTC has been working to secure sufficient budget and an outside expert pool in addition to establishing taskforces to handle particular cases (consisting of responsible staff, the Litigation Team and outside experts). Due to the credibility issue the court has regarding the KFTC staff s statement and the lack of manpower within the KFTC, the court has relied on outside economic experts advice in most cases. However, it is hard to say this method is more effective than others. 32

128 DAF/COMP(2008) Would you recommend that courts appoint independent economic consultants to supplement the parties' presentations on the economic issues involved in a competition case? Or do you believe that courts should rely exclusively on the economic arguments presented by the parties? The KFTC has never recommended the court to appoint independent economic consultants. When the two sides economic arguments are sharply divided making it difficult for the court to make a decision, the court can ask an outside expert to confirm facts or review the evidence and ask him questions. Here, the plaintiff and the defendant are free to recommend qualified experts to the court, but the court is not bound to follow that recommendation. The court determines the value of evidence according to its free conviction and does not have to rely only on the economic arguments presented by the two sides. Nevertheless, in case the court decides to judge based on economic arguments not proposed by the plaintiff and the defendant, it is desirable to give the two parties sufficient opportunity to defend their positions. 3.5 Does presentation of complex economic theory or evidence present different issues before an appellate judge as opposed to a judge who is responsible for making factual findings? In a trial at the Supreme Court (the appellate court), the original decision is reviewed only from the legal perspective and thus, the Supreme Court conducts ex post facto review unlike the Seoul High Court. The appellate court does not carry out fact finding itself and makes a decision based on the fact finding in the original judgment by the Seoul High Court. In this regard, facts confirmed to be legitimate in the original decision are binding at the appellate court. Both the plaintiff and the defendant cannot argue fact findings of the original ruling. However, if an economic theory presented in the appellate court helps the judge s decision on the given facts, the presentation of the theory before the appellate judge will be considered possible. 33

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130 DAF/COMP(2008)31 NETHERLANDS 1. Introduction In this paper some comments are offered on the issue of (techniques for) presenting (complex) economic analysis to judges. What follows is a short discussion of a few aspects of this topic on the basis of some examples. Although the number of occasions where the Netherlands Competition Authority (hereinafter: NMa) has had to present (complex) economic evidence in court has not been numerous so far, the experiences drawn from these occasions nevertheless give an impression of the Dutch courts approach towards economic issues in competition cases, which might be useful for the Working Party. We will first discuss how the judicial system with respect to competition law works in the Netherlands. Then we will briefly discuss how the (specialised) courts have up until now considered economic issues in competition cases. We will do this by presenting some of the relevant cases. We will also discuss one specific case (Nuon-Reliant) in which complex economic analysis was presented. Although the NMa s track record for court cases also shows more positive results, we chose to discuss examples that resulted in a negative (for the NMa) outcome in this area, since these are more suitable to demonstrate lessons learned. In general, they show that the Dutch courts seem inclined to put a heavy burden of (factual) proof on the NMa, even with respect to basic economic issues. 2. The judicial system in the Netherlands The Netherlands Competition Act [Mededingingswet] is analogous to European Community competition law (EC Treaty) as regards substantive law rules. The statutory framework for enforcement provides for both a civil and administrative enforcement system. The NMa has been responsible for administrative enforcement of competition law since Review of the NMa decisions is regulated by the Competition Act and the General Administrative Law Act. According to Article 93 of the Competition Act, the (District) Court of Rotterdam (administrative law department) is the competent court in respect of judicial appeals against decisions of the NMa. Judgements of the Court of Rotterdam are subject to a judicial appeal to a specialised tribunal, the Trade and Industry Appeals Tribunal (CBb). The Court of Rotterdam is the only ordinary court which is competent to handle cases of the NMa and other regulators, such as OPTA (telecommunication). A limited group of judges has been trained/specialised in economic public law, but the court has no experts in competition law or economics. The CBb is a specialised court in financial and economic public law. This court not only judges questions of law, but also investigates the merits of the case. Consequently, two courts (first instance, appeals court) perform a full review of cases. Unfortunately, the Court of Rotterdam and the CBb take a different stance on a number of fundamental principles. This is however not surprising, bearing in mind that the Dutch Competition Act is relatively new. 35

131 DAF/COMP(2008)31 3. Selected cases 3.1 Secon This case was about (vertical) retail price maintenance (RPM) of G-star clothing. The NMa considered that RPM was prohibited per se and, hence, did not have to analyse the effects of the RPM on the market. According to the appeals court (CBb) RPM can indeed be considered as a per se forbidden agreement, but it still needs to be proven that the agreement has the potential to appreciably restrict competition on the market. More specifically, the Court ruled that it was the NMa s job to investigate and establish the appreciability of the restriction, which cannot be done in abstracto but has to be done by taking into account the concrete factual and economic circumstances. Since the NMa had failed to investigate these circumstances, its fining decision was quashed and the NMa was ordered to reassess the case. From an economic substantive point of view this decision may be considered sensible. Though from a legal point of view, with respect to the desired burden of proof, the consequences might be far-reaching. Did the court imply that all per se forbidden agreements, horizontal ones also, should be investigated with respect to appreciable restrictions of competition? And if so, should this be limited to some kind of market-share analysis only (see below on the bicycle -case), or should the NMa establish some sort of effect on the market? Subsequent rulings seem to imply that the appreciability issue is to addressed primarily by looking at the market shares of the undertakings involved. Since all the evidence on the character of the G-star-agreement pointed in the direction of very low market shares, the NMa did not consider it worthwhile to investigate the matter in more detail after the CBb s quashing of the decision, and decided to drop the case. 3.2 Bicycles This case concerned a horizontal price-fixing agreement between bicycle producers in the Netherlands that was also deemed per se forbidden by the NMa. In this case the court sustained the NMa s decision, but, more importantly, the court also ruled that the agreement was an appreciable restriction of competition because of the large combined market share of the producers involved of over 75%. 1 Since it was evident in this case, on grounds of the large market share, that the agreement (given its hard core nature) was to be considered an appreciable restriction of competition, the court s ruling in the bicycle-case did not give the NMa much guidance on the required burden of proof in less straightforward cases. 3.3 Modint This was also a case of RPM, at least according to the NMa. Although the case is more complicated than presented here, basically the court decided that the NMa had not established that the agreement was a case of RPM. The court ruled that the agreement had to be analysed (which had not been done by the NMa) in its economic context in order to determine whether the agreement constituted RPM at all. Again, this could not be done in abstracto by looking at the content of the agreement only. In this case, the NMa 1 In a later case on bid rigging the court even went so far as to rule that, at least in that case, bid-rigging practices were not only forbidden per se, but also appreciably, because of the fact that this specific auction constituted a market by itself. 36

132 DAF/COMP(2008)31 decided that a certain system of (given) rebates between producers and retailers constituted an instance of RPM. More specifically, the Court was of the opinion that the system of rebates did not constitute RPM, but should be considered as a specific payment system for administrative services delivered by the retailers trade association. Essentially, the Court pointed out to the NMa that agreements should be considered in the economic and legal context in which the agreement functions or takes effect, in order to determine whether or not they (may) restrict or distort competition. Part of this analysis should be dedicated to the issue of the appreciability test. 3.4 Psychologists A case in which it became particularly clear how thorough the Court seems to want the NMa to investigate cases with respect to economic aspects, is the case concerning psychological services. The Court seems to demand not only a detailed economic story behind the case, but also requires this story to be supported by the facts in the file and demonstrate that a restriction of competition did indeed take place. The case involved three trade associations of psychologists. These associations offered (fixed and equal) advice on tariffs to be employed by psychologists (differentiated with respect to specific types of psychological help, like, for instance, psychotherapy or labour psychology ). The NMa considered this market to be a contestable market, open to competition between psychologists. The Court, however, was very sceptical about the actual possibilities for psychologists to compete. The Court pointed out that the NMa should have established, on the basis of facts, that the psychologists did in fact have room to compete, given the role of health insurers and the way people requiring psychological help ( consumers ) were directed by their general health practitioners to certain psychologists. The Court, in other words, seems to suggest that the specific circumstances in this market, more specifically that consumers did not choose their own psychologist, nor would they be very interested to do so (given the nature of their insurance policies), meant that competition was weakened to begin with. If psychologists did not or need not compete with one another within this specific economic context, then there was no competition to be restricted either. The case is now under review by the CBb. In its defence statement, the NMa basically argues as follows: Psychologists are free to advertise, charge any price, determine working hours etc., hence are free to compete, generally speaking. Consumers may choose any psychologist they want. Even if consumers choose on the advice given by a general practitioner or health insurer, still psychologists are able to compete with respect to consumers, general practitioners and health insurers. It will not be easy to convince the CBb with these arguments, since there is no new factual evidence to sustain them other than the facts on which the court based its judgment. It is possible therefore that the CBb will adopt the Court of Rotterdam s reasoning. In that case the NMa may be required to (additionally) prove/investigate that indeed consumers, general practitioners and insurers can and also do choose between psychologists on the basis of, for instance, price and quality. 37

133 DAF/COMP(2008) KLM In this case the NMa investigated a complaint of excessive pricing by the Royal Dutch Airlines (KLM) and found that there was no reason to assume the existence of excessive pricing. On the basis of these conclusions, the NMa did not give much consideration to other elements of the complaint that also related to high prices. These elements consisted of the non-availability of low priced tickets and overbooking of airplane capacity. The Court of Rotterdam pointed out that these elements of the complaint should have been investigated, because they might have constituted a separate abuse of a dominant position. The Court did not dispute the NMa s decisions concluding that the tickets were not excessively priced. The NMa adopted a new decision and defended in detail why and how the additional elements of the complaint were related to pricing policy and, in the specific case at hand (hence, not in general), could not constitute forms of abuse independent of excessive pricing, on which the court has sustained the NMa s previous decision. Therefore, no new investigation or market research was necessary with regard to these elements. The Court remained unconvinced, though, and retained its point of view that factual analysis had been necessary; a theoretical description of the relation between the different aspects of the complaint was insufficient to conclude that no separate abuses were possible Mobile operators The NMa imposed fines on the five mobile telephony operators in the Netherlands for a concerted practice in violation of Article 81 EC and its national equivalent in the Dutch Competition Act. The operators convened (on one occasion) and discussed a reduction of the bonuses paid to independent dealers for each telephony subscription sold to consumers ( prepaid and post paid mobile telephony packages). More specifically, the operators discussed the timing of this bonus reduction, which the NMa considered an attempt to avoid a first mover disadvantage (market share decline because of unilaterally reducing the bonuses) for the operator who is the first to reduce bonuses. In its decision, the NMa qualified this concerted practice as a severe violation of article 81 EC, having as its object the restriction of competition. The undertakings involved were fined heavily. This time the Court of Rotterdam and the CBb did not so much focus on the (absence of) economic content of the reasoning, but more on the legal requirements of proving the existence of a concerted practice. With respect to prepaid packages, both the Court and the CBb ruled that it was only proven that one party had unilaterally stated its intention to reduce bonuses for prepaid packages. There was no evidence of any response the other parties might have given to this announcement, during the one() meeting. Hence, there was no proof of concerted practice (which required some sort of mutuality ). With respect to post paid subscriptions the Court of Rotterdam ruled that the meeting constituted a concerted practice (there was no question of just a unilateral statement) as opposed to the prepaid -part of the case) and that this practice had the object of reducing competition. With respect to post paid telephony packages, the Court of Rotterdam ruled that there was a violation of competition law, but that the concerted practice only concerned the timing of the reduction of bonuses and therefore did not constitute a severe violation, in contrast to the NMa s findings. According to the Court, the reduction of bonuses would have happened unilaterally by each operator anyway, due to the 2 The case was won by the NMa in higher appeal, but the economic content of the CBb s ruling is rather scanty. 38

134 DAF/COMP(2008)31 oligopolistic structure of the market. So, the Court put its own economic reasoning in place of that of the NMa. This was one of the reasons for the NMa to appeal the Court s decision. In its ruling, the Court of Rotterdam referred to the Anic-case law (Polypropylene), as the NMa had done in its decision. 3 According to this case law, undertakings that take part in a meeting where commercially sensitive information is exchanged with the goal of restricting competition and that remain active on the market after such a meeting, are deemed to take this information into account when determining their market behaviour. Hence, the causal link with their market behaviour is given, unless these undertakings can prove to the contrary ( the Anic rule ). The court ruled that there was no case law preventing the application of the abovementioned Anic-rule in cases where the concerted practice existed of only one meeting between competitors. The CBb is not yet convinced though, and recently stated that it will request the European Court of Justice for a preliminary ruling. One of their questions concerns the CBb s dilemma on exactly what criterion should be used in order to determine whether a concerted practice has the goal of restricting competition. Another question is whether the Anic-rule also holds in case of one meeting only, since Anic concerned a complex cartel with a longstanding concerted practice. So, on the substantive economic issues the CBb has not yet decided, as this will only happen after the judgement of the European Court of Justice. 3.7 Nuon and Reliant merger case Nuon and Reliant were independent energy producers and (wholesale) energy traders. With respect to electricity Nuon was a relatively small producer, while Reliant had ample production capacity. After the second-phase investigation, the NMa cleared the merger on condition that 90 tranches of 10 MW of Nuon s firm capacity were auctioned between July 1, 2004 and December 31, Total capacity in the Netherlands is about MW (2001-figure). Some market parties (Nuon, Essent and Electrabel) were excluded from these auctions. Nuon and Reliant objected to the obligations and appealed before a Dutch court. The NMa had based its decision, among other things, on two econometric simulation models of the Dutch electricity market, one of which was a supply function equilibrium model (SFE-model). SFEmodels are relatively complex models and typically generate many equilibria. The models predicted that the merger would lead to significant price-increases (ca. 10% on average; see below), depending on the time of day, i.e. the moments which allowed the parties to exercise (significant) market power. Hence, these studies tried to measure market power directly. The SFE-models forecast was that the merger would lead to a different set of equilibrium-solutions so that, compared to the pre-merger set of equilibria, the low-price equilibria disappeared. The median price was thus higher and was presented as the predicted result. The Court ruled that the NMa had failed to prove that the merger would result in a dominant position with respect to electricity production. One important reason for this conclusion was that the Court did not accept the outcome of the econometric analysis as prove of dominance, but considered these merely as an indication that prices could rise as a result of the merger. Beside, the Court was not convinced by the argument that in the SFE-model the median price would rise. The NMa had not proven convincingly what the pre-merger equilibrium price was and how the merger would lead to a higher equilibrium price. Put differently: the fact that many equilibria exist before and after the merger with no proof of what the actual 3 European Court of Justice, d.d. 8 July 1999, Commission/Anic Partecipazioni, C-49/92P, I

135 DAF/COMP(2008)31 equilibrium was before the merger and what would be the likely equilibrium after the merger, caused the judge to be hesitant in accepting the results. The Courts even seemed to doubt the applicability of an assumption like profit maximization. This seems to have been a side-issue as well in some of the other cases described before. Do firms maximise profits and if not, in what sense would or could they have incentives to restrict competition, seems to be the underlying question of the courts. Consequently, the NMa should possibly go as far as to prove that firms do indeed (intend) to maximise profits. All in all, the court was not convinced that the SFE-model in particular, with its many equilibria, could forecast with precision whether prices would rise. Besides, they were not convinced that a dominant position would be created based on market share analysis. The CBb decided along the same lines. According to the CBb the market share analysis did not point to a position of dominance. The CBb also did not accept proof of price rises based on the econometric models as direct proof of dominance. The CBb based this decision on the reasoning that such proof of price rises assumed dominance instead of implying dominance. 4. Some tentative conclusions The Court s decisions in the Nuon-Reliant case seems to point to the tension between an analysis of dominance in terms of market shares and qualitative analysis on the one hand, obviously preferred by the courts, and (direct) econometric evidence of dominance on the other, possibly dismissed on the basis of a faulty argument. Whether and in what way this is due to the presentation of the analysis by the NMa remains to be seen. The NMa has of course tried to think about how to present the same type of econometric analysis used in the case of the proposed merger between Nuon and Essent, but this has not been put to the test, due to the fact that both parties withdrew their merger plans. On the other hand, based on the other cases described, it seems that the courts themselves experience difficulties in deciding how to deal with basic economic assumptions and theories, especially where the translation of abstract economic principles to concrete cases is concerned. The courts pointed out that the NMa s analysis has not been sufficient in a couple of cases, and they have doubted some of the underlying assumptions of the functioning of the markets as described by the NMa. Still, they have not pointed out exactly what is required to convince them. For instance, should the NMa always prove that firms (or professionals in the market) maximise profits and hence have the incentive to restrict competition? So, the NMa is still wrestling with the question what exactly is required with respect to the facts (like the functioning of a market) and economic analyses and, consequently also with the question how to present an economic analysis. To base the analysis on the facts of the case at hand as required by the courts and less in abstracto - is obviously a very sensible starting point and the courts are certainly willing to review both the facts, the (economic) reasoning and the logic between them in order to be able to assess the conclusions drawn by the NMa. That much is clear. It is also clear that in the past the NMa has not always performed this exercise satisfactorily. Still, it is unclear what the courts expect from the NMa with respect to the level of detail of economic analyses, underlying assumptions and the facts required to underpin them and the presentation of the analysis. It follows from the above that the questions posed by the OECD cannot be answered very satisfactorily at this moment. Still, that may be informative in its own way. 40

136 DAF/COMP(2008)31 One of the OECD s questions is whether we think that competition authorities can be more effective in court if they retain external economic consultants to present their case(s). Another question is whether we are in favour of courts appointing independent economic consultants to supplement the parties' presentations on the economic issues involved in a competition case. Or do we believe that courts should rely exclusively on the economic arguments presented by the parties? We cannot answer these questions based on our experience. Does presentation of complex economic theory or evidence present different issues before an appellate judge as opposed to judge responsible for making factual findings? We do not have a strict answer to this question, since in the Netherlands the appellate judge and the fact finding one do not differ in their approach. Both the court in appeal and the court in higher appeal are inclined to fully test the facts and the theories presented by all parties. 41

137 DAF/COMP(2008)31 42

138 DAF/COMP(2008)31 PORTUGAL 1. Introduction The purpose of the present paper is to provide an insight on the techniques which have been used by the Portuguese Competition Authority (PCA) for presenting complex economic evidence (theories, sophisticated methodologies or empirical analysis) in Court. The paper is divided in four sections. We shall first, in this section, present the national legal framework on the way economic evidence can be considered in competition cases and presented in Court. We shall then consider in greater detail the use of economic evidence on competition cases and its presentation before the Courts (section II). The latter is illustrated by means of a concrete case dealt with by PCA, namely the salt cartel, whose decision (from June 2006) has been confirmed by the two Portuguese Jurisdictional Instances, in 2007, where economic analysis has been used, mostly, for the computation of the economic benefit obtained by the cartel members from that conduct (section III). Finally, we conclude with some remarks and comments on open issues (section IV). 1.1 Legal framework Law and Economics have always been at the heart of competition assessment. However, over the past years, the complexity of economic analysis used in competition cases has increased. This trend is visible in merger analysis and particularly in anti-trust proceedings. Often, competition cases involve several economic studies presented both by the parties and by Competition Authorities, showing antagonising theories about the same case. Frequently, it is for the Judge to decide which economic theory is more appropriate to assess a particular case. In Portugal, Judges and Public Prosecutors do not have any research or economic staff to assist their assessment of economic analysis. Portuguese Law Schools generally include basic economic theory in their curricula and the Centre for Judicial Studies (Centro de Estudos Judiciários) provides accounting and management training to Judges and Public Prosecutors 1. 1 In order to provide Judges and Public Prosecutors more in-depth understanding of competition law and economics, the PCA, in co-operation both with the Centre for Judicial Studies the body responsible for, inter alia, the initial, supplementary and ongoing training of Judges and Public Prosecutors and the Attorney General's Office have organised several Seminars targeted at the Judiciary. The I Training Course for National Judges in European Competition Law (November 2004), co-financed by the EC and endorsed by the Superior Judicial Council, was attended by 85 Judges. In June 2005, a Course on European Competition Law for Public Prosecutors, co-organised with the Attorney General's Office, was attended by 82 Public Prosecutors and legal staff from the Office. In addition, from 2005 to 2007, PCA staff co-operated in a series of Seminars organised countrywide by the main Portuguese Consumer Association, and also targeted at the Judiciary training. In May 2006, the PCA and the Centre for Judicial Studies signed a Cooperation Protocol to assure a broader knowledge of competition issues and administrative offence law, on the basis of initiatives carried out on a regular basis. In June 2006, the PCA participated in a Seminar EC and National Competition Law organized by the Centre for Judicial Studies in the context of Judges and Public Prosecutors initial training. 43

139 DAF/COMP(2008)31 Nevertheless, such basic teaching is in general insufficient to cope with the increasing complexity of economic studies involved in competition cases. Therefore, the procedural rules applicable to appeals of PCA decisions establish mechanisms to overcome such technical lacuna. A way to provide Judges a further insight on economic studies used in competition cases is the testimony of witnesses in Court. Through testimonial evidence, the Court can better comprehend the methodology used by economists in order to establish the facts on which subsequent analysis will be based on. Furthermore, the relevance of such facts and its significance for the implementation of the chosen methodology, as well as the justification for the selection of any given methodology can be clarified by means of a testimony in Court. Moreover, according to Portuguese procedural rules, Courts can be assisted by independent experts, whose intervention can be required by the parties or determined ex officio. Experts can only intervene when the assessment of certain facts requires special technical, scientific or artistic knowledge. In highly complex cases, more than one expert can intervene and the law provides that experts may have different views on the same facts. Experts are appointed by the Judge, who also determines the scope of their intervention. After the analysis, experts provide a report and can also be heard in Court. In order to assist the expert opinion assessment, the Public Prosecutor and the parties involved can designate their own technical consultant, who can question the expert. The law foresees that the experts technical, scientific and artistic opinion cannot be freely appreciated by the Judge unlike all other evidence, which can be assessed by the Judge unreservedly and that the Judge must duly justify its assessment whenever it disagrees with the expert s opinion. However, this restriction only applies to the expert technical opinion and not to the assessment of facts on which that technical assessment is based. Therefore, the Judge can reject any economic analysis if the underlying facts are found not proved. In practice, as will be described in further detail below, the Lisbon Commerce Court (Tribunal do Comércio de Lisboa, the national first jurisdictional instance on appeals of PCA decisions) has accepted that PCA economists and econometricians testify in Court as witnesses. Therefore, PCA specialists have had been given the opportunity to explain during trial, in an intelligible manner for the Court, PCA economic assessment reasoning answering to questions posed by the different trial participants: the Public Prosecutor, PCA, the involved undertakings, and the Judge. Furthermore, PCA provides its view on the economic studies presented by the involved undertakings, thus helping Judges to construe those studies in a more balanced and critical way. Reciprocally, economic specialists of the involved undertakings have also testified in Court, in a similar way as the PCA. So far, there has not been a case where an independent expert, in the legal sense described above, has been called in proceedings dealing with an appeal of a PCA decision. In October 2007, the PCA and the Attorney General s Office organised a Seminar on the Application of National and Community Competition Law. The Seminars and Courses organised so far have benefited from an active participation of Judges and Public Prosecutors, allowing for a broad and fruitful exchange of experiences. 44

140 DAF/COMP(2008) The scope of economic evidence In Portugal, only the Lisbon Commerce Court (first instance), which reviews PCA s decisions both on the merits and procedural issues, has the competence to assess facts on proceedings related to appeals of PCA decisions. Economic evidence may, yet, go beyond facts and rely on specific methodologies (theoretical or econometric) which, as opposed to facts, have a subjective (or potentially contestable) nature and may thus, in case of appeal, be subjected to further assessment of the Second Jurisdictional Instance, the Lisbon Court of Appeal (Tribunal da Relação de Lisboa). National Courts have so far well accepted the economic evidence presented by PCA and this, in part, due to the simplicity and intuitive reasoning underlying the presented methodologies, being thus explicit to Judges and Public Prosecutors. Since National Courts are not, in principle, coadjuvated by economic expertise, the methodologies presented before Courts must be explained in a simple and intuitive way. 2. Use of economics in competition cases and its presentation before the courts As stated before, economic evidence is useful (and used) in merger and anti-trust cases. On the antitrust cases, economic evidence has been used, notably, on: The relevant market definition; The identification of effects stemming from the conduct; and The economic benefit and/or damage, resulting from the conduct. Since the creation of PCA in 2003, although two merger decisions have so far been appealed, the appeals are still pending. Only anti-trust cases, namely cartels, have been subjected to by now completed judicial review. No judgement has yet been given on abuse of dominance cases. A more general (and more difficult) use of economic evidence, not yet considered in decided national cases, regards indirect proof of anti-trust conducts (v.g., cartels) for which there is no direct evidence of an agreement (maxime, documentary evidence). Some issues on the use of economic evidence on anti-trust cases are detailed hereafter. 2.1 Relevant market definition Economic analysis is important for defining the relevant product/service (material) and geographic dimensions of the market, either by the means of the substitutability criterion (vide the SSNIP Small but Significant and Non-transitory Increase in Price criterion) which may require econometric estimates of elasticities (if such values are unavailable) or by the means of any other economic analysis tool. Economic analysis for the relevant market definition based on the SSNIP criterion is, notably, important for assessing complex cases where the concerned product may have close substitutes or where more than one relevant market may be concerned (v.g., cases where the involved undertakings are vertically integrated). 45

141 DAF/COMP(2008) Effects resulting from the conduct Anti-trust conducts may produce pro- and/or anti-competitive effects. Whilst a conduct producing pro-competitive effects, which outweigh possible anti-competitive effects, may be considered justified, anti-competitive effects contribute to increase the infringement s gravity and are thus taken into account on the determination of the amount of fines. Effects can be further disentangled between observable effects, sustained by direct evidence (v.g., documentary evidence of selling price increases), and unobservable effects, which need to be inferred by the means of specific economic or econometric analysis. In an economic sense, effects measure the difference in consumer and social welfares between the observed market state, subjected to the anti-trust conduct, and the unobserved market situation in a competitive environment. It follows from the distinction between an observable and an unobservable market states that part (if not most) of the effects stemming from an anti-trust conduct are unobservable. That means that, despite the available direct evidence, economic or econometric analysis tools may always be required to infer (part of) the unobservable effects stemming from the conduct in question. Moreover, Portuguese Courts, and notably the Lisbon Commerce Court, have stated that any referred effect from the conduct must be clearly demonstrated. Two effects-related concepts are economic damage and economic benefit, the first defining the cumulated effects stemming from the conduct and the latter being the part of economic damage which is captured by the infringing parties (as detailed in subsection II.3 hereafter). 2.3 Economic benefit / damage resulting from the conduct The economic damage (or cumulated effects) resulting from the conduct equals the sum of the economic benefit (which the infringing parties perceived) and the economic harm to consumers (and customers of the latter parties). Theoretically, both the economic damage and the economic benefit are quantifiable, although the latter is more hardly quantifiable than the former as it requires, in addition to the economic benefit, inferring and comparing the demand structure between the unobserved competitive environment and the observed market state subjected to the anti-trust conduct. Yet, since part of the economic benefit is not quantifiable, in practice one can only hope to get an underestimate of the real economic benefit, whose value is, in principle, lower than that of the economic damage. 2 Apart from being harder to quantify than the economic benefit, the concept of economic damage is not clearly defined within the national competition law, other than being possibly considered a cumulating factor to the infringement s gravity. The concept of economic benefit, on the other hand, is expressly mentioned in the legislation as one of the criteria for determining the fine, as [t]he advantages that the offending undertakings have enjoyed as a result of the infringement (ex vi Article 44(b) of the PCL). 2 In theory, it cannot be excluded that an anti-trust conduct, though anti-competitive, may result in benefits for final consumers, thus implying a total economic damage lower than the economic benefit the infringing parties retrieved from the conduct. 46

142 DAF/COMP(2008)31 PCA has successfully defended in Court a cartel case containing an assessment of economic benefit, known as the salt cartel (further detailed in section III below). 2.4 Economic evidence as indirect proof of a cartel On the use of economic evidence as indirect proof of an anti-trust conduct, we shall focus on the specific case of cartels. According to the EC Treaty and the PCL, the concept of cartel may fall into two distinct types of conduct: an agreement and a concerted practice. Whilst there is a distinction between these two types of conduct an agreement results from a communion of will and a concerted practice consubstantiates a less formal coordinated behaviour such as that stemming from a set of communications the same standard of proof is applicable. If direct evidence may be sufficient to establish the existence of a cartel, the exclusive use of circumstantial or indirect evidence is possible but riskier, as it must dismiss any other plausible explanation that the observed conduct may not emerge from a cartel, 3 and may, also for this reason, prove insufficient to convince courts. Indirect evidence can be notably of two types: communication and economic evidence. Communication evidence shows that the parties established contacts about issues related with their alleged agreement, thus suggesting the existence of the latter but without proving it per se. Special types of communication evidence are the so-called facilitating practices, which include price signalling and the most favoured nation and meeting competition clauses. 4 In the absence of communication evidence, it becomes even harder to prove the existence of a cartel exclusively on the basis of economic evidence and, notably, if the relevant market has a structure which favours (tacit or explicit) collusive behaviour. If such is the case, it becomes almost impossible to disentangle between plus factors which can per se dismiss the possibility that the observed parallel behaviour stems from any other type of (licit) conduct than concertation. Rather than establishing proof of a cartel, indirect (economic) evidence should be mostly used, as it has been in Portugal, (i) ex ante screening device to the formal opening of a cartel investigation in case that evidence cannot dismiss the possibility of collusion or/and (ii) ex post as a way of inferring (unobserved) effects from the conduct. 3 4 In the famous EC pulpwood case, the European Court of Justice (ECJ) ruled that parallel conduct cannot be regarded as furnishing proof of concertation unless concertation constitutes the only plausible explanation for such conduct. That is to say that, although collusion which distorts competition is prohibited by law, the EC Treaty does not deprive economic operators of the right to adapt themselves intelligently to the existing and anticipated conduct of their competitors (see Ahlström and Others v. Commission, Cases No. C-89/85, C-104/85, C-114/85, C-116/85, C-117/85 and C-125/85 to C-129/85, ECJ decision, 31 March 1993, paragraph 71). See v.g. Massimo Motta, Competition Policy: Theory and Practice, Cambridge University Press, United Kingdom, chapter 4, for details. 47

143 DAF/COMP(2008)31 The recent national Wheat millers cartel, decided by PCA in October 2005, fully illustrates a case where both communication and economic evidence have been used in order to establish the infringement. The appeal of the case is still pending before the Lisbon Commerce Court Case study: The Portuguese Salt Cartel The national salt cartel, detected in mid 2005 and sanctioned by PCA in June 2006, is a highly instructive case in Portugal for a twofold reason: It was the first hard core cartel case to be assessed and upheld by the Lisbon Commerce Court, the first instance court, albeit the total fine reduction, from 910,728 to 704,500, and whose decision has been totally confirmed by the Lisbon Court of Appeal (the second jurisdictional instance); It was the first cartel case with an assessment of the economic benefit the four infringing parties obtained from the agreement, which, according to PCA, amounted to about 5,2M. This case s proceedings together with the two jurisdictional instances judgements are summarized in greater detail hereafter. 3.1 PCA Decision Relevant market The relevant market consisted in the wholesale of salt to the food and industrial sectors within the national borders. The geographic dimension of the market was mostly justified on the basis of transportation costs. 6 Apart from its importance to the general food sector, salt (sodium chloride, NaCI) is, notably, an important raw material for several industries, such as construction and public works, glass manufacturing, chemical industry, and metalworking PCA investigation and findings Following dawn raids, PCA found hard (documentary and testimonial) evidence that, from about October 1997 to January 2005, four salt producers and wholesalers had been involved in a hard core cartel, in pursuance of which they held regular secret meetings in order to coordinate their commercial behaviour, fixed target and/or minimum prices, agreed target sales quotas among themselves and monitored the progress of the said collusive arrangements. The agreement aimed wholesaling to two families of customers: industry (family 1) and the general food sector (family 2), the latter regrouping general food wholesalers and large retailing groups More information on this case can be found at: According to the EC, the wholesale of salt ranges from 400km to 800km around the distribution centres, delimiting, in casu, the geographic market to the national territory (v.g. EC Merger decisions IV/M.1522 CSME/MSCA/ROCK, 11 June 1999, and COMP/M.2176 K+S/SOLVAY/JV, 10 January 2002). 48

144 DAF/COMP(2008)31 PCA decision was addressed to Vatel (integrated, since 2002, into the current European market leader, ESCO European Salt Company) and to three national undertakings, Salexpor, Sociedade Aveirence de Higienização de Sal (SAHS), and Salmex. These four undertakings controlled altogether, in 2004, about 75%-90% of the relevant market Object and effect of an appreciable restriction to competition PCA concluded that the agreement had the object and effect of appreciably distorting and restricting competition in the whole of the national market, thus violating competition law. From the agreement s duration (seven years, at least) as well as from its object and effect of significantly distorting and restricting competition, resulted, necessarily, an economic benefit for the involved undertakings and an economic damage to the market as a whole (competitors and consumers). However evidence only allowed to determine, and in a simple way, the minimal value of the economic benefit, and thus part of the total economic damage Modus operandis of the agreement and compensation scheme The undertakings established their target sales quota, for the two customer families (industry and food sector), on the basis of their historical annual sales (in tons of salt) 8 over the period In order to ensure the agreement s sustainability, the cartel members set a compensation scheme which imposed that, at the end of each year, undertakings whose (effective) realized annual sales exceeded their quota paid compensation to those selling below their quota. Compensations could be paid either in monetary value or in quantities, but corresponded to a fixed monetary value for each ton of salt sold over quota. That compensation value was set to 12,5/ton and 17,5/ton of salt sold to the industry (family 1) and the food sector (family 2) respectively Economic benefit The substantial collected evidence allowed for the determination, in a simple and (strongly) intuitive manner, of the minimal value of the economic benefit the infringing parties perceived from the cartel, over the period (see Appendix for details). At the end of each year, an undertaking selling below her quota, would gain from the cartel an economic benefit, at least, equal to the value of her compensation. Reciprocally, undertakings exceeding their quota would enjoy from the cartel an unitary economic benefit (per ton of salt), at least, equal to the value they paid as compensation for that same quantity of salt, and therefore those undertakings, selling above their quota, obtained an economic benefit, at least, equal to what they got from increasing their sales cut by the compensation they paid by selling above their quota. Accordingly, the economic benefit amounts, in the total of the four undertakings to, at least, 5,2M during the seven year period, In general, only large buyers, such as wholesalers and large retailing groups, have the dimension to buy directly in the supply market. Wholesalers supply downstream small retailers such as traditional small grocery shops and the hotels, restaurants and cafés channel. Except if otherwise mentioned, sales refer here and henceforth to quantities, in tons of salt. 49

145 DAF/COMP(2008) First Instance s Decision Following the appeal of the decision by the addressees of PCA decision, 9 the Lisbon Commerce Court upheld most of PCA findings, including the proposed methodology to evaluate the economic benefit, dismissing an alternative methodology proposed by one of the parties, albeit with a reduction in the amount of the fine, from 910,728 to 704,500. In its decision of 2 May 2007, this Court rejected some of PCA findings and, in particular, the alleged impact on trade between EU Member States. Despite the fact that the parties might control altogether between 75% and 90% of the (relevant) market and the fact that the national market represents a substantial part of the EU market, the Court found that the PCA should have further demonstrated that the relevant product (salt) is, by its nature, important for intra-eu trade and/or for any undertaking which may wish to expand her activity to Portugal. Although the Court dismissed the PCA finding on the concrete economic benefit value, 10 it upheld the PCA economic benefit methodology, by stating that: 11 PCA departs from two evident premises [ ] It is thus secure to state [as claimed by the PCA] that between the minimal value of the economic benefit and the compensation value there is a direct cause-effect relation [ ] Therefore, those who pay compensations [by exceeding their quota] have an economic benefit, at least, equal to the total amount of compensations they paid (cf. pp. 97 and 100 of the Judgement), and if [undertakings which paid compensations] stayed, during seven years, in an agreement which forced them to pay annual compensations to the other parties [ ] that is because what [they] paid [as compensations] allowed them, even in that way, to gain in a market whose underlying uncertainty was strongly limited by force of the agreement, being certain that such limitation cannot be dissociated from the obtained gains (cf. p. 100 of the Judgement). Moreover, in consonance with PCA, the Court considered irrelevant for (reducing) the economic benefit value the fact that undertakings had not effectively paid due compensations, concluding that: Actually, when not effectively paying due compensations, the infringing party has an additional economic benefit: she obtains the agreement s benefits majored by the amount she should have paid but did not (cf. Sentence, p. 101) The economic analysis related to economic benefit computation was presented in Court by PCA, not only through its written reply to the undertaking s appeal (which contained further economic analysis counter arguing the economic benefit methodology proposed by one of the defendants), but also by means of testimonial evidence of PCA economists and econometricians. PCA experts presented economic reasoning in a complete but intuitive way, resorting to a simplified, although not less rigorous, language, which proved to be quite efficient in Court One of the involved parties (Salmex) did not appeal as it got insolvent before the PCA decision. According to the Court, on computing the economic benefit, the PCA based herself on quantity elements apprehended, during the dawn raids, from one of the parties, but not rightly authenticated during proceedings. Only the Portuguese version of both the two Instances decisions is available and authentic. Translations are our own. 50

146 DAF/COMP(2008) Second Instance s Decision In its decision of 7 November 2007, the Lisbon Court of Appeal confirmed the first instance s decision, corroborating, in particular, the reasoning behind the PCA methodology to compute the economic benefit. On the economic benefit, the Court stated that: 12 In what concerns the existence and value of the economic benefit (if the latter cannot yet, at least in part, be considered a factual finding and is, for that reason, an issue that cannot be subtracted from this court s assessment), it must be noted that the amount that has been received as a compensation by the parties selling below their quotas [ ] effectively represents a benefit (the minimal benefit, as stated in the [first instance s] judgment [and in the PCA decision]) which those parties would have not received if the cartel would have not been constituted. Therefore, that benefit must be considered as a factor on the determination of the fine. (cf. p. 40, first paragraph, our enhancement) The Lisbon Court of Appeal thus points out the extent up to which assessment of economic evidence may go beyond the factual scope, allowing it, in case of appeal, to be subject to the additional assessment of a second jurisdictional instance. 4. Final remarks The challenge of competition authorities is to present economic reasoning in an understandable but not less precise way to non-economists, in particular to Judges. The fact that lawyers and economists work as a team within PCA has contributed to a better mutual understanding of each others thinking and scientific language. This experience has produced positive results, as shown by the salt cartel case. The simplified language and the strong underlying intuition of the economic analysis have been, perhaps, the main reasons why the salt cartel case has been so well accepted by the two Portuguese jurisdictional instances. Moreover, specific training targeted at the judiciary has also proved to be a positive way to develop further analytical skills. The increased complexity of economic analysis required in anti-trust cases demands an additional effort from Judges in assessing competition authorities decisions. Competition authorities must, therefore, and in the interest of the values they pursue, contribute to convey economic theory in an intelligible way to non-economists and to provide thorough and constructive co-operation with the Courts, either through written documents or by means of testimonial evidence. 12 Only the undertakings which received compensations from the agreement appealed from the first instance s decision, i.e. all except Vatel and the insolvent Salmex. 51

147 DAF/COMP(2008)31 APPENDIX MATHEMATICAL PROOF OF THE ECONOMIC BENEFIT IN THE SALT CARTEL CASE Given the evidence available on: The 4 undertakings effective annual sales (in tons of salt), denoted by qi for undertaking i, over the period ; The 4 undertakings target sales quota, denoted by qi* for undertaking i, discriminated between the two customer families (food sector and industry), that each should satisfy at the end of each year; The unitary compensation value (k), discriminated between the two customer families; and, finally, on the fact that At the end of each year, undertaking i pays a total compensation (in ) equivalent to k(qi qi*) in case she sells above her quota (qi > qi*) or receives that same amount in case she sells below her quota (qi < qi*), It was straightforward to show that the total economic benefit the four undertakings got from the agreement corresponded, at least, to 5,2M during the seven years period, Consider, first, the determination of the unitary economic benefit, denoted by m i for undertaking i (specific to a given year), i.e. the unitary margin i obtained from the cartel in addition to what she would have obtained in a competitive (oligopolistic) environment. Theoretically, m i equals the mark-up differential between the observed anti-trust behaviour (cartel) and the unobserved state of a wellfunctioning competitive market, in oligopoly. Should there be no compensation scheme, undertaking i would get a total (annual) economic benefit (EB) equal to m i q i. Given compensations, the latter amount is increased by k(q i * q i ) in case she sold below her (target) quota and cut by k(q i q i *) in case she exceeded her quota. Mathematically, that means that the (annual) EB is, in general, given by: EB = m q k q q *), (1) i i i ( i i 52

148 DAF/COMP(2008)31 If i satisfied her quota (q i = q i *), she would not have received or paid any compensation and had thus: EB = m q *, (2) i* i i Undertakings selling below their quota always receive, at least, the compensation k(q i * q i ), albeit not selling (q i = 0). Such undertakings had thus always an incentive to cooperate, i.e. to keep the agreement. 1 Yet, ab initio when setting the agreement and at the beginning of each year, cartel members ignored how the market would have cleared at the end of the year and thus whether they would have met their quota, i.e. whether or not they would have had to pay a compensation. The existence and sustainability of the agreement (during, at least, seven years) implied, therefore, that the benefit each cartel member got by exceeding her quota covered, at least, the benefit she would have obtained should she had satisfied her quota. In other words, the expressions (1) and (2) above must, at least, be equal, namely: [ miqi i i i i k( q q *)] m q *, (3) or ( m k)( q q *) 0, (4) i i i Given that, as afore referred, this incentive compatibility constraint only mattered for undertakings exceeding their quota (q i > q i *), expression (4) was satisfied for those undertakings if and only if, m > q *), (5) ( q k In other words, a sine qua non condition for the agreement to last (as it has lasted), ab initio when it was established (in October 1997) and a posteriori given its duration (up to January 2005), was that the EB an undertaking retrieved from one ton of salt (m) covered, at least, what she was prepared to pay as compensation (k) for that same quantity (in case she exceeded her quota). Given result in (5), it follows from expression (1) above that the EB an undertaking exceeding her quota retrieved from the cartel was, at least, equal to: EB ( q> q*) = kqi k( qi qi*) = kqi*, (6) Whilst result in (2) above ensures that m i > 0 (for all i), as an undertaking selling below her share received always, at least, the compensation, it is irrelevant for her the way her m i is determined. 1 Undertakings selling below their share have thus an unbiding incentive compatibility constraint. 53

149 DAF/COMP(2008)31 In other words, whilst result in (5) above holds for undertakings exceeding their quota, undertakings which sold below their quota might have an unitary EB (m) satisfying 0 < m i < k; the EB they retrieved from the cartel would always be, at least, equal to the value of their compensation, namely EB < q*) = k( qi * q ), (7) ( q i Q.E.D. 54

150 DAF/COMP(2008)31 LEXICON DG EC ECJ EC Treaty EU NCA PCL PCA Lisbon Commerce Court (Tribunal do Comércio de Lisboa) Lisbon Court of Appeal (Tribunal da Relação de Lisboa) Directorate General European Commission European Court of Justice Treaty establishing the European Community European Union National Competition Authorities Portuguese Competition Law (Law No. 18/2003, 11 th June) Portuguese Competition Authority the national Court of first instance in competition cases the national Court of second instance in competition cases 55

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152 DAF/COMP(2008)31 UNITED KINGDOM 1. Introduction Competition law is designed to underpin the efficient operation of markets and thereby promote economic growth. As such, it is to a large extent based on economic concepts, and economic analysis and evidence lies at the heart of many actual competition cases. When bringing competition cases, or defending its decisions on appeal, the UK Office of Fair Trading (OFT) therefore lays great emphasis on the robustness and clarity of presentation of its economic analysis and evidence. We typically receive economic submissions from the parties involved, the analysis for which will usually have been carried out by specialist economic consultancies (or occasionally academic economists). In order to review these submissions, and to develop our own economic thinking and evidence, the OFT regularly uses both its own staff economists and input from independent expert economists. Economics is fully embedded within the work of the OFT. We have around 60 staff economists, and for the past seven years the OFT has been headed by an economist. 1 As a competition authority, the OFT is a decision-making body, rather than a prosecuting authority (as in some other countries) which is required to present each of its cases to a court for decision. As such, the OFT is typically only involved in presenting complex economic theories to judges when its competition decisions are appealed. The OFT is also a consumer authority, and under consumer law we have a prosecutorial role, rather than a decision-making role. Consumer cases may in some cases involve economic issues, and are heard by non-specialist courts. We also have a role in providing amicus briefs to the courts in competition cases which raise important policy issues, but in which we have had no direct role. These can potentially cover economic issues. In addition, the OFT has experience of presenting economic evidence to Courts under the previous competition law regime, and specifically under the now-superseded Restrictive Trade Practices Act. Based on this experience, the OFT has developed a set of ten key principles for presenting economic evidence, both in its own decisions and elsewhere. These are set out at the end of this short paper. 2. The UK Appeals Process The competition decisions made by the OFT (and its concurrent Regulators) may be appealed in the first instance to the specialist Competition Appeal Tribunal (CAT). Although strictly speaking its role is that of an appeal court, the CAT is able to determine facts and make its own decision in competition cases. Notably, the CAT s three-person tribunal will typically include an economist, especially where the case raises economic issues. 1 Formerly Sir John Vickers, and currently John Fingleton. (The current non executive Chairman of the OFT, Philip Collins, is a lawyer). The OFT s sister authorities the Competition Commission (CC) and the concurrent sectoral regulators also place great emphasis on the quality of their economic analysis and evidence. 57

153 DAF/COMP(2008)31 Appeals of CAT judgments (on points of law only) pass to the non-specialist Court of Appeal and ultimately to the House of Lords, the UK s Supreme Court. In principle, the CAT may give directions for the appointment and instruction of experts, whether by the CAT itself, or by the parties. This can provide evidence that assists the CAT in completing the proceedings in a cost efficient way. On occasion, the CAT has set up a structured debate on specific points between the parties and their respective experts, an activity which has become known as hot tubbing. These powers, and the composition of panels in appeal cases, would suggest that the CAT will tend to have a greater understanding and appreciation of economic theory in competition cases, than judges (for example, those in the English Court of Appeal) or courts who will often not have backgrounds in economics, or indeed competition law. 3. Presenting Economic Evidence The OFT makes substantial effort, both in its decisions and in its submissions to the Courts, to ensure that its economic evidence and argument is explained and presented carefully and clearly. The OFT has the option of bringing in external economic expertise in specific instances. This is costly, but we have done it on occasion. For example, in defence of an appeal to the CAT against the OFT s original decision against Mastercard s Interchange Fee 2 (now set aside), we employed two US academic economists who are expert in the area of multi-sided platforms. We have occasionally considered using our own economics staff as expert witnesses. So far this has not proven necessary in practice. The OFT has more usually chosen to present its economic evidence to the courts through its lawyers (independent advocates instructed by the OFT specialising in competition law). This can require substantial preparation time to ensure that the lawyers sufficiently understand the underlying economics and its application to the case, and they clearly never become experts. However, a major advantage of this strategy is that our lawyers once convinced of an economic case are typically better at describing it to a court in terms that judges not versed in economics find compelling. The OFT s 1999 case against the joint selling of television rights by Premier League football clubs (taken under the Restrictive Trade Practices Act 3 ) is a good example of the converse; a situation in which a judge found it difficult to grasp and adjudicate on the economic evidence presented by two expert economists. In this case, the judge, Mr Justice Ferris commented in court as follows: I speak only for myself, and I do so without criticising anybody, but I have to say, I have never listened to evidence in any court for an hour and understood so little of it as I have understood during the last hour. It may all be as clear as daylight to my colleagues. 2 3 Office of Fair Trading, Investigation of the multilateral interchange fees provided for in the UK domestic rules of Mastercard UK Members Forum Limited (formerly known as MasterCard/Europay UK Limited), 6 September Decision No. CA98/05/05. In the matter of an agreement between the Football Association Premier League ltd & the Football Association ltd & the Football League ltd & their respective member clubs : in the matter of an agreement relating to the supply of services facilitating the broadcasting on television of premier league football matches & the supply of services consisting in the broadcasting on television of such matches (Judgment 27 August 1999) 58

154 DAF/COMP(2008)31 All I can say is that anybody who really wants to make sure that I understand and have the ability to make an evaluation of this kind of material that we have has a very long way to go in educating me as to how I should deal with it. At the moment, I am firmly, myself, of the school which says this is all too difficult, we had better give up. I simply warn that - I am very sorry, it is all above my head. I will sit here quietly and let it all wash over me for a reasonable amount of time, but I think that those who are asking the court to rely on this must be under no illusions that at the moment, so far as I am concerned, this is all washing over my head. I am thinking of buying a little flag which I can raise when we get to a part of the case that I just do not understand, but perhaps a notional flag will do. It is up at this part of the case. This was in the context of highly complex and technical witness evidence on appropriate techniques for econometric regression in this case. In the final judgment, the rather more judicial wording read as follows: The evidence of the econometricians displayed an enormous degree of expertise and diligence, but we have to say that we found it of limited assistance. Mr. Bishop and Dr. Szymanski had exchanged a number of reports dealing with the attempt to measure, by the application of statistical processes, the impact of television coverage on attendances at matches. Unfortunately there was little common ground between them. Having regard to this fact, the highly technical nature of the statistical discipline which was being applied, the limited scope of the underlying data and the difficulties involved in taking proper account of all the factors which may affect a person's decision whether or not to attend a football match, we do not feel able to prefer the evidence of one of the experts to that of the other Ten key principles for presenting economic evidence As described above, the UK CAT, due to its composition, should be in a better position to take in, and adjudicate on, economic evidence than a court where the judge(s) are not versed in economics. Nevertheless, the OFT considers that there are ten key principles that it is useful to seek to follow when presenting complex economic evidence to any Court, or indeed to a competition authority. 1. Explain underlying intuitions. In some cases, economists fail to describe the underlying intuitions behind their findings. It is important to remember that judges who are not versed in economics may not fully understand the intuition underlying even basic economic concepts, such as why three competitors are typically better than two, let alone more complex concepts such as the effects of competitors exchanging information or predatory or exclusionary conduct. One useful tool for providing the intuition behind complex economic concepts is by way of analogy or by using worked examples. 2. Ensure that economic theories are grounded in the facts of the case. While any economic model will necessarily involve some degree of abstraction from reality, it is important to ensure that the key elements of any economic theory employed are broadly grounded in the empirical evidence. The OFT was criticized by the CAT failing to do exactly this in its judgment in the appeal against the OFT s Attheraces (ATR) decision: 4 It seems that the OFT faced an uphill struggle in explaining the economic reasoning underlying its case. When the case was mentioned in the UK Parliament, one Member of Parliament (David Mellor) commented: I cannot imagine how even some pointy-headed quasi-intellectual in the Office of Fair Trading could seriously believe that [the independent selling of TV rights by Premier League clubs] lies within the world of practical reality. (Hansard, 2 nd July 1996). 59

155 DAF/COMP(2008)31 Ultimately, however, the whole [ ] question appears to us to be anyway probably too theoretical to be of real practical utility. The OFT s case is founded on the assertion that ATR could have gone about the purchasing exercise in a fundamentally different way from that which ATR originally acknowledged was the only practical way; and that, had it done so, it could have picked up the requisite rights at an appreciably lower price. [I]n our judgment the evidence before the OFT did not entitle them to be confident as to the correctness of their interpretation of such events. 5 Likewise, in the recent appeal Albion Water Limited v Director General of Water Services, the CAT was clearly more positively disposed towards the expert evidence of one witness, which it viewed as practical and dynamic than the evidence submitted by another witness, which it characterized as theoretical and static Know and explain the limits of your data. A common technique in challenging empirical analysis is to point to one or two of the underlying data points and show that they are shaky, or even wrong. In most cases, these one or two data points will not actually be determinative of the analytical conclusions reached, but this form of attack on the evidence can undermine a Judge s confidence in the analysis. It is therefore important to check the robustness of the data and the likely effect of changing the data before getting into Court, in order to be in a position to show that any apparent data deficiencies do not affect the overall conclusions Carry out sensitivity analysis. Another common technique in challenging economic modeling work is to show that the assumptions underlying the model are not precisely accurate. Sensitivity analysis can be used to demonstrate that the same results hold under a variety of different realistic assumptions, which in turn makes modeling analysis more robust to such criticisms and assists in building a judge s confidence in the evidence. 5. Employ (and develop) simple rules. In a legal context, it can be valuable to provide and justify an analytical rule or approach, before going on to apply it. The most commonly used rules in competition cases are the Areeda-Turner (or Akzo) test for predation and the Hypothetical Monopolist (or SNIIP) test and Critical Loss Analysis for market definition. Economists have an important role to play in developing the set of useful rules. However, it is also important to note that these simple rules can potentially be misleading in some circumstances and cannot always be applied dogmatically. Economists also have an important role to play in explaining when and how this can occur and thus why the application of the rules will be appropriate in some cases, but not in others. 6. Use plain, non-technical language. Economists sometimes forget that non-economists find it hard to understand economic terms, such as what a regression means, let alone heteroscedasticity (see Premier League case above). The correct technical terms must be used, but they must be explained in plain, non-technical language and often the use of analogies is helpful. Plain language and analogies should not, however, be used at the expense of the accuracy and robustness of the economic reasoning The British Horseracing Board v Office of Fair Trading, [2005] CAT 29, paragraphs 200/201. Albion Water Limited v Director General of Water Services, [2006] CAT 23, paragraph 662. An alternative solution to this problem can be for the Court to require both parties to use a dataset that they have jointly agreed upon in carrying out their analysis. 60

156 DAF/COMP(2008)31 7. Where possible, draw on the established stock of economic theory, not the latest advances. Economic theory is continuing to develop quickly in a number of areas (for example, buyer power and multi-sided markets). While recent developments explored in newer papers can be useful in supporting or complementing established theories, the latest papers can sometimes be less robust than the body of established theory. This point has been emphasised (although not in the context of court submissions) in a speech by Professor Paul Klemperer. 8 Hence the latest advances need to be presented with caution and in context. 8. Make sure the economic case is well aligned with the legal case. In some cases presented to the OFT (especially in the mergers field) or by parties in court in competition cases, the economic and legal analyses are presented as more or less distinct sets of arguments, and can even make inconsistent assumptions. This is particularly common when the economic evidence is included as an annex to the main submissions, rather than being fully embedded within the submissions. Judges will be well used to dealing with properly presented legal submissions and may be confused by a set of separate, unintegrated and inconsistent economic arguments and thus tend to discount them. 9. Don t try to use complex economics as a smokescreen for weak arguments. If the case is weak on the evidence and/or economic theories, no amount of complex economic evidence is likely to save it before a judge. All you are likely to do is annoy the judge. But this does not mean that competition authorities should not pursue complex economics in the appropriate cases, even where the economic theory is still being developed and its application explored. 10. Ensure your expert witness is well prepared and doesn t hector or talk down to the Judge. Completely obvious, but sometimes forgotten. Expert witnesses are likely to have written extensively and given evidence in other cases. They need to be prepared to deal with apparent inconsistencies or contradictions between their evidence in the case in question and positions taken elsewhere; in some cases it may be better to deal with this as part of their initial evidence so that the Judge s confidence in the witness and the evidence is not undermined when the evidence is examined in court. And judges never like to feel that they are being patronised! 8 Paul Klemperer, Using And Abusing Economic Theory, 2002 Alfred Marshall Lecture to the European Economic Association. Reprinted in Journal of the European Economic Association,

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158 DAF/COMP(2008)31 UNITED STATES 1. Introduction Apart from cartel cases, the application of competition law always involves economic analysis in some form. An important element typically is the delineation of a relevant market, and the ultimate issue is whether the suspect conduct has had, or is likely to have, an anticompetitive effect. Economic analyses of various sorts are required for sensible and persuasive market delineation or competitive effects assessment. Economic analysis provides not only specific tools useful in informing the analysis of particular issues, but also the essential logic that brings order to the chaos of real world factual settings. Successfully presenting a (non-cartel) competition case to a judge, therefore, requires effectively communicating economic analysis in a manner understandable to someone who has not necessarily had special training in economics, and who may have no prior experience with competition law. This is often a difficult task. Although the best practices in any particular case will depend on the particularities of the case and applicable procedural rules, the experience of the U.S. enforcement agencies suggests three general principles for efficiently and effectively presenting complex economic analysis to judges. First, economic analysis should be fully integrated into the presentation of the case. It generally is counterproductive to treat economic analysis as a separate and discrete element of proof. Second, economic analysis should be fully and carefully explained in terms that are understandable, or a judge is not likely to rely on it. Third, the opinions of economists should be firmly grounded in the models and methods of economics and, when appropriate, be empirically validated. Economists are most persuasive when they do not stray outside their areas of expertise and do not adopt an advocacy posture in particular litigation. 2. Economic Analysis Should Be Fully Integrated Into the Presentation of the Case The core issue in a competition case commonly is the actual or likely impact of particular conduct on the competitive process and its resulting implications for consumer welfare. Proper adjudication of such a case demands that a judge thoroughly understand how the competitive process operates, what role in the process is played by the competitors whose conduct is at issue, exactly how the conduct at issue affects the process, and what implications for consumer welfare that effect is apt to have. Effectively presenting such a case, therefore, requires weaving the factual threads into a tapestry realistically depicting the competitive process and illustrating the impact of the conduct at issue. Properly applied, economic analysis can turn jumbled facts into a coherent pattern. For economic analysis to perform this function, it is vitally important that the relevant analysis be communicated to a judge clearly and in a timely manner, and every opportunity should be taken to communicate the relevant economic analysis. What opportunities exist depends on particular legal institutions, but a judge is likely to have latitude with respect to procedures, and a competition agency should make constructive suggestions as to what may work best for the judge. When possible, a judge should be provided with a written statement setting out the legal theory of the case and the associated economic analysis, and this statement should be provided as early in the 63

159 DAF/COMP(2008)31 proceedings as possible. 1 Such a statement should be the product of robust collaboration between economists and lawyers, it should fully integrate the law and economics in the case, and it should commit the agency to a particular legal theory and economic analysis that is maintained throughout the case. A written statement is likely to be far more accurate, clear, complete, and concise than any oral presentation could be. Providing the statement in advance allows a judge enter the courtroom with a reasonably clear picture of the case already in mind. In no event should the jumble of facts be laid before a judge before a framework for their analysis has been established. Although extremely useful, a written statement is unlikely to be entirely adequate. A judge almost certainly will have questions about the relevant economics and how it applies to the case. It is highly desirable to use a procedure through which the judge has an early opportunity to ask questions raised by the written statements of the opposing parties. Clearing up points troubling the judge may enable the judge to focus better on the evidence to be presented and to view it in the proper light. Many questions are best addressed by an economist. The depth of understanding that comes from advanced technical training and experience in the practice of economics can be critical in providing clear, and above all, accurate, answers to a judge s questions. An interesting approach used by a judge in a case brought by one of the U.S. enforcement agencies was to preview the testimony of all of the economic experts prior to the trial. Each of the experts was given an opportunity to provide an overview of the case in narrative form, and the judge asked questions. 2 A competition agency should not hesitate to propose novel procedures that could provide a judge with a better understanding of, or an earlier exposure to, the economic analysis in a case. 3. Economic Analysis Should Be Fully and Carefully Explained A judge is not likely to be persuaded by mere assertion. Economic analysis can be expected to play a prominent role in a competition case only if it is fully and carefully explained. The explanation should indicate what models or methods of economics have been employed and basically how they work, why those models or methods are suited to the specific task of understanding the actual or likely competitive effect of the particular conduct at issue, and how those models or methods support particular conclusions on the basis of the facts of the case. 3 Almost as important as explaining why an agency s economic analysis is appropriate is explaining why its analysis is more appropriate than the competing analysis put forward by the defense. An agency and its economists should explain why their analysis is more consistent with the facts of the case or economic literature, or simply how its logic is more compelling Two U.S. trial judges indicated when interviewed that they would be receptive to counsel s request for an early opportunity to brief the key economic issues in the case. Lisa A. Wood, Trying Antitrust Cases Before Generalist Judges, ANTITRUST, Fall 2006, at 85, 86. Another wrote that judges frequently need to understand the technical material long before the case gets to trial. Lewis A. Kaplan, Experts in the Courthouse: Problems and Opportunities, 2006 COLUMBIA BUSINESS LAW REVIEW 247, 254. The case was United States v. First Data Corp. and Concord EFS, Inc. (D.D.C., filed Oct. 23, 2003), Trade Cas. (CCH) 74,481 (2004) (final judgment and competitive impact statement). The case was settled between the expert preview and the start of the trial. Under rules applied in U.S. federal courts, expert testimony, including from economists in competition cases, is admissible only if there is a good fit between the testimony and the pertinent inquiry. Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 591 (1993). Courts exclude opinions when there is too great an analytical gap between the data and the opinion proffered. General Electric Co. v. Joiner, 522 U.S. 136, 146 (1997). In one competition case, the appeals court demanded a thorough analysis of the expert s economic model, holding that it should not be admitted if it does not apply to the specific facts of the case, and the court excluded the expert s model because it was not grounded in the economic reality of the industry. Concord Boat v. Brunswick Corp., 207 F.3d 1039, (8th Cir. 2000). 64

160 DAF/COMP(2008)31 The vast majority of economic concepts applicable in competition cases can be clearly and succinctly explained. Economic theory and econometrics can be presented to judges in a non-technical manner that omits most details, unless specifically queried on them by the judge, but nevertheless avoids statements that are so simplistic that they are highly misleading. It is rarely either necessary or wise to sacrifice substantial accuracy in the pursuit of comprehensibility, and it is most unwise to simplify so much that the essential logic is lost and no economics actually remains. 4 Effectively communicating complex economic analysis demands a great deal of advance preparation. Typically, it is best to begin with an objective description of the factual setting that is detailed, precise, and above all clear. To the extent possible, the description should be presented in the form of tables, graphs, and charts (as well as in narrative form), and it should include the key quantitative details necessary to understand the case. The economic analysis can then begin to explain which are the key facts and how they matter. When a case raises an empirical issue, such as the elasticity of demand, the economic analysis should explain why it is a key issue and how data and inference inform the issue. When a case raises a theoretical issue, such as how a merger alters unilateral pricing incentives, the economic analysis should articulate a relevant model of competitive interaction and explain what assumptions drive the model and why they are reasonable in the context of the case. The presentation of economic theory should be made as concrete as possible and should be made quantitatively whenever that is feasible. 4. The Opinions of Economists Should Be Firmly Grounded in Economics The U.S. enforcement agencies believe that an economist is unable to educate or persuade a judge if the judge perceives that the economist is acting merely as an advocate for a litigating position. 5 This perception is best avoided by making sure that an economist offers sound economics, and does nothing else, when appearing in court. In preparing for court, competition agencies should carefully consider both the conclusions and methodologies of their economists. Agencies should strongly discourage their economists from offering opinions for which they are unable to articulate a clear basis that is firmly grounded in the models and methods of economics and also the facts of the case. Although economic experts should not act as advocates for a litigating position, they should act as advocates for their own economic analysis. In coming to any useful view in a competition case, an economist makes many choices. For example, an economist in a merger case may chose some particular basis for assigning market shares (e.g., sales or capacity) or rely on some particular theoretical model of competitive interaction for predicting the price effects of a proposed merger. If these choices appear to matter and yet seem arbitrary, a judge is unlikely give much weight to the economist s conclusions. Thus, an economist should always explain the logic underlying these choices based on knowledge, experience, and especially the evidence in the case. 4 5 At the Fordham conference on International Antitrust Law & Policy, a judge of the Court of First Instance commented: I don t think it is a good idea that we be provided with an economic message which is economics for beginners really. We would like to have the full demonstration in economic terms.... If you want to raise the importance of economics in courts, give us the real thing. Economic Experts before Authorities and Courts Roundtable, in 2005 FORDHAM CORPORATE LAW INSTITUTE 615, 642 (Barry E. Hawk ed., 2006). In the United States, where expert witnesses are used extensively in jury trials, a common critique is that they often act not as experts at all, but rather as advocates for the position taken by the litigant that engaged them. See, e.g., Lewis A. Kaplan, Experts in the Courthouse: Problems and Opportunities, 2006 COLUMBIA BUSINESS LAW REVIEW 247,

161 DAF/COMP(2008)31 5. The Use of Complex Economic Analysis in Appellate Courts In the United States, appeals in competition cases generally do not reconsider the factual findings made by the trial court; 6 rather, they address points of law. The logic of competition law is thoroughly infused with economics, so rules of competition law generally have rationales based on economic analysis, and many rules of competition law themselves invoke economic analysis. Thus, economic analysis can play a central role in an argument for the adoption of a particular rule of law or in an argument for a particular interpretation of an existing rule. In the United States, appellate arguments are almost entirely written in briefs with strict word limits. Consequently, economic analysis must be presented concisely and selectively. An appellate brief in a competition case should identify the key strains of economic analysis bearing on the legal questions posed by the case, concisely relate the basic logic of and insights from the economic analysis, and refer the court to significant contributions in the economic literature. Painstaking drafting may be required to convey the essential logic of the economic analysis in a manner comprehensible by a generalist judge and to strike the right balance between simplicity and accuracy. Economic jargon generally should be avoided and any essential terminology should be clearly defined. Perhaps most important, an appellate brief in a competition case should clearly explain why the economic analysis presented should be given significant weight in deciding the questions of law that have been posed. 6 Findings of fact are set aside on appeal only if found to be clearly erroneous. Consequently, factual findings normally are not challenged. 66

162 DAF/COMP(2008)31 CASE ANNEX 1. United States v. Visa U.S.A. The effective presentation of complex economic analysis was central to the Department of Justice s successful lawsuit against the Visa and MasterCard credit card networks. In this civil non-merger case, the government alleged that the defendants violated Section 1 of the Sherman Act through certain governance arrangements and through the adoption of exclusionary rules that kept member banks from issuing cards on other networks (such as American Express and Discover). The case was presented to a federal judge (without a jury) in a trial that lasted 34 days with thousands pages of trial testimony and close to six thousand admitted exhibits. To prove its case, the government put forth economic analysis with respect to the essential elements of the case market definition, market power, and competitive effects from its expert, Dr. Michael Katz, Professor of Economics and Business Administration at the University of California at Berkeley. Utilizing sound and accepted methodologies, Professor Katz provided his expert opinion to the court that the defendants had market power in the properly defined relevant markets and that the challenged conduct was anticompetitive. In the end, the district court agreed with the government s and Professor Katz s core contentions, finding that the exclusionary rules violated the antitrust laws, and the Court of Appeals affirmed that finding 1. The process of presenting coherent and persuasive expert testimony began long before trial. Recognizing the importance of economics to the ultimate outcome of the case, the government retained Professor Katz at the early stages of the matter, making sure that he was involved with the development of the case throughout the discovery and pre-trial periods. For example, Professor Katz attended important depositions, reviewed documentary material, and considered the defendants arguments as the case developed; in this and other ways, he became well-versed in the myriad details of the important issues well before trial began. As the case progressed from discovery toward trial, the government took advantage of opportunities to present to the Court the relevant economic issues and frame our view as to the appropriate analysis. While there was no formal pre-trial hearing on economic issues, the government set forth the general economic concepts in various legal briefs, and, in the pre-trial brief, provided a detailed explanation of the disputed economic issues. At trial, the government called Professor Katz as its final witness, after the numerous fact witnesses had been heard and documentary evidence submitted. In his direct testimony, Professor Katz fully and carefully worked through the numerous issues, explaining his methodology, highlighting key evidence, and making extensive use of charts, graphs, and other visuals. His testimony on market definition provides an example of the importance of using economic analysis to provide a framework for analyzing the evidence. The government had to prove that credit card network 1 United States v. Visa U.S.A. Inc., 163 F. Supp. 2d 322 (S.D.N.Y. 2001), aff d, 344 F.3d 229 (2d Cir. 2003), cert. denied, 543 U.S. 811 (2004). The district court ruled in the defendants favor on the allegations concerning governance practices, and the United States did not appeal that finding. 67

163 DAF/COMP(2008)31 services constituted a relevant market, and that, from a consumer perspective, credit cards were a market distinct from other forms of payment. To support its market definition, the government presented extensive testimony and documentary evidence demonstrating consumer preferences, merchant and bank requirements (merchants and banks are the customers of credit card network services), and admissions by the defendants. In his testimony, Professor Katz was able to synthesize this extensive evidence and, applying the appropriate economic tests and performing empirical analyses, opine that the evidence amply supported the government s proffered relevant market. The Court agreed, assessing the evidence in the framework of Professor Katz s opinion. 2 As stated above, economic analysis used in litigation should be carefully explained to the court and be firmly grounded in economics. The debate at trial surrounding a survey proffered by MasterCard s expert demonstrates the types of disputes between opposing economic experts that courts must resolve. MasterCard s expert claimed that a survey of consumer preferences demonstrated that, in the face of a price increase, consumers would readily switch from credit cards to other forms of payment. Professor Katz disputed this finding, testifying that the study contained a fundamental and crucial error, i.e., it based the price increase on the price of the product being purchased rather than the cost of the use of the credit card. The defendant Visa s expert was forced to concede the importance of MasterCard s expert s error. In the end, the Court found that given the facts of the credit card industry and the issues raised by Professor Katz, it is essentially impossible to make a definitive calculation of consumer price sensitivity or elasticity of demand via survey a finding that served to refute the MasterCard survey. 3 In retrospect, one aspect of the expert presentation was not particularly effective. The parties had agreed to provide the direct testimony of the experts through written statements. There was no live direct examination of the economic experts, meaning that Professor Katz (and the defendants experts), upon taking the stand, immediately were subject to cross-examination by counsel for the opposing party. Although the judge had previously been provided the experts written direct testimony, this procedure made for a somewhat confusing courtroom presentation of the important economic issues. While it may be impractical (indeed, tedious) to present an expert s entire direct testimony through live questions and answers, it would be worthwhile to petition the court for an abbreviated live direct examination where the expert could provide the court an overview of his or her written statement prior to hostile crossexamination. In conclusion, the Department s experience in the Visa case shows the importance of presenting sound and persuasive economic analysis to the court. A credible expert can provide invaluable assistance to assist the court in putting voluminous evidence in context, providing a framework for addressing the ultimate legal questions, and, ultimately, reaching the correct decision. 2 3 See Visa, 163 F. Supp. 2d at The structure of the Court s opinion itself shows the importance of using economic testimony to provide a framework for the relevant analysis. In its discussion of market definition, the Court initially sets forth Professor Katz s opinion and methodology and then discusses the evidence that supports his conclusions. The Court of Appeals echoed this analytical structure when it, citing the explanation of the government s expert witness, found no reason to doubt the District Court s market definition finding. 344 F.3d at 239. Visa, 163 F. Supp. 2d at 336. For a more in-depth discussion of the issues surrounding the survey, see pp of the United States appellate brief. Brief for the United States, United States v. Visa U.S.A., available at 68

164 DAF/COMP(2008)31 2. In the Matter of Evanston Northwest Healthcare Corp., Docket No (Federal Trade Commission Decision 2007) This case was a challenge to a consummated merger of two Chicago-area hospitals. Evanston Northwest Healthcare Corporation (ENH) acquired Highland Park in January The acquisition combined ENH s Evanston and Glenbrook Hospitals located in Cook County, Illinois with Highland Park, the nearest hospital to the north. Under its statutory authority, the Federal Trade Commission (Commission) filed an administrative complaint in February 2004, alleging that following the acquisition, ENH was able, as a result of the transaction, to raise its prices charged to health insurers far above price increases of other comparable hospitals. The matter was tried before an Administrative Law Judge (ALJ) of the Commission. According to the Commission s complaint, the price increase resulted in higher costs to insurance purchasers and hospital services consumers. The complaint alleged that the merger violated Section 7 of the Clayton Act. Economic analysis provided the basis for much of the evidence that the merger was anticompetitive. Prior to this action, combined, the Commission, the Department of Justice, and the California Attorney General s Office lost their last six hospital merger challenges. In most of these cases, the courts reasoned that it was unlikely that the merging parties would increase prices anticompetitively because patients and their health insurers would continue to have many hospital choices. This conclusion was based on findings of relatively large geographic markets for hospital services, which in turn was based on the observation that many patients travel long distances for hospital care. Economic studies, however, suggested that insured patients rarely face a change in their relative outof-pocket costs when a hospital in their health plan s network increases its price. Moreover, key to hospital prices is the negotiation between the health plan and the hospitals for inclusion in the health plan s network. Hence, patients who see no change in the relative price of hospitals in their network are unlikely to switch hospitals in response to a price increase unless their health plan drops the hospital from its network. Thus, if patients do not switch hospitals, as economic studies indicated, geographic markets are typically smaller than those found by the courts in previous hospital merger challenges. The Commission s challenge to ENH presented an opportunity to change judicial thinking on this issue. In most industries, even those that are very competitive, prices increase over time. A simple observation of a post-merger price increase does not necessarily imply an increase in market power. To test for an increase in market power, one needs to measure the difference between the post-merger price increase and the price increase that would have occurred absent the merger. Because the latter cannot be observed, proxies for this but-for price increase are needed. A good proxy for the but-for price increase is the contemporaneous price increase that occurred at non-merging hospitals that are similar to the merging hospitals in most other respects. Despite the differentiation of hospitals that makes the selection of a control group difficult, the difference in differences method of isolating the price effect of the merger has the inherent advantage of differencing out any unexplained, but hospital-specific variation in prices. The trial was held before an Administrative Law Judge in late 2004 and early Each side sponsored expert economic testimony, which informed the trier of fact of the respective sides economic analysis and conclusions. Both ENH and the Commission litigation teams found that the post-merger price increase was larger than the price increases at control hospitals, although ENH s economic expert s estimate of this difference was slightly smaller than the estimate of the FTC staff s economic expert. In briefing and in testimony during the trial, FTC staff argued successfully to the trier of fact that this relative 69

165 DAF/COMP(2008)31 price increase was evidence that ENH had gained market power through the merger and that, therefore, the merger was illegal. The Commission s expert economist at trial was an outside academic economist. She was assisted in her research by the Commission s internal economics staff, who worked closely with staff attorneys. At trial, she testified first about the nominal post-merger price increases that had taken place. Then, she explained how her analysis of the merged hospitals in comparison with the control group of hospitals sought to separate benign causes of the post-merger price increases from any portion due to the anticompetitive effects of the merger. Finally, the witness described and displayed her econometric estimates using several demonstrative slides to help the ALJ grasp the analysis. In a decision released in October 2005, the ALJ ordered the divestiture of Highland Park Hospital by ENH. In August 2007, the full Commission affirmed on liability, but ordered a more limited remedy in the case. 3. In the Matter of Chicago Bridge & Iron Company N.V., Chicago Bridge & Iron Company, and Pitt-Des Moines, Inc., Docket No (Federal Trade Commission Decision 2005) In an administrative opinion issued in January 2005, the Federal Trade Commission affirmed an Administrative Law Judge s (ALJ) ruling, issued in June 2003, that Chicago Bridge & Iron Company (CB&I) illegally acquired certain Pitt-Des Moines, Inc. (PDM) assets. CB&I completed the acquisition of PDM assets in February 2001, while the agency was investigating the transaction. The Commission found that the acquisition substantially lessened competition in four relevant product markets in the United States. The Commission therefore held that the acquisition violated Section 7 of the Clayton Act and Section 5 of the FTC Act. At the time of the acquisition, CB&I was one of the world s leading global engineering and construction companies. PDM was a diversified engineering and construction company, and a distributor of a broad range of carbon steel products. Prior to the 2001 transaction, CB&I and PDM competed against each other as the two leading U.S. producers of large, field-erected industrial and water storage tanks and other specialized steel-plate structures. The Commission s complaint alleged, among other things, that the consummated merger significantly reduced competition in four separate markets involving the design and construction of various types of field-erected specialty and industrial storage tanks in the United States: liquefied natural gas storage tanks; liquefied petroleum gas storage tanks; liquid atmospheric gas storage tanks; and thermal vacuum chambers. During the trial, the Commission s legal team offered the expert economic testimony of an economist from the Commission s Bureau of Economics. The expert economist testified that CBI and PDM were by far the two strongest competitors in the U.S. market at the time of the merger and that other firms could not readily replace the competition lost through the merger. To assist the ALJ to contextualize the effects of the merger, the expert explained that economic theory offers various reasons why some firms might have an advantage in selling a product. These include lower costs obtained through learning-by-doing, a reputation for reliability obtained through years of successfully meeting customer expectations, and better access to key assets. With this contextual background, the Commission staff was then able to show that these specific factors made CBI and PDM the two strongest competitors in the markets in question. Using other fact witness testimony, the Commission s legal team offered evidence that buyers viewed CBI and PDM as the two strongest competitors in the market. Moreover, the companies own documents showed that the 70

166 DAF/COMP(2008)31 merging firms viewed each other as their strongest competitor in these markets. Evidence on the history of sales in these markets similarly went to show that CBI and PDM were the two strongest competitors. Given these facts, the Commission s expert economist, drawing on economic teachings, was able to offer the opinion that following the acquisition of its strongest competitor, a firm would be expected to increase price up to the point where it began to lose sales to other firms (either fringe competitors or new entrants). During his testimony, the Commission s expert economist made extensive use of demonstrative exhibits, including pie charts showing the percentages of U.S. projects built by the defendants, maps showing where CBI, PDM, and foreign firms had built liquid natural gas tanks throughout the world, and bar charts showing the size of CBI compared to smaller domestic firms. These aids helped to present the ALJ with a more understandable picture of the relevant markets, the competitive presence of the defendants in those markets, and the anticompetitive effects of the merger. Following the trial, the ALJ ruled that the acquisition was anticompetitive. The Commission affirmed and, to restore competition as it existed prior to the merger, ordered CB&I to create two separate, standalone divisions capable of competing in the relevant markets, and to divest one of those divisions within six months. In January 2008, a federal appeals court affirmed the Commission s opinion in the case. 4 4 See Chicago Bridge & Iron Co. v. Federal Trade Commission, No (5th Cir. Jan. 25, 2008). 71

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168 DAF/COMP(2008)31 SOUTH AFRICA The South African competition authorities rely substantially on evidence presented by economists, acting in merger hearings and restrictive practices cases as experts for the Commission, for merging parties, for interveners, complainants and respondents. Economists generally present five kinds of evidence: (1) evaluation of strategic, marketing and other documents and the economic interpretation of these; (2) an analysis of descriptive data including prices, production capacities, output and sales, transport costs and investments required to enter and expand in a market; (3) econometric estimation of demand and supply relationships to establish in particular the degree of substitutability based on data developed independently or by one or other of the interested parties in a matter; (4) direct surveys of customers and competitors undertaken by the economists themselves, generally in intermediate input markets where the number of customers and competitors is limited, as well as analysis of independent larger sample surveys; and (5), modeling exercises where the costs and benefits of different sorts of behaviour are evaluated in merger analysis, or models that assess the impact of a firm s behaviour on competition in the case of abuse of dominance cases or restrictive agreements. We will focus on four points. These are the composition of the adjudicative bench; the methodology of economics and its interrogation in proceedings; the notion of the economist as independent expert witness ; and the nature of empirical evidence utilized in anti-trust hearings. 1. The composition of the adjudicative bench The Competition Tribunal is our effective court of first instance. This is an administrative body whose members are each required to possess suitable qualifications and experience in economics, law, commerce, industry or public affairs. The Tribunal comprises a pool of 10 full time and part-time members, 8 of whom are lawyers and 2 of whom are economists. Each hearing before the Tribunal is before a panel of three of these members appointed by the Chairperson. At least one of these members is required to have legal training and experience. A major consideration underlying the decision to utilise an administrative tribunal as the decisionmaking body in competition law (as opposed, that is, to the civil courts) was precisely the ability to appoint economists to the adjudicative body. Furthermore, the Tribunal has an extensive work load and most of its members are now well into their second term of office. Considerable experience built up through hearing many cases as well as from participating in international forums such as the OECD s Competition Committee and the ICN has resulted in those Tribunal members without any formal economics training developing substantial knowledge and experience in interpreting and assessing the arguments and analysis typically presented by economists. This has worked well for the Tribunal. However, the Competition Appeal Court the body that hears appeals from the decision of the Tribunal is comprised of serving members of the high court, none of whom have any training in economics. Important decisions of the Competition Appeal Court reflect its composition. While judges are naturally required to possess legal training and experience, nothing would preclude the body responsible for appointments to the court from seeking out those high court judges who also have some training in economics although there are probably few that even possess an undergraduate degree in economics. In the event it often appears that an attempt is made to overcome this shortcoming by appointing judges with commercial law experience in the mistaken belief that this constitutes a greater experience in economics. 73

169 DAF/COMP(2008)31 At the time of drafting the Competition Act consideration was given to requiring the court to sit with assessors who possessed expertise in economics although this was ultimately rejected. With hindsight the appointment of assessors with expertise in economics should have been required. An additional difference between the Tribunal process and that of the CAC is that the Tribunal ruling is the product of intensive engagement with the economic arguments and evidence presented during the hearing, that is, the economic debates which are thrashed out in some depth during a typical hearing. The CAC hearing is not well suited to engagement with these debates and thus the CAC has to fall back on the generally voluminous record in order to critically assess the arguments presented to it by the appellant. 2. Understanding the methodologies of economics One of the successes of the South African Tribunal processes is the level of engagement with economic theory and the key factual foundations on which the economic analysis rests. This has been particularly evident in the move towards a more effects based approach and the engagement with what John Vickers and others have termed the post -Chicago synthesis. Examples in recent years include cases turning on concerns of foreclosure, bundling, exclusionary behaviour and excessive pricing. Rather than complex econometric analysis these cases have involved critically assessing theory and evidence, in short, the methodology underlying the conclusions of the economists appearing before the Tribunal. Our experience points to the need for proper appreciation of the methodologies of economics and the nature and limitations of economic evidence on the part of competition adjudicators who have not had formal training in or experience of economic analysis. Attempts to overcome this through training generally involves attempts to teach non-economists esoteric industrial organization theory when they would rather be better served by training that focused on the methodologies of economic analysis and an understanding of the nature and limitations of economic evidence. Hence in the case of a relatively straightforward concept like the SSNIP test, we frequently encounter the expectation from the Appeal Court that the application of the test will produce a number that will be readily accepted by the parties before the tribunal. Greater experience with the methodologies of economics and, in this instance, particularly with the data limitations that economists face (particularly in the time frames of an anti-trust investigation), would help non-economists understand that the test expresses a methodological approach to understanding substitution and one that can rarely rely on uncontested data to produce a single numerical solution. These problems are compounded in the face of more complex theories and tests. 3. The economist independent experts or expert advocate? The economists presenting argument and evidence are generally presented in the category of independent, expert witness. The implicit analogy is with a scientist or medical specialist being called to provide expert testimony in, say, a road accident case. This representation is of course substantially at odds with reality. The truth is that the economists who give evidence in competition hearings do so as advocates of their clients cases, rather than as independent experts assisting the adjudicators. Many are credible academics but their case work is not subject to the peer reviews to which their academic work is subject. Nor is their profession governed by the same ethical rules as those of, say, the medical profession. They are then simply constrained, as would be any factual witness, to tell the truth although much of their evidence consists not of facts but of support for theoretical propositions that are frequently subject to significant contestation. This characterization applies with significantly less force to the economists representing the enforcement agency than to those representing private parties. 74

170 DAF/COMP(2008)31 It is difficult to know how to deal with this reality although the simple acknowledgement of their lack of independence if not of expertise may represent a step forward. A possible solution is for the court to subject their expert submissions to peer review through the use of expert amici curiae. To the extent that the theoretical positions of economist expert witnesses are subject to factual verification it is generally the case that their initial reports are filed before discovery takes place and so many facts are simply unavailable to them at the time of the drafting of their reports, although, of course economists for the parties in a merger should have the facts at their disposal. New facts emerge in oral evidence and even if, as is normally the case in our hearings, the experts are called after the presentation of a party s factual witnesses, they generally do not have the opportunity to absorb fully these new facts into the framework of the submissions on which they rely. Our proceedings are essentially adversarial with expert witnesses subject to robust cross examination. However not much of the cross examination goes to the merits of the contending theoretical positions. Generally the cross examination would attempt to establish that the economists submissions were merely theoretical propositions that enjoyed no proven relationship to the real world or, worse, that proven facts in the real world called into question the usefulness of their theoretical propositions. The theoretical positions may be more effectively elucidated and evaluated if the adjudicator were to set up the gathering of expert evidence in such a way that the experts wrote or even made their oral submissions directly to each other rather than through the intermediation of their legal counsel who, uncomfortable with testing the internal coherence or otherwise of theoretical economic propositions, prefer to focus on subordinating all theoretical propositions to real world empirical tests. We repeat though, that although solutions are not easy to find, the adjudicative process would be assisted by mere recognition that these independent experts are in fact more accurately characterized as expert advocates. 4. Economic Evidence Economic theories would have greater credibility if they were supported by more persuasive and intelligible factual evidence. Hence the theories that go to the question of changing incentives and strategic considerations are often usefully supported by strategic documents that are frequently brought to light in the discovery process. This evidence which is relatively easy to understand often elucidates the most complex economic theories that are presented to judges. There are two related points here. First, greater attention needs to be given to the gathering and presentation of data, including by the Competition Commission (as the enforcement agency). Parties in opposition to the Commission have an incentive to obstruct the collection of such data or to overstate its complexity and hinder its interpretation. As the Commission continues to build expertise this should be less significant, although will inevitably always be present. Second, particular attention needs to be given to clear explanation of statistical tests and the role and limitations of modeling exercises. The ability to adjudicate even relatively accessible theoretical propositions is often bedeviled by the inability to gather sufficiently comprehensive or sufficiently well focused data samples. The economists providing expert evidence including those of the enforcement agency - do not have the time or resources to carry out large market surveys. However consideration needs to be given to gathering credible consumer data even within the confines of these resource and time constraints. For example, greater use of consumer focus groups should be explored. Again data sets that are well chosen and clearly presented may be able to elucidate complex theoretical arguments and propositions. 75

171 DAF/COMP(2008)31 Statistical techniques used by economists in South Africa are price correlation tests for market definition and price-concentration studies, particularly in retail markets, to assess anti-competitive effects of a merger. Cross-price elasticities of demand are another means of defining markets, although these not often used due to data limitations. Other more exotic means of defining markets, particularly where competition is not based on prices, or where price data is not readily available, such as principal component analysis (a technique used to minimise the number of variables in a model, and produce new variables that essentially define markets), are also used from time to time. The intuition behind many of these techniques is readily explainable, although the limitations of these techniques must be fully understood. Hence the fact that prices of two products that move together indicates some level of discipline from one product to another is easy to understand. Interestingly expert economists in many instances fail to appreciate the limitations of the technique in a time series setting. For example problems of cointegration are rarely mentioned. In addition the limitations of simple correlations are often not appreciated such as accounting for the impact of other variables such as the products having similar cost components, which could be driving the similar price movements. That firm concentration affects prices is also intuitive; prices are higher the more concentrated markets are. The importance of measuring the impact of having one of the merging parties as opposed to both in different geographic areas is self-explanatory. However, one of the problems with these studies is that if the extent of the geographic areas over which concentration and prices are measured is not carefully determined, the results may be misleading. Demographic information, such as race and income, is also important to control for, as these factors determine willingness to pay to some extent, and may be causing prices in different areas to differ. Measuring crossprice elasticities of demand where there is some market power already present, gives rise to the cellophane fallacy, where products become substitutes because their prices are high due to market power, rather than any substitutability between the products. The usefulness of many of these statistical techniques in abuse of dominance cases is limited, since market power lies at the heart of the dispute, which will give rise to cellophane fallacy type problems. One of the most important problems facing an adjudicative body is the reliability of the data used in these analyses, which in a merger is usually provided by the merging parties themselves. These statistical analyses must also be weighed against documentary evidence and testimony by factual witnesses. Provided that these techniques are presented with their limitations, and the importance of documents and factual witnesses are given their proper weight, the economic evidence is likely to be of value to judges. 76

172 DAF/COMP(2008)31 BIAC 1. Introduction The Business and Advisory Committee (BIAC) to the OECD appreciates the opportunity to submit these comments to the OECD Competition Committee s Working Party No. 3 (WP3) for its roundtable on techniques for presenting complex economic analysis to judges on February 19, BIAC supports the growing acceptance of the proposition that modern antitrust enforcement should be based on a clear and objective assessment of effects as identified or measured by sound economic analysis. Among the reasons for this trend are the advances in economics made over the past two decades and growing convergence among economists on the proper framework of analysing for many areas of competition law. 1 Much of the progress that has been made can be attributed not to the most complex economic models, but often to the thoughtful application of the simplest, for example, the use of the SSNIP test as a means of examining market definition. To be sure, the progress in economic thinking has also included the development of more sophisticated quantitative techniques that may, for instance, be applied when simulating the (unilateral) effects of mergers. While these have usefully instructed internal agency consideration, they have rarely been the subject of a court challenge. Significantly, these fundamental developments coincide with increasing demands from courts for substantial economic support for antitrust challenges. As a result, a number of enforcement agencies have responded by creating or further developing institutional capacity and procedures to meet these demands. 2 At present, economic evidence is in particular relied on in merger control proceedings to identify the competitive interaction between the merging parties products and to assess (unilateral) effects and efficiencies. Similarly, economic models of anticompetitive foreclosure are progressively applied and tested by courts. And while the role of economic evidence is perhaps at first glance less at the forefront in the initial treatment of collusive and other per se illegal conduct, such analysis may still be important in helping to establish the existence of those agreements, to prove causation in damage analyses or to calculate pass-through pricing. BIAC is highly supportive of this trend. Consumer welfare is best served by a rational competition policy that is driven by the analysis of likely effects that is in turn firmly rooted in economics. The proper and transparent use of economics by agencies together with the resulting convergence of substantive norms contributes to a more level playing field for international business. 1 2 In some cases, such as in the EU, the growing willingness to apply economic analyses geared towards identifying actual economic effects (or proxies thereof) has resulted in legislative and regulatory reforms. See, e.g., John Vickers, Competition Law and Economics: a Mid-Atlantic Viewpoint, European Competition Journal, June 2007, p The reform package that the EC Commission has over the past four years implemented, in particular the Office of the Chief Competition Economist and devil advocate panels, is just one example. Other countries, like Denmark, The Netherlands and Italy, have also set up economics departments with trained econometricians and economists over the past years. All European agencies employ economists. 77

173 DAF/COMP(2008)31 BIAC appreciates, however, that agencies and courts across jurisdictions display varying degrees of sophistication when conducting economic analyses or failing to do so. In some instances courts have even openly acknowledges that the economics are too complex. 3 One such area of significant divergence is the extent to which jurisdictions have developed rules and procedures that regulate the introduction of economic evidence in particular expert witnesses in court proceedings and that seek to ensure the integrity and quality of economic evidence in the form of economic testimony or otherwise and thereby stimulate courts to accept this type of evidence. It appears that these requirements are more developed in jurisdictions where litigation is an important phenomenon. Jurisdictions where public enforcement is relatively important may in this respect draw from the lessons of countries that have more practical experience with the enforcement of antitrust and merger control law in courts that operate under specific evidentiary standards. On a more general level, BIAC notes that the proper and successful application of economic analyses by competition agencies and the subsequent review and validation of those analyses by courts is dependent on a multitude of factors, in particular the substantive standards that govern the conduct at issue, evidentiary rules, the agencies ability to present economic evidence in court, the receptiveness of courts to economic evidence (which in part depends on training and capacity and on the way it is presented by the economist in question) and the state of the economic research in the area that is under discussion. These interrelated factors complicate the identification of one single success factor for the presentation of complex economic evidence to courts. BIAC strongly supports both general and specific measures to improve the correct application of robust economic theories and methodologies by agencies and their subsequent review of those analyses by courts. Indeed, in this respect the interests of agencies and the business community the very subjects of the agencies control are to a large extent aligned: proper use of economic evidence limits the risk of false positives, while at the same time improving the track record of agencies when defending their enforcement actions in court. BIAC would note that the stated topic of this Roundtable, however, is somewhat misplaced. In our view, the question should not be how to present complex economic theories to judges, but rather how to effectively present economic evidence to the courts. Economic theory, as such, better suits the classroom than the courtroom. Economic evidence, based on accepted economic principles and sound application of facts to those principles, can shine significant light on the key questions underlying antitrust laws. Preparing and presenting this evidence, which often implies the avoidance of complex theory in favour of straightforward analysis, should be a key consideration of an agency s case. We note that economic theory and, indeed, the application of quantitative techniques should not be considered a substitute for sound factual analysis. The purpose of economics in competition law, as discussed further below, should be to develop a framework within which to examine facts, not to substitute theory for these facts. Thus, while BIAC wholeheartedly endorses the further advancement of economic techniques and the presentation of economic evidence to courts, it notes this important caveat. 2. The Role of Economics in Antitrust Cases Economics may have myriad influences on agencies decisions. Very generally, economic theories may help to postulate the theory of harm (or the absence thereof), i.e. the logic and organizing principles 3 See, e.g., the UK judgment of Mr Justice Ferris in the Premier League case, judgment of 27 August

174 DAF/COMP(2008)31 behind the conduct at hand. 4 Second, economics may be used to test the hypothesis, for instance by analyzing empirical data or market structure, in seeking to identify ex ante assessments of the likely effects of mergers and other transactions. Significantly, in many cases economic analysis may be purely or predominantly empirical, for instance in determining whether the merging parties are close competitors on the basis of win loss tender data, 5 or the delineation of the relevant market by means of the SSNIP test. 6 While the economic methodology applied is well-accepted in these cases, other cases provide more challenging areas of analysis. One of the most controversial areas in which economic analysis is used is the field of merger simulation models. These models can be divided into three principal categories: (a) merger simulation models based on minimal data, (b) merger simulation models based on econometric evidence of elasticities of demand, and (c) econometric models that can be used to infer the price effects of the model. The first category would include simple models based on diversion ratios and are typically not very useful or reliable. The second category would include the typical differentiated products merger simulation model that is often used in assessing retail products, which can be useful. The third category would include econometric models such as those used in Staples/Office Depot, GE/Instrumentarium 7, Ryanair/Aer Lingus 8 and, perhaps to a lesser extent, Volvo / Scania. In these models, the merger effect was determined by assessing the amount by which prices were higher in less concentrated markets. These also can be useful. In these cases the question is whether the choice of modeling properly reflects the structure and type of competition in the industry and whether the specification of the model on which the outcome depends is correct, complete and sufficiently robust. Where this type of economic evidence is used to support the challenge of proposed mergers, the assumptions and methodologies underlying the models are likely to be severely disputed. Notorious examples where sophisticated economic models were used to predict post-merger market developments to challenge the transaction include Staples/Office Depot and Whole Foods/Wild Oats 9 in the US and Volvo / Scania 10 in Europe. It is fair to say that economic models play an important role in most, if not all significant mergers that agencies seek to challenge 11 Economic evidence is also but perhaps in a less uniform manner - used in unilateral conduct cases 12 and, in particular in the field of causation, assessment of damage, and pass See, e.g., Lars-Hendrik Roller, Economic Analysis and Competition Policy Enforcement in Europe, MODELLING EUROPEAN MERGERS: THEORY, COMPETITION POLICY AND CASE STUDIES 18 (Van Bergeijk and Kloosterhuis, eds.) (2005). See, e.g., Case COMP/M Oracle/ Peoplesoft, 2005 O.J. (L 218) 6. See, e.g., Case COMP/M CVC/Lenzing 2004 O.J. (L 82) 20. Case COMP/M General Electric/ Instrumentarium, 2004 O.J. (L 109) 1. Case COMP/M.4439 Ryanair/Aer Lingus (June 27, 2007), available at FTC v. Staples, Inc., 970 F.Supp (D.D.C. 1997). Case COMP/M Volvo/ Scania, 2001 O.J. (L 143) 74. See, e.g., Derek Ridyard, Economic Experts Before Authorities and Courts Roundtable, Annual Proceedings of the Fordham Corporate Law Institute on International Antitrust Law & Policy 2005, p. 626 ( But certainly, mergers is the easy area where you can say with great clarity that economics is really driving the debate. ). See, e.g., Case COMP/C-3/ EC Commission/Microsoft, (Mar. 24, 2004), available at 79

175 DAF/COMP(2008)31 through pricing, in cartel cases. 13 In fact, as Professor Gavil has observed, expert testimony from economists now plays a more critical role than ever before in resolving antitrust matters before agencies and courts. 14 Economic evidence enters into the administrative or judicial procedures in various ways depending on the specific features of the enforcement system. Ordinarily, during the administrative part of the agencies procedure, economic evidence may be part of the agencies own analytical work and generated by the agency itself (on the basis of information submitted by the parties, third parties or other sources of information), or may be presented to the agency through submissions made by interested parties. For instance, in Europe, it is common to submit detailed economic evidence as part of the notification of a concentration under the European Merger Control Regulation. Such evidence is also frequently submitted following a Statement of Objections issued by the Commission. In some jurisdictions, the litigation of competition matters between private parties also implicates economic analysis. In those instances, the development of economic theory plays out during the discovery phase of the proceedings, in which the expert economists are severely tested with respect to their conclusions and the bases for those conclusions through intensive factual inquiry, expert reports, and oftencontentious depositions. In these cases, the ultimate emphasis lies on the admissibility and persuasive value of economic evidence in court proceedings. In this way, the parties are usually able to judge in advance of the trial or key hearing whether their economic evidence is likely to be compelling or weak. This frequently leads parties to a settlement that better reflects the risks inherent to the litigation process. In contrast, the dialog between regulatory agencies and parties regarding the economic analysis being utilised by the agency is inconsistent and may range from virtually no communication at all to a relatively open exchange of views on the merits of a specific economic study. BIAC believes that it would be beneficial if agencies would allow a more meaningful interaction between their (staff) economists and the parties experts at an early stage of administrative procedures. 15 Interaction between experts may contribute to the identification of key issues, an early resolution of disputes, and, more generally, contribute to wellfounded decisions as to whether the agency s economic analysis is likely to stand up in court. 16 Agencies are sometimes reluctant to engage in such a discussion for fear that they may reveal their strategic thinking in a way that may later harm their ability to succeed in court. As a practical matter, however, since far more cases are resolved through negotiation than through trial, the benefits of such interaction are likely to outweigh the risks. Moreover, the discovery process ultimately allows at least some degree of insight prior to trial, which undermines the fundamental concern that is often expressed See, e.g., Julian Joshua, Supermodels, Geeks and Gumshoes: Forensic Economics in EC Cartel Investigations, Paper prepared for Workshop sponsored by Amsterdam Centre for Law and Economics Forensic Economics in Competition Law Enforcement, (Mar. 17, 2006), available at 92F385214D106506/download=true. See, Andrew Gavil, The Challenges of Economic Proof in a Decentralized and Privatized European Competition Policy System: Lessons From the American Experience, Journal of Competition Law and Economics (forthcoming). One example in Europe where the notifying parties experts had access to econometric analyses provided by a third party complainant during the first phase review of a concentration under the European Merger Regulation is Case COMP/M General Electric/ Instrumentarium, supra note 7. See, e.g., Maarten Pieter Schinkel, Forensic Economics in Competition Law Enforcement, Journal of Competition Law and Economics (forthcoming), who argues that an open decision-making process safeguards the quality of economic analyses. 80

176 DAF/COMP(2008)31 While expert testimony by the party s or agency s economic experts is the main vehicle for economic evidence to become part of the judicial procedure, there are alternative ways for courts to handle expert witness testimony in antitrust disputes. In Australia, New Zealand and occasionally in the United Kingdom by the CAT, hot tub procedures are used, whereby both parties experts take the stand simultaneously and question one another about their opinions. 17 Also, in Australia and Ireland (and elsewhere), joint conferences of experts are sometimes used. In contrast to hot tub procedures, joint conferences take place outside the courtroom, with only the experts present. These types of meetings seek to explore areas of agreement and disagreement among the parties. The experts views are then presented to the court. 18 In other cases, courts themselves may appoint economic experts to assist them in resolving these types of cases. 19 The benefits of court-appointed experts, especially as substitutes for experts appointed by parties, are disputed. 20 Second, BIAC does not condone the concept that the testimony of experts engaged by the parties should somehow have lower evidentiary value than objective testimony by court-appointed experts. This is a suggestion that is explicitly made in the Green Paper on Damage Actions, which was released by the EC Commission in December BIAC submits that, while it may in some cases be proper to apply conditions ensuring a proper foundation for economic testimony provided by parties (and agencies ) experts, perhaps in a manner similar to that applied in the US, 22 there is no sound rationale for a priori rejection of the testimony of party-appointed experts Reasons that May Cause Courts to Reject Economic Evidence There may be various reasons that could cause a court not to accept the economic analysis advanced by agencies, some of which are (largely) outside the control of the agency. Excessively high standards of economic proof may prevent courts to support agencies decisions. BIAC does not believe that there is an endemic problem in this regard. Rather, it seems that courts exercise a sufficiently effective, but not overly strict review of agencies decisions. Besides, the required standard of proof is largely outside the control of agencies. Nonetheless, BIAC acknowledges that in many See, Lisa C. Wood, Experts in the Tub, Antitrust, Summer 2007, p. 95. See, Lisa C. Wood, Out of the Hot Tub and into the Joint Conference, Antitrust, Fall 2007, p. 89. In the US, there is limited experience with these types of experts. For a discussion of court-appointed experts, see, e.g., Gavil, supra note 14 and the literature mentioned in America Bar Association, Section on Antitrust Law, Final Report of the Economic Evidence Task Force (August 1, 2006), available at In Canada, the Competition Tribunal is expressly authorized to appoint one or more independent experts to inquire into and report on any question of fact or opinion relevant to an issue in a proceeding. The parties may jointly recommend an expert to the Tribunal, but the Tribunal is authorized to select an expert by its own motion. See, e.g., Gavil, supra note 14, who states that, while concerns have been raised against the objectivity of party experts, court-appointed experts would be ill-equipped to take over the role of those experts. In particular, court-appointed experts would be particularly helpful in evaluating the data-gathering, studying, and opinions of the party experts. Green Paper on Damage Actions for Breach of the EC Antitrust Rules, available at See also, paragraphs 28 and 29 herein. See also, Gavil, supra note

177 DAF/COMP(2008)31 jurisdictions the debate on the question how much and what kind of (economic) evidence is enough continues and is supportive of efforts to clarify this issue. 24 Lack of substantive standards and agencies guidelines may contribute to a poor reception of economics by courts. Indeed, courts may be disinclined to accept complex economic analyses from agencies if the state of economic research is unsettled and/or the applicable substantive standard is unclear, as is the currently the case for some types of exclusionary conduct. Here, agencies may help to build consensus on the proper analysis of these types of conduct. Also, the adoption of guidelines, such as the EC horizontal and non- horizontal merger guidelines may encourage courts to more readily accept complex economic analyses that apply the methodology of the guidelines. 25 Courts may simply not understand the economic analyses advanced by agencies, or be unwilling to apply them. As mentioned below, agencies may, in addition to improving upon the presentation of their analyses in some cases, help to train courts in the understanding and application of economic analyses and, more generally, engage in advocacy efforts to make judges more comfortable applying and reviewing economic analyses. In Canada, Parliament has endeavoured to address at least in part the common concern that judges in the general court system are often ill-equipped to assess complex economic issues. The Competition Tribunal (the specialized court with exclusive jurisdiction over the reviewable trade practices set out in the Competition Act, including mergers and abuse of dominant position) is composed of judges of the Federal Court and lay members, selected for their expertise in areas such as economics, business, accounting or marketing. Although there is no statutory requirement that the lay members include trained economists, since its creation in 1986, the Tribunal has always included lay members with some training in economics. The Tribunal has also established rules of procedure designed to facilitate the receipt of complex economic evidence. Expert witnesses can testify individually or they (as well as lay witnesses) may be directed to testify as part of a panel, where the Tribunal determines that testimony by panel would be the most effective means of conveying the evidence. The agency may not apply sufficient rigor in developing complex economic analyses and present confusing or otherwise inadequate economic evidence, or may present as such adequate economic evidence in an unattractive or non-sophisticated manner that discourages the court to follow the agencies analyses. One way of improving the quality of economic analyses of agencies would be to adopt (practical) measures that prevent agencies from becoming too insulated from parties observations. As set out below, other means may include capacity building. In this respect, it is noteworthy that Damien Neven, the present Chief Competition Economist with the EC Commission is of the opinion that, given the gross imbalance in economic resources between parties and the Commission, the Commission needs to significantly increase its resources, in particular by reinforcing the team of the Chief Competition Economist. 26 BIAC supports such measures where they are likely to enhance the quality of economic analyses by agencies. Next, as set out below, agencies may want to concentrate on improving the presentation of the evidence See, e.g., Gavil, supra note 14, who notes that it will always be possible to demand greater economic certainty and greater economic proof and who suggests that, before concluding that a party should be required to produce more or better economic evidence, courts and agencies would ask whether the marginal value in terms of economic certainty (reduction of error costs) outweighs the costs of demanding additional economic evidence (processing and information costs). Guidelines on the assessment of horizontal mergers and guidelines on the assessment of non-horizontal mergers, available at Damien J. Neven, Competition economics and antitrust in Europe, ECONOMIC POLICY (Oct. 2006). 82

178 DAF/COMP(2008)31 4. Evidentiary Issues 4.1 Burden of Proof The increased use of economic analyses and the application of more or lesser accepted theories of harm over the past years have prompted courts to more carefully review agencies analyses and decisions. The burden of proof that must be met by agencies that seek to challenge business transactions, or whose administrative decisions are appealed, is a key variable that determines agencies success in court. European examples of cases where the EC Commission failed to meet the burden include AirTours, 27 Schneider Electric, 28 Tetra Laval, 29 GE/ Honeywell 30 and Sony/BMG. 31 While in Europe relatively few of the EC Commission s merger decisions are challenged before the Community Courts, the proportion resulting in annulment is high, reaching almost 50% in prohibition cases. 32 While the U.S. authorities have a better track record over the long term, recent cases in which the DOJ or FTC failed to meet their burden include Oracle, Arch Coal and Whole Foods. 33 In each of these cases, the rejection of the economic testimony of the agency s expert was critical to the ultimate decision. Similarly, in The Netherlands, the Dutch agency s decision to approve the Nuon/Reliant merger subject to conditions was annulled by the District Court of Rotterdam and on appeal, because the mere possibility of price rises shown by the simulation models does not justify the conclusion that a dominant position will be created or strengthened. 34 In Europe, especially following the Tetra Laval judgment, it has become clear that the intensity of judicial control over EC Commission s decisions varies depending on whether the courts are reviewing the correctness of the facts, the application of the law, or the correctness of the Commission s appreciation of complex economic matters. Review of the primary facts and the application of the law are comprehensive, while the control of the economic appreciation by the Court of First Instance is more limited and takes account of a margin of discretion that that the Commission enjoys when it engages in economic assessments. Still, the Community Courts must establish whether the evidence is factually accurate, reliable and consistent, and whether that evidence contains all the information which must be taken into account in order to assess a complex situation and whether it is capable of substantiating the conclusions drawn from it Case T-342/99, AirTours v. Commission, 2002 E.C.R. II Case T-310/01, Schneider Electric v. Commission, 2002 E.C.R. II Case T-5/02, Tetra Laval v. Commission, 2002 ECR II-4381, aff in part, Case C-12/03P, 2005 O.J. (C 82) 1. Case T-210/01, General Electric Company v. Commission, 2005 E.C.R. II Case T-464/04 Impala v Commission, 2006 E.C.R. II See, Bo Vesterdorf, The European Courts Case Law in the Area of Merger Control: New Standards for the Commission s Practice?, Competition Law and Economics, Advances in Competition Policy and Antitrust Enforcement 250 (Mateus and Moreira, eds.) (2007). See, United States v. Oracle Corp., 331 F. Supp. 2d 1098, 1109 (D. Cal. 2004); FTC v. Arch Coal, Inc., 329 F. Supp. 2d 109 (D.D.C. 2004); and FTC v. Whole Foods Mkt., Inc., 502 F. Supp. 2d 1 (D.D.C. 2007). CBB 28 November 2006, NMa v. Nuon and Essent, LJN: AZ3274. Among the reasons for not accepting the agency s conclusions was the fact that the NMa had not established convincingly the pre-merger equilibrium price. For a discussion of the simulation models that were used in this case, see, J. De Maa and Gijsbert Zwart, Modelling the Electricity Market: Nuon/Reliant, in Modelling European Mergers, Theory, Competition Policy and Case Studies, p

179 DAF/COMP(2008)31 BIAC believes that agencies decisions may be particularly vulnerable with regard to the relationship between the underlying facts and the specific model that the agency has chosen to predict or explain the effects of the (proposed) transaction at hand. This is in line with (summary) reports on US practice. 35 This suggests that agencies should not only pay attention to the specific modelling technicalities, but should in particular ensure that the underlying facts are complete and that the model properly reflects the market conditions of the real world. 4.2 Admissibility Standards Admissibility standards that govern the use of economic evidence in courts are another major factor that may determine the outcome of the court case. Over time, the US has developed a demanding system that seeks to ensure the quality of expert testimony and economic evidence generally. These rules have become an integral part of the US system of private enforcement of antitrust law. BIAC believes that these rules serve a very useful function in disciplining the adversarial process and might be a valuable reference for countries that wish to stimulate the adjudication of antitrust disputes by courts. One main element is the Daubert line of cases and the subsequent revision of the Federal Rules of Evidence. 36 Very generally, the Daubert doctrine provides that experts must be qualified to provide an expert opinion by knowledge, skill, experience, training, or education and that the expert s testimony must be based upon sufficient foundation of facts or data, that the testimony is the product of reliable principles and methods and that the expert has applied the principles and methods reliably to the facts of the case. In practice, these requirements serve as an important filter against junk science, or otherwise inadequate economic evidence. The ABA s Final Report of the Evidence Task Force provides an instructive overview of both confusing (unclear, confusing, or otherwise uninformative) and unprofessional (baseless or intentionally misleading) issues with economic testimony that may help agencies and private parties alike to avoid courts excluding economic experts Practical Suggestions for Presenting Economic Analysis and Testimony The promotion of economic knowledge of judges can be facilitated by the development of a competition enforcement culture that relies on a foundation of economics. The role of judges varies across jurisdictions, but nearly always requires an analysis of the law and regulations that apply, as well as the application of judicial precedent. In this respect, the presentation of economic evidence to judges is facilitated by the adoption of a culture within the agency that seeks to evaluate laws and regulations in light of economic principles. By leading the way in this respect, courts will take heed and begin to apply a similar methodology See, e.g., Andrew Gavil and Katherine Funk, Daubert Comes to Washington: Managing Expert Economic Testimony in Part III Proceedings at the FTC, Antitrust, Spring 2006, p ( The two most common objections (against economic expert testimony were choice of methodology (or lack thereof) and failure to properly apply the theory of methodology to the facts of the case. The respondents experts seemed especially likely to be challenged on the ground that they did not consider enough data or they did not consider the proper data, or that their methodology was not appropriately applied to the facts. ) Daubert v. Merell Dow Pharms., Inc., 509 US 579 (1993). On the requirements applying to economic experts, see, e.g., Gavil, supra note 35 and Gregory Werden, Making Economics More Useful in Competition Cases: Procedural Rules Governing Expert Opinions, Annual Proceedings of the Fordham Corporate Law Institute on International Antitrust Law & Policy, 2005, p See supra note 19. See also, Andrew Gavil, Competition Policy, Economics, and Economists: Are We Expecting Too Much?, Annual Proceedings of the Fordham Corporate Law Institute on International Antitrust Law & Policy, 2005, p

180 DAF/COMP(2008)31 An example of this is the application by U.S. courts of the Herfindahl-Hirshman Index. Although the HHI test is not part of the U.S. law, regulations or Supreme Court precedent, courts routinely apply the test in large part because it is part of the Horizontal Merger Guidelines 38 developed by the DOJ and FTC. 39 In general terms, when presenting economic materials to judges, it is useful to supplement written submissions by oral testimony (during the hearing). Obviously, testimony by economic experts should be tailored to the audience, should reinforce the key issues, be free of unnecessary jargon and be straightforward and comprehensible. There are a number of additional practical considerations that are in BIAC s view important when presenting complex economic analyses to judges. These are based on discernible lessons from past antitrust cases and are enumerated below. Economic Experts Should Not Be Relied Upon as Fact Witnesses In some cases, economic experts have been pressed to support the agency s case in a way that requires the economic expert to introduce and support facts, rather than focusing on the economic or econometric analysis of facts that have been introduced and established through other witnesses. One such example of this occurrence is the litigation in U.S. v. Oracle, where Professor Kenneth Elzinga, a renowned economist of impeccable credentials, became the witness responsible for demonstrating that the DOJ s market definition was sustainable. Elzinga was called upon to describe why there was something different about the merging companies products, despite the fact that there was no quantifiable metric for that asserted market. In the end, the Judge rejected Professor Elzinga s testimony in what may have been a fatal blow to the DOJ s case. 40 Ensure Consistency between the Law and Economic Experts Testimonies According to reports, in Rambus, experts for the defendant argued in favour of an efficiency breach defence which was held not to be recognized as a valid defence. Absent this, the testimony was held irrelevant. 41 In a similar vein, in the recent Labatt 42 case in Canada, the Competition Tribunal criticized the Commissioner s expert on the basis that his evidence was predicated on a U.S. legal test that differed materially from the applicable test in Canada. The point is that expert evidence can only be effective if it is directly relevant to the legal and factual context in which it is being used. Ensure that Economic Experts Advance Sufficiently Tested Theories and Methodologies that have been Subject of Peer review in the Economics Community In the US, expert testimonies have been excluded for failure to adhere to accepted principles Horizontal Merger Guidelines of the United States Department of Justice and the Federal Trade Commission, as revised April 8, 1997, available at See, e.g., United States v. Oracle Corp., 331 F. Supp. 2d 1098 (N.D. Ca. 2004). Id. See, Gavil and Funk, supra note 37, p. 29. The Commissioner of Competition v. Labatt Brewing Co. Ltd. et al., 2007 Comp. Trib

181 DAF/COMP(2008)31 Complex Arguments Must be Reduced to Simplicity Judges not schooled in complex economic theory often will rely on their instincts in assessing economic testimony. Thus, the ability to boil down complex economic theory and analysis to simple explanations, consistent with conditions observable to the judge, are often the most successful. For example, in the preliminary injunction action in FTC v. Heinz, 43 Dr. Jonathan Baker successfully convinced the court that the 3 to 2 merger of Heinz and Beechnut would not result in the elimination of significant competition. His analysis of unilateral effects was reduced to a simple explanation that Beech Nut and Heinz are virtually never found in the same supermarket and therefore do not constrain each others pricing at the retail level very much. The ability to reduce the econometric analysis to a common sense, observable conclusion that you just don t see these two products on the shelf competing against one another apparently had a profound impact on the court (although the judgment of the District Court was later reversed on appeal). 44 Similarly in FTC v. Staples, the FTC persuaded the court that the market should be narrowly defined to include only office supply superstores based on detailed pricing analysis which showed, in simple form, that prices were lower where these stores competed than where they didn t. Underlying this conclusion, the FTC conducted a systematic empirical study of Staples' pricing, presented in court by their econometric expert, Professor Orley Ashenfelter. 45 Experts Should Not be Narrowly Confined in the Data They Analyze Economic analysis and conclusion, to be effective, must look beyond the narrow horizon of the supportive facts and be prepared to explain the contrary facts that the opposing party will rely upon. This principle was highlighted in several cases, including the recent challenge by the FTC of Whole Foods acquisition of Wild Oats. In that case, the FTC s expert Dr. Kevin Murphy, also a distinguished professor of high reputation, based his market definition on the differentiation or uniqueness of the two stores and argued that the appropriate market definition was premium natural and organic supermarkets. His analysis of competition within this market led him to conclude that the merger would lead to competitive harm. But the Court found that Dr. Murphy did not adequately assess the potential competitive constraints and alternatives posed by supermarkets outside of this narrowly defined market, which, ultimately, undermined the FTC s alleged market. 46 Similarly, in U.S. v. Oracle, the Court was not persuaded that the market consisted of only three players in a highly concentrated market when alternatives outside of those three players were not fully analyzed by Dr. Elzinga. The clear lesson here is that courts will expect experts to analyze and explain data outside of the narrow range of their conclusions. Economic Experts Should Not be Advanced as Industry Experts The credibility of an economic expert can be significantly jeopardized in those situations where the economist takes on the mantle of industry expertise. Maintaining this distinction can be challenging, especially where the expert is assessing industry dynamics in support of the economic analysis. But placing the economist in the role of industry expert exposes the economist to potentially withering cross-examination as well as counter testimony by company representatives who often have spent a lifetime as compared to a few months studying the industry FTC v. H. J. Heinz Co., 116 F. Supp. 2d 190 (D.D.C. 2000). See, FTC v. H.J. Heinz Co., 345 U.S. App. D.C. 364, Trade Cas. (CCH) P73,243 (D.C. Cir. 2001). FTC v. Staples, Inc., 1997 U.S. Dist. LEXIS 9322; Trade Cas. (CCH) P71,867 (D.D.C 1997). FTC v. Whole Foods Mkt., Inc., 502 F. Supp. 2d 1 (D.D.C. 2007). 86

182 DAF/COMP(2008)31 Economic Conclusions Must Be Based On Robust Facts In FTC v. Arch Coal, the FTC advanced an argument (not central to their overall objection to the merger) that 8800 Btu coal constituted a separate relevant product market from 8400 Btu coal. The FTC s economic expert examined the conditions that distinguish one relevant market from another, observed that in some cases 8400 Btu coal could not be substituted for 8800 Btu coal, and concluded that 8800 Btu coal was likely a separate relevant product market. The Court rejected this conclusion as speculation, because Dr. Morris had not examined the factual conditions that lead to his conclusion of non-substitutability and also because he did not analyze and explain the circumstances under which 8400 Btu coal could be substituted for This exposed a fracture in the factual analysis that caused the court to view the two products as wholly interchangeable, even under conditions where the substitutability may have been limited. A further examination of the factual underpinnings of customer substitution could have lead either to a more robust rationale for the hypothesis that 8800 constituted a separate market, or to the abandonment of the argument prior to trial, which likely would have preserved witness credibility. In Canada, similar issues have arisen, for example in the Superior Propone 48 case, where it became apparent that the Commissioner had not established a sufficient evidentiary basis for the opinions expressed by her experts in connection with the complex efficiencies defence. Experts Should Be Prepared to Play Both Offence and Defence In most contested proceedings, both the agency and the defendant parties will have economic experts. The most successful parties will have spent as much time preparing their economist to critique and undermine the testimony of the opposing expert as they have spent on preparing their affirmative story. In many cases, neutralizing the opposing expert is key to a successful outcome. In this respect, it is important to examine burden of proof and presumption issues. If a party can project that the burden of proof (or the burden of persuasion) will shift to the opposing party due to fundamental facts, then an effort to undermine the economic testimony of the opposing expert may be the most important aspect of the case. For example, in the U.S., a rebuttable presumption of competitive harm is established in mergers in which the resulting market concentration reaches a certain threshold in a well defined market. 49 Thus, in those instances where the market is reasonably well defined and the concentration levels are sufficiently high, the burden shifts to the merging parties to rebut the presumption of competitive harm. 50 Thus, it is important in these cases for the agency to prepare their economic expert to destabilize the parties economic expert testimony. If, on the other hand, the burden is on the agency to establish prima facie elements, such as the relevant product market, then the agency should focus more attention on advancing the testimony of its own expert FTC v. Arch Coal, Inc., 329 F. Supp. 2d 109 (D.D.C. 2004). Commissioner of Competition v. Superior Propane Inc. et al (2000), 7 C.P.R. (4th) 385 (Comp. Trib); (2001), 11 C.P.R. (4th) 289 (F.C.A.); (2002), 18 C.P.R. (4th) 417 (Comp. Trib.), aff d (2003), 23 C.P.R. (4th) 316 (F.C.A.). United States v. Philadelphia Nat'l Bank, 374 U.S. 321 (1963). See, e.g., FTC v. H.J. Heinz Co., 345 U.S. App. D.C. 364, Trade Cas. (CCH) P73,243 (D.C. Cir. 2001). 87

183 DAF/COMP(2008)31 6. Concluding Observations BIAC supports the growing acceptance of the proposition that modern antitrust enforcement should be based on a clear and objective assessment of effects as identified or measured by sound economic analysis. However, it notes that agencies and courts across jurisdictions display varying degrees of sophistication when conducting economic analyses or failing to do so. BIAC believes that agencies decisions may be particularly vulnerable with regard to the relationship between the underlying facts and the specific model that the agency has chosen to predict or explain the effects of the (proposed) transaction at hand. This suggests that agencies should not only pay attention to the specific modelling technicalities, but should in particular ensure that the underlying facts are complete and that the model properly reflects the market conditions of the real world. Interaction between economic experts engaged by agencies and the parties (or third parties) may contribute to the identification of key issues, an early resolution of disputes, and, more generally, contribute to well-founded decisions as to whether the agency s economic analysis is likely to stand up in court. BIAC supports the use of Daubert-type rules to ensure the quality of economic evidence. In addition, it supports the adoption of general and specific measures aimed both at agencies and courts to improve the reception of economic analyses by courts as set out in this paper. Among the practical considerations for presenting economic analysis and testimony that BIAC submits are the suggestion that economic experts should not be relied upon as fact witnesses, the need to ensure consistency between the law and economic testimonies, the adherence to accepted principles, the need to base economic conclusions on robust facts and the ability to boil down complex economic analysis to simple explanations that are consistent with conditions observable to courts. 88

184 DAF/COMP(2008)31 SUMMARY OF DISCUSSION The Chair opened the discussion and introduced the three expert panellists: Judge Douglas Ginsburg, US Court of Appeal for the District of Columbia Circuit; Dr Lilla Csorgo, the Special Economic Advisor to the Canadian Commissioner on Competition; and Dr Frédéric Jenny, Cour de Cassation, France. He thanked the delegations that made submissions to the roundtable. The Chair stated that the meeting would consist of a discussion among the panellists and then questions and comments from the floor. Judge Ginsburg believed that the quality of the submissions was uniformly high and that the consistency of the content was quite impressive. There was a virtual unanimity on both the importance of and the specific role of economic evidence in pursuing competition cases. Although there were some procedural differences in the submissions, there was virtual unanimity on the role of economic experts and on some of the limitations that one faces when introducing economic testimony. One important difference was noted in this context: whether one faces a specialised or generalised tribunal in the first instance or in the first instance of judicial review. Judge Ginsburg noted that in the United States the Federal Trade Commission (FTC), a specialised collegiate agency, conducts hearings and reaches its own decisions subject to judicial review. The Department of Justice (DoJ) however must bring its cases before generalist judges. Such judges may have no prior experience with either competition policy or microeconomics. It is a challenge for the DoJ to make its case in front of such non-specialist judges in a sophisticated way that is appropriate in today s competition environment. Judge Ginsburg quoted the advice that he received from Ronald Coase at the University of Chicago: that if an economist couldn t express himself adequately in plain language then it is likely that he did not know what he was talking about. This advice does not discount the value of econometrics or scientific technical advice, it simply acknowledges that in a generalist forum it is essential that the material be presented in an ordinary language narrative that can be understood by a willing and intelligent judge or panel of judges. Graphical aids may be very useful, as was mentioned in the German submission. Judge Ginsburg noted that he recently participated at the FTC in a mock trial of a unilateral effects case against a merger where such visual aids would have been useful to explain the concept of the competitive space within which the merging parties operated. He also noted that it was extremely rare for him as a judge - to receive a legal brief with a diagram in it. In practice, judges will often end up creating their own illustration in order to better understand the case in front of them. Judge Ginsburg noted the importance of bearing in mind that some people learn better visually than they do through words. Judge Ginsburg then highlighted his support for continuing judicial education. Most US states require lawyers as opposed to judges to take several hours a year of educational instruction. Judicial instruction, including classes in economics, is offered by both the Federal Justice Centre and by private and public universities. Judge Ginsburg noted that in some jurisdictions judges may not understand the economics of the government s case and may seek out some procedural resolution in order to dispose of the case in a manner that does not require them to deal with the actual substance of the case. Judges should be encouraged to become more sophisticated in competition economics. 89

185 DAF/COMP(2008)31 The Chair thanked Judge Ginsburg for his comments and gave the floor to Dr Csorgo. Dr Csorgo described her first encounter with the judicial process, in particular the difficulties she encountered explaining the concept of the downwards sloping demand curve to a non-specialist judge. According to Dr Csorgo, when economists are making their cases in front of judges they should remember their audience. The onus is on the economist to ensure that what is being explained is understood. Knowing one s audience is itself a difficult task. One may be faced with a judge for the first time, for example. Or it may be a number of years since a given judge has sat on a competition law case. Dr Csorgo believed that judges should feel free to ask the proverbial dumb question. Importantly, economic expert reports should be made available to the judges before the commencement of hearings so that the judges have time to think about the relevant issues. If this were the case, then when the hearings start and an economic expert is on the stand, the judge would be well placed to be able to ask the necessary questions of clarification to make sure that he/she has actually truly understood the points being made. The key to ensuring judicial understanding is that the reports be made available to the judges before the hearings start. In short, the economist must ensure that he/she takes the time to explain his position, makes the economic reports available beforehand, and encourages questions. Dr Csorgo noted that even if the judgment is in the economist s favour it may not necessarily be so for the right reason; indeed, the judgment may display a lack of real understanding of the economic issues involved. According to Dr Csorgo, this makes for poor jurisprudence. Appointing an economist as an adjudicator has its advantages in this regard, provided it is done in a transparent manner. The Chair thanked Dr Csorgo for her comments and gave the floor to Dr Jenny. Dr Jenny concentrated on the French legal system. According to Dr Jenny, there is a different perspective on the relationship between the judge and the expert depending on whether one is in a common law country or a civil law country. In France, a civil law jurisdiction, the heritage of the French Revolution is felt: the judiciary cannot intrude into the areas reserved for the other two powers (i.e. the executive and the legislature). Consequently, in France, judges are supposed to read and apply the law; they cannot interpret the law. If one starts with this background, it is very difficult to deal with competition/antitrust law: it is difficult to pretend that competition/antitrust law is complete or clear and that it does not need to be interpreted. For Dr Jenny, there are at least three potential roles for economists in front of the courts, two of which are problematic. The first role is to measure the damage and measure the dimensions of the relevant markets. According to Dr Jenny, this role is the least problematic. Indeed, judges are given the opportunity to ask experts to explain things when necessary. The second role, where the economist is asked to inform the judge what relevant facts should be taken into consideration, is more problematic. It is here that one moves from fact-finding to interpretation, as the relevant facts depend very much on the underlying theory. A third role for the economist entails considering what is supposed to be legal and what is supposed to be illegal, that is, what is supposed to be pro- or anti-competitive. With this role, one gets completely into the area of economic analysis. As with the second role, this causes problems, as the judiciary are very ill at ease with experts telling them what facts to consider and what interpretation of the law to adopt concerning the relevant facts. Judges in France are not specialised; they do not therefore necessarily know anything about economics. For Dr Jenny, this is not something that is particularly unusual: judges often adjudicate cases concerning issues of which they are relatively ignorant, for example in medical malpractice cases. Dr Jenny also briefly noted that the system in France is not an adversarial system, but a court-centred system, 90

186 DAF/COMP(2008)31 and that this creates potential problems, such as how a judge should communicate with experts. Dr Jenny would come back to this point later in the discussion. The Chair thanked Dr Jenny for his contribution. He then asked the panellists: whether their respective legal regimes consider economic analysis of some form to be essential at some stage of the decision-making process or in defining the relevant market and whether a thorough presentation of the relevant economic analysis is useful in adjudicating such cases; whether a clear explanation of the economic as well as the legal theories at the outset of a cases is important; and whether there is a preferred method for making an introductory presentation of the economic issues. Dr Csorgo stated that the Canadian regime considers economic evidence to be essential in many ways. It is always part of the process; and the Competition Bureau contacts economists at an early stage of an investigation. In Canada there is a specialised tribunal the Competition Tribunal which by its very nature recognises that economic analysis is a very important part of the process. In Canada, however, there is one exception to this situation: questions are generally applicable to any number of matters so that once a decision on that matter is made, it is applicable potentially to all the matters that have the same issue arising. Issues concerning the test for defining a relevant market and the definition of efficiencies, for example, are actually considered as questions of law. It is not problematic when those questions of law are decided by the specialist Competition Tribunal but it could be problematic when such questions are appealed to non-specialist courts. In this context, Dr Csorgo gave the example of a (non-specialist) appeal court deciding whether the hypothetical monopolist test is the right test for defining a market. For Dr Csorgo, a thorough presentation of the relevant economic analysis is useful in adjudicating competition cases. There is a definite advantage in having that presentation take place at the beginning of the process. Dr Csorgo conceded that not everyone in Canada would agree with her on the issue of timing. But for her at least, it is essential to have the presentation early on so that one can have a sense of how to fit these facts into a reasonable story. Judge Ginsburg pointed out that in the US in recent years there has emerged a category of cases in which the enforcement agencies have brought to court direct evidence of effects and in the process have attempted to dispense with the requirement of defining the relevant market. In those cases the courts have scrutinised such direct evidence. In other cases, a great deal of attention is placed on market definition. Indeed, in some cases market definition may well be the determinative issue. It has become an area that is sufficiently technical and disciplined that the experts generally agree on basic propositions about market definition and narrow the issue for the court in a manner that is essential to its ruling. Dr Jenny noted that the word relevant is not employed in French law when considering the concept of market. The problem for Dr Jenny here is that there is no unique definition of market : definitions change depending on whether one is talking about trade law, competition law, unfair trade law etc. The law does not concentrate on relevant market and doesn t differentiate between the different markets that one should have in mind depending on what kind of law one deals with. Hence there is a certain difficulty. The value of econometrics and regressions in determining markets is not very high for judges in France, as for any regression there may be a counter regression which is presented that provides a different result. For Dr Jenny, regression is useful for adjudicating cases where the regression confirms the original intuition of the judge. 91

187 DAF/COMP(2008)31 Dr Jenny was a little hesitant to answer the second part of the first question, as he was not sure what thorough presentation actually implies. If it were to mean thoroughness in terms of the issues, he would answer in the positive; by contrast, if thoroughness refers to setting out all of the excruciating details of the finesse of the technical expertise, his answer would be in the negative, as judges may get lost in the detail. Dr Jenny also stated that an early presentation of the economic issues is useful as it helps the judges to know in which direction they should look during a case. In France, typically a lead lawyer will be designated by all the participants in a case and will spend around half an hour setting out the basic contours of the case. Judge Ginsburg picked up the point that Dr Jenny introduced concerning judicial intuition. For Judge Ginsburg, the intuition of a judge can be informed as well as appealed to; homey examples are useful in this regard. One needs to find in every case the illustration of the principle involved in a way that appeals to the intuition of the court. The Chair noted that the earlier comments on plain language were still relevant here. Comments from the other participants were then offered. The delegate from Brazil agreed that judges can be confused by the economic issues and that graphics and visual aids may be helpful in reducing this confusion. An example of a Brazilian case where diagrams were particularly useful was provided. The Brazilian delegation asked for more specifics on the decisionmaking process in the US. Judge Ginsburg explained that when expert economic testimony is presented in the US it is often in written form with a summary given at the hearing. The real value of this evidence is determined by what happens during cross-examination where a given lawyer tries to discredit the other side s expert. There is no real use in trying to discredit an expert s credentials, as the expert will usually have been well-chosen. Rather, one has to discredit his/her economic reasoning. It is almost unheard of to allow the experts to question each other. The process is mediated through lawyers who have to become fluent with this material in order to cross-examine effectively a hostile witness. Dr Jenny came back to the point concerning the differences between adversarial and inquisitorial systems. In France, one does not have experts on both sides talking to each other with the judge waiting to see the result of their exchange at the end. However, in France judges can ask the experts questions. According to Dr Jenny there is a major problem here: judges rarely ask the experts questions either because they do not know what questions to ask or because they will not understand the answer. Dr Jenny has provided training to judges specifically on this issue. For him the Daubert 1 test in the US is useful. Dr Jenny has developed a set of questions that any judge can ask any expert in order to have some sense of the value of the expert advice that he gets. These fairly simple questions develop the ideas of reliability, relevance, internal consistency, and whether the theory has been published etc. Successful use of these questions has been reported to Dr Jenny. For him, the education of judges as to what questions to ask helps (re)place the decision-making in the judges hands; it helps facilitate discussion and therefore improves the ability of the judge to decide whether or not the expertise offered is useful to his case. Dr Csorgo questioned the usefulness of the adversarial system when economic evidence is considered. The process of cross-examination generally enables the judge to determine what is left over after both parties have had their say. But with economic testimony, the judge may not be in a very good position to determine what is indeed left over after the process of cross-examination, particularly if economists use this process to indirectly communicate with one another at a level that is beyond the non-expert s comprehension. 1 Daubert v. Merrell Dow Pharmaceuticals 509 U.S. 579 (1993). 92

188 DAF/COMP(2008)31 The delegate from South Africa noted some unique aspects of the competition regime in his country. South Africa has an adversarial system with inquisitorial powers. In practice, the panels of the tribunal demand additional evidence and discovery, instruct experts to prepare additional reports and evidence, and question such experts when necessary. These experts reply to any questions in writing. It was suggested that, while robust cross-examination occurs, experts do not speak to one another and that there is no real peer review of their testimony in the strict sense of the word. For the delegate from South Africa, one way of introducing that kind of dimension into the process would be to have the expert economists communicating directly with one another both orally and in writing. Publicity during hearings was also noted as an effective disciplinary tool as far as economists are concerned. Indeed, it was submitted that the public nature of hearings in South Africa appears to be quite an effective constraint on some of the wilder fantasies of expert economists. The Chair then asked the panellists if any of them had any experience with hot tubbing, that is, where the experts and the court talk directly to one another. Judge Ginsburg stated that he had never seen such a practice, but did know of one trial judge who had found it to be quite useful. Judge Ginsburg had, however, done something very similar in his court, which he found to be highly effective: after hearing successive arguments from counsel on appeal, he recalled the first expert and kept both experts in the well of the court and addressed them alternately in order to narrow an issue as much as possible. Dr Jenny did not know of any examples but believed that such a practice might be useful to the judge, as it could help clear away side issues on which there is general agreement. The Chair submitted that it would require the lawyers to teach their experts to speak in plain language while they were cross-examining each other so as not to lose the judge in the process. On the question of oral versus written testimony, the Chair wished to seek clarification from the Finnish delegation. In their submission, the delegation highlighted the advantage of oral presentations; but was that meant as a supplement to written submissions or instead of written submissions? The delegate from Finland replied that it was as a supplement to written material. In Finland the court process is initiated with the help of written background material which may be quite substantive in its economic theory and analysis. However, during the course of the court process the overall presentations or testimonies have been considered more effective when they are provided by appointed expert witnesses such as established scholars who are able to translate theories into normal language. It has helped in confirming the robustness or legitimacy of the theoretical foundations that are being used in assessing market power or in proving the existence of consumer harm. Moreover these presentations have the potential to do three things: (a) to make the approach used comprehensible in a non-technical way; (b) to summarise the key findings and arguments; and (c) to provide a platform for counter arguments to be used in a constructive manner. The Chair then asked the following questions: can a simplified and conclusory presentation be effective (in other words how do you balance the danger of getting into too much detail either in length or in terms of technicality against the desire not to go in the other direction of being so overly simplistic that you haven t explained much)?; what are the impediments to a judge without specialised training in economics understanding moderately complex analysis?; and 93

189 DAF/COMP(2008)31 should a judge reject economic analysis that he/she doesn t fully understand because it wasn t well explained, and if so, what is the judge to do in such a situation? Dr Jenny believed that the judge should indeed reject something that he/she did not understand. On the second question, he submitted that there is a very important issue of language. To substantiate this point, Dr Jenny offered the example of the different meanings of the word price (e.g. money actually paid out versus the point where demand equals supply). There have been cases with which Dr Jenny was uncomfortable where this difference in interpretation of price has been instrumental in leading to a decision. Dr Jenny submitted that the real impediment to a judge comprehending economic analysis is not the use of the jargon or the type of presentation, it is the fact that the economist starts with a hypothesis; this is incomprehensible for the judge because it means that maybe the hypothesis isn t valid and may tend to mislead. Dr Jenny conceded that there is a level of complexity that should be avoided in a courtroom setting. Dr Csorgo concentrated on the first question. She agreed that the economic presentation should be intuitive and in clear and simple jargon. She also highlighted the fact that one needs to be careful not to oversimplify while at the same time making the theory accessible. Judge Ginsburg came back to Dr Jenny s earlier point about probability. He submitted that merger control is inherently predictive and that US statutory law calls for a predictive judgment. Judge Ginsburg did not believe that in the US judges are uncomfortable with the recognition that one should consider the probability of something occurring. He contended that while the government has lost a number of merger cases in recent years, it was not because of a judicial rejection of the notion of probability. Dr Jenny expanded on his earlier comments concerning assumptions that need to be made. He submitted that in any abuse case one has to assume that the firm was aiming to maximise its profit; one starts from this assumption of rationality and applies it to a dominant firm. In Europe judges find this a little bit unsettling. For Dr Jenny, there is only one area where the judges don t seem to have a problem: predation. Predation is an anticompetitive practice if you assume that whoever is doing the predation is in fact being rational: he is losing money in order to eliminate competition. According to Dr Jenny, the reason why judges don t have a difficulty with predation has nothing to do with the fact that they accept the assumption that the people who are doing this are rational; rather, it has to do with the fact that it is perceived as being grossly unfair. Judge Ginsburg then considered the third question. He submitted that if judges don t understand the economic analysis then they don t know whether it is because it was not well explained or because it is inexplicable; either way it has to be rejected. According to the delegate from the United States, some lawyers prefer to edit all of the economics out of the economic argument and to jump from the facts to the conclusion. But the judge generally wants to hear the economics, wants to try to understand it and frequently can understand if it is explained properly. It was submitted that it is almost never appropriate to leave any of the economics out. Nonetheless, it may have to be simplified, particularly in terms of language. The Chair moved on to the next questions. These included the following: Are there things one can do with the process or the format that maximises the chance that the arguments will be well explained and that the judge will better understand them? Is an adversarial system most likely to shed the most light on the issues versus a court-directed system? 94

190 DAF/COMP(2008)31 Should one have written or oral presentations by counsel or by economists? What about the role of court appointed economists as opposed to party proffered economists? What about the concept of basic tutorials? Judge Ginsburg stated that the best way to calibrate the economic presentations to the needs of the court is to start with as basic a level as possible, having the court indicate when it is ready to go forward. This approach would be much less risky than being too sophisticated and running the risk that the court will be embarrassed or shy about asking questions. On the business of court appointed experts, Judge Ginsburg noted that the rules in the US do allow a trial court to appoint an expert and that this procedure is relatively uncontroversial when it is done in accordance with the applicable rules (i.e. transparently): the parties know who the expert is; the court expert makes a presentation or submits something in writing and shares it with the parties. However, Judge Ginsburg noted that it has been suggested on a couple of occasions by important jurists that an appeal court should be able to draw their own experts as well, either through the judicial system retaining experts for this purpose or on a purely ad hoc basis in a particular case. It was submitted that such an idea would be impractical: the appeal process could become so elaborate and so repetitive of what had been done in the trial court that it may not be worth the effort involved. Dr Jenny considered the questions as they applied to France. In France there is no real choice between written and oral presentation: any argument which has not been written up in the conclusions is not considered to be relevant. The process has to start with a written presentation. Then the focus turns to how the economists or experts intervene. Dr Jenny s experience is that typically it is much better when it is the counsel who understands the economic argument. The main reason for this is that the counsel is known by the court and generally knows how to talk to the court better than the economists do. Dr Jenny noted that when economic evidence started being used in antitrust cases, economists were ready to argue almost anything and that there was no quality control concerning their submissions. Over time some of these economists developed a reputation for arguing anything; consequently, no judge wanted to hear them. Dr Jenny underlined the point that it takes time to refine the field so that it will be self-disciplined. Dr Csorgo commented on the court-appointed economist. In Canada there are rules that attempt to make any appointment transparent. The report of the court-appointed expert is available and the economist can be cross-examined by the parties and by the members of the tribunal. In fact, in Canada all of the written and oral presentations by the parties economists are available, as well as the arguments of the court-appointed economists. The process is adversarial, even though it is conducted in front of a specialised tribunal. Dr Csorgo believed that this process works well. Where specialised tribunals do not exist, it was submitted that it would be very useful to provide judges with questions to test the credibility of experts, as suggested by Dr Jenny. The Chair noted that the German submission refers to the possibility of court-appointed experts. The Chair asked the German delegation to address the question of whether there is anything that the competition agency can do to support the judge either in the choice of the expert or in defining an expert mandate to help the process. The delegate from Germany replied that the German competition authority (the Bundeskartellamt) believes that it is important that the court appoints an expert that is experienced and neutral. In Germany decisions are appealed to a specialist court in the first and second instance, but judges generally only have legal, as opposed to economic, training. It was submitted that in principle the Bundeskartellamt and its economists are arguably closer to the world of economics and to those who might appear in court as an expert. Consequently, they could help find experts and advise courts on who might have deeper insights 95

191 DAF/COMP(2008)31 and experience on a given issue. As to the questions that might be formulated, the delegate from Germany submitted that it is vital that one formulates questions as precisely as possible and defines which facts and data should be employed as a basis for the analysis, in order to ensure that the expert s findings can be verified at a later stage. The Chair raised the point that many competition agencies have economic expertise in-house and have the option of either using in-house expertise in presenting the evidence or of hiring an outside expert. He noted that the submission of the Portuguese authority emphasises the fact that they use exclusively internal experts. The Chair asked the Portuguese delegate to elaborate on the use of internal experts. The delegate from Portugal provided the example of a case concerning a salt cartel in Portugal. In this case the Portuguese competition authority found hard evidence of the cartel following dawn raids among four undertakings which controlled 80% of the market. Apart from this hard evidence the authority also found quite strong evidence concerning the compensation scheme that those firms had established within the cartel. This evidence enabled the authority to compute in a quite simple, intuitive and mathematicallysustained way the economic benefits that these undertakings retrieved from the conduct. This simplicity was sustained in court so as to avoid using difficult economic language. According to the delegate from Portugal, even if one of the parties presented an alternative method in a more technical manner in court, for reasons related to comprehension, the authority s position was not only confirmed in the first instance but also on appeal. The Chair then asked the delegate from Korea to briefly summarise the Korean Fair Trade Commission s (KFTC) experience concerning the pros and cons of using outside economic experts. The delegate from Korea noted that in 14 cases between 2005 and 2007 the KFTC used outside experts. Using external experts has a number of merits especially when economic evidence is crucial in deciding a pending case. In general the judge tends to trust the state s objective third party rather than the internal staff of the KFTC. In other words, using outside experts is more useful for securing the credibility of the economic evidence submitted by the KFTC. According to the delegate from Korea, at the end of 2005, the KFTC created a new unit called the Econometric Analysis Team which is composed of several economists in order to reinforce the capabilities concerning economic analysis. But currently the KFTC does not have enough internal staff to conduct its economic analyses. The KFTC has experienced problems when getting help from outside experts, in particular as a result of the limited choice of economists available. The relatively small budget of the KFTC, particularly compared to that of the opposing party, is also a negative factor. The Chair requested comments from the United Kingdom on the issues raised. The delegate from the United Kingdom stated that the critical message in the UK submission was to keep it simple. Ten principles are set out in that submission; 2 they include the idea of using plain, nontechnical language as well as making sure that the economic case is well aligned with the legal case. It was submitted that one has to make sure that the economic theory is well grounded in the evidence of the case. Two judicial quotes were given to illustrate that judges may be confused by economic evidence. For the UK delegate, all economic arguments must be tested to destruction by colleagues who will concentrate on whether such arguments are understandable to the judge; no assumption of understanding must be made. The delegate from BIAC intervened and noted that BIAC has drawn up a list which happens to be quite similar to the list contained in the UK submission; it contains ten simple recommendations. In particular, it recommends a simple presentation of the economic evidence which appeals to the logic of the 2 See DAF/COMP/WP3/WD(2008)24, at

192 DAF/COMP(2008)31 court and which is aligned with intuition. The delegate from BIAC noted that there have been cases where the economists have tried to postulate a theory or have tried to demonstrate a certain methodology which was not aligned with legal analysis, and that this is something to avoid. If economists rely on robust theories and not on theories that have not been accepted by a large number of their peers then, according to BIAC, the chances of failure in court would definitely be reduced. On a more general level, BIAC submitted that it is important that courts embrace economics: economics is important in many cases as it can show where the harm or absence of harm is. BIAC would be in favour of general as well as specific measures that would enhance the reception of economic evidence by the courts. The Chair thanked BIAC for its submission asked the panelists for their concluding remarks. Dr Csorgo agreed that the economic theory should be clearly grounded in the evidence. What is also of (admittedly less) value, however, is the evidence that is somehow not relevant to the matter at hand. This evidence has merit because there are a lot of facts that are thrown out that add interesting colour to a matter. The economist expert can play a role in highlighting why a certain set of information - however interesting - is actually not pertinent in what one is trying to decide and explain. Dr Jenny wished to point out that even though there are difficulties in presenting economic evidence to judges there has been progress in this area. Judges want to understand; it is not the case that they are narrow in their thinking. But they are worried about the methodology, and they wish they could understand better and participate better in the debate. For Dr Jenny, this is a positive thing. Judge Ginsburg picked up on the point made by the UK about not pressing novel arguments or arguments that have not withstood a good deal of scrutiny over the years. Competition law is unusual and perhaps unique in that it incorporates by reference the body of learning and social science that is inherently subject to evolution, to further advances and to the disconfirmation of hypotheses as we go along. Lawyers are inclined to use any argument that might enable them to win. Judge Ginsburg noted that it is an important responsibility for competition agencies not to allow their lawyers to evoke what are essentially novel economic arguments; it does not serve the law or competition law to make decisions based on the most recent issue of the economic journals only to have those views rejected a few years later. The Chair thanked the delegations for their submissions as well as the three panelists and drew the Roundtable to a close. 97

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194 DAF/COMP(2008)31 COMPTE RENDU DE LA DISCUSSION Le Président ouvre la discussion et présente les trois membres de la Commission d experts : M. Douglas Ginsburg, Juge à la Cour d Appel de Circuit du District de Columbia (États-Unis) ; Mme Lilla Csorgo, Conseiller économique spécial auprès du Commissaire de la concurrence du Canada ; et M. Frédéric Jenny, Cour de Cassation, France. Il remercie les délégations qui ont présenté des communications à la table ronde. Le Président déclare que la réunion comportera une discussion entre les membres de la Commission suivie de questions et de commentaires de la salle. Le Juge Ginsburg estime que toutes les communications ont été d une grande qualité et que la pertinence de leur contenu est remarquable. Les participants sont pratiquement unanimes en ce qui concerne l importance et le rôle spécifique des données économiques dans le traitement des affaires concernant la concurrence. Bien que les communications fassent apparaître certaines différences quant aux procédures, les participants sont pratiquement unanimes pour ce qui est du rôle des experts économiques et de certaines des limites que l on rencontre pour la présentation de témoignages en matière économique. Une différence importante est soulignée dans ce contexte, selon que l on a affaire à une juridiction spécialisée ou à compétence générale en première instance ou en appel. Le Juge Ginsburg note qu aux États-Unis une agence collégiale spécialisée, la Federal Trade Commission, procède à des auditions et dispose d un pouvoir de décision sous réserve d un recours judiciaire. Toutefois, le Département de la justice doit soumettre ses affaires à des juges généralistes. Ces juges peuvent ne pas avoir d expérience préalable en matière de politique de la concurrence ou de microéconomie. La difficulté consiste, pour le Département de la justice, à présenter les affaires à des juges non spécialisés avec toute la complexité qui convient au contexte actuel de la concurrence. Le Juge Ginsburg cite l avis exprimé par Ronald Coase à l Université de Chicago selon lequel, si un économiste ne peut s exprimer de manière appropriée en termes simples, il est probable qu il ne sait pas de quoi il parle. Cette opinion ne conteste pas la valeur de l économétrie ou des avis techniques exprimés par des scientifiques, elle reconnaît simplement le fait que, dans une instance généraliste, il est essentiel que les informations soient présentées dans un langage narratif courant qui puisse être compris par un juge ou un groupe de juges bien disposés et avisés. L aide de représentations graphiques peut être très utile, comme l indique la communication de l Allemagne. Le juge Ginsburg note qu il a participé récemment dans le cadre de la Federal Trade Commission, a un jugement fictif d une affaire concernant des effets unilatéraux d une fusion dans le cadre duquel ces aides visuelles auraient été utiles pour expliquer la notion d espace concurrentiel dans le cadre duquel les parties à la fusion opéraient. Il indique par ailleurs qu il reçoit très rarement en tant que juge un dossier juridique accompagné d un graphique. En pratique, les juges finissent souvent par créer leurs propres illustrations afin de mieux comprendre l affaire qui leur est soumise. Le juge Ginsburg souligne la nécessité de tenir compte du fait que certaines personnes retiennent mieux les informations visuelles que celles qui leur sont présentées verbalement. Le juge Ginsburg met ensuite l accent sur son soutien à la poursuite de la formation des juges. La plupart des États américains obligent les avocats et non les juges à suivre pendant plusieurs heures par an une formation. La formation des juges, qui comporte des cours d économie, est assurée à la fois par le Federal Justice Center et par des universités privées et publiques. Le juge Ginsburg note que, dans 99

195 DAF/COMP(2008)31 certaines juridictions, il est possible que les juges ne comprennent pas l aspect économique de la position de l administration et s efforcent d aboutir à une résolution de procédure afin de traiter l affaire d une manière qui ne les oblige pas à l aborder au fond. Les juges devraient être invités à approfondir leurs connaissances en matière d économie de la concurrence. Le Président remercie le Juge Ginsburg pour ses commentaires et donne la parole à Mme Csorgo. Mme Csorgo fait part de son premier contact avec la procédure judiciaire, et notamment des difficultés qu elle a rencontrées pour expliquer la notion de courbe de demande à pente descendante à un juge non spécialiste. Selon Mme Csorgo, lorsque les économistes exposent leurs affaires à des juges, ils doivent tenir compte des réactions de leurs auditeurs. C est à l économiste qu incombe la charge de s assurer que ce qu il explique est bien compris. La connaissance de l auditoire est en elle-même une tâche difficile. On peut, par exemple, se trouver face à un juge pour la première fois. Ou bien il est possible qu un juge n ait pas eu connaissance d une affaire de droit de la concurrence depuis plusieurs années. Mme Csorgo estime que les juges doivent se sentir libres de poser la «question stupide» proverbiale. Il est important que les rapports des experts économiques soient mis à la disposition des juges avant le début des auditions afin que ceux-ci aient le temps de réfléchir aux problèmes posés. Dans ce cas, au moment où l audition débute et où un expert économique se trouve à la barre, le juge serait en mesure de demander les précisions nécessaires pour s assurer qu il/elle a réellement bien compris les arguments invoqués. La condition essentielle pour assurer une compréhension satisfaisante des juges est que les rapports soient mis à leur disposition avant le début de l audition. En résumé, l économiste doit veiller à prendre le temps nécessaire pour exposer sa position, à transmettre les rapports économiques suffisamment à l avance et à inviter les juges à poser des questions. Mme Csorgo note que, même si le jugement est favorable à l économiste, ce n est pas nécessairement pour la bonne raison ; en fait, le jugement peut faire apparaître une absence de compréhension réelle des problèmes économiques posés. Selon Mme Csorgo, il en résulte une jurisprudence qui n est pas satisfaisante. La nomination d un économiste comme juge présente des avantages à cet égard, à condition qu elle ait lieu dans des conditions de transparence. Le Président remercie Mme Csorgo pour ses commentaires et donne la parole à M. Jenny. M. Jenny met l accent sur le système juridique français. Selon lui, la relation entre le juge et l expert doit être envisagée dans une optique différente selon que l on se trouve dans un pays de «common law» ou dans un pays de droit civil. En France, qui est un pays de droit civil, l héritage de la Révolution se fait sentir : le pouvoir judiciaire ne peut s immiscer dans les domaines réservés aux deux autres pouvoirs (c est-à-dire le pouvoir exécutif et le pouvoir législatif). En conséquence, en France, les juges sont censés lire et appliquer la loi ; ils ne peuvent l interpréter. Si l on part de ce contexte, il est très difficile de traiter du droit de la concurrence/antitrust : il est difficile de prétendre que le droit de la concurrence/antitrust est complet ou clair et qu il n a pas besoin d être interprété. Pour M. Jenny, les économistes ont face aux tribunaux au moins trois rôles potentiels à jouer, dont deux sont problématiques. Le premier rôle est d évaluer les préjudices causés ainsi que les dimensions des marchés concernés. Selon M. Jenny, ce rôle est le moins problématique. En fait, les juges ont la possibilité de demander des explications aux experts en cas de nécessité. Le second rôle, qui consiste pour l économiste à informer le juge des faits à prendre en considération est plus problématique. C est là que l on passe de la collecte de données à leur interprétation, car les faits pertinents dépendent dans une large mesure de la théorie sous-jacente. Un troisième rôle pour l économiste consiste à rechercher ce qui est considéré comme légal et ce qui est considéré comme illégal, ainsi que ce qui est considéré comme favorable à la concurrence ou anticoncurrentiel. Ce rôle relève complètement du domaine de l analyse 100

196 DAF/COMP(2008)31 économique. Comme en ce qui concerne le second rôle, cela pose des problèmes, dans la mesure où le pouvoir judiciaire se trouve très mal à l aise lorsque des experts lui indiquent les faits à prendre en compte et l interprétation de la loi à adopter concernant ces faits. En France, les juges ne sont pas spécialisés ; ils n ont donc pas nécessairement de connaissances économiques. Selon M. Jenny, ce cas n est pas particulièrement rare : les juges ont souvent à se prononcer dans des domaines qu ils connaissent relativement mal, par exemple dans les affaires d erreurs médicales. M. Jenny note par ailleurs brièvement que le système qui s applique en France n est pas accusatoire mais inquisitoire, et que cela donne lieu à des problèmes potentiels, notamment pour ce qui est de la manière dont un juge doit communiquer avec des experts. M. Jenny reviendra sur ce point dans la suite de cette discussion. Le Président remercie M. Jenny de sa communication. Il demande ensuite aux membres de la Commission : si leurs régimes juridiques respectifs considèrent l analyse économique, sous une forme ou sous une autre, comme essentielle à un certain stade du processus de décision ou pour la définition du marché à prendre en compte et si une présentation approfondie de l analyse économique pertinente est utile pour juger ce type d affaires ; si une explication claire des théories économiques comme des théories juridiques est souhaitable dès le début des procédures ; et s il existe une méthode qui a leur préférence pour une présentation préalable des problèmes économiques posés. Mme Csorgo déclare que, dans le régime en vigueur au Canada, les données économiques sont considérées comme d une importance essentielle à de nombreux égards. Elles jouent toujours un rôle dans la procédure. Par ailleurs, le Bureau de la concurrence prend contact avec des économistes dès le début d une enquête. Au Canada, il existe un tribunal spécialisé le Tribunal de la concurrence qui, par sa nature, même reconnaît que l analyse économique constitue un élément très important de la procédure. Cependant, il existe une exception à cette situation : lorsqu une décision est prise dans un domaine, elle est potentiellement applicable à tous les domaines dans lesquels le même type de problèmes se pose. Les problèmes concernant le critère de définition d un marché pertinent et la définition des efficiences, par exemple, sont actuellement considérés comme des questions de droit. Cela ne pose pas de problème lorsque ces questions de droit sont tranchées par le Tribunal spécialisé de la concurrence mais cela pourrait en poser lorsqu elles sont soumises à des tribunaux non spécialisés. Dans ce contexte, Mme Csorgo donne l exemple d une cour d appel (non spécialisée) qui doit décider de la question de savoir si le test du monopole hypothétique est bien approprié pour la définition d un marché. Pour Mme Csorgo, une présentation détaillée de l analyse économique pertinente est utile pour rendre des jugements dans des affaires concernant la concurrence. Le fait que cette présentation ait lieu au début de la procédure présente un avantage certain. Mme Csorgo admet qu au Canada tout le monde n est pas d accord avec elle sur la question de la date. Elle estime cependant pour sa part qu il est nécessaire que cette présentation ait lieu dans des délais rapides afin que l on puisse replacer les données dans un cadre cohérent. Le Juge Ginsburg fait observer qu aux États-Unis on a assisté ces dernières années à l apparition d une catégorie d affaires dans lesquelles les administrations chargées de l application de la loi ont présenté aux tribunaux des éléments de preuve directs des effets de certaines pratiques et se sont efforcées, dans le cadre de la procédure, de se dispenser de l obligation de définir le marché pertinent. Dans ces cas, les tribunaux ont examiné avec soin ces données directes. Dans d autres cas, la définition du marché fait 101

197 DAF/COMP(2008)31 l objet d une attention particulière. En fait, dans certains cas, cette définition du marché pourrait bien être le point déterminant. Ce domaine est désormais devenu suffisamment technique et structuré pour que les experts s entendent d une manière générale sur les propositions de base concernant la définition du marché et puissent préciser la problématique à l intention du tribunal d une manière déterminante pour sa décision. M. Jenny note que le mot «pertinent» n est pas employé en droit français lorsqu on envisage le concept de «marché». Le problème pour M. Jenny est dû au fait qu il n existe pas de définition unique du «marché» : les définitions varient selon que l on parle de droit commercial, de droit de la concurrence, de droit des pratiques commerciales déloyales etc. Le droit ne met pas l accent sur «le marché pertinent» et ne fait pas de différence entre les différents marchés à prendre en compte selon le type de droit qu il y a lieu d appliquer. Cela donne lieu à certaines difficultés. Les juges français n accordent guère de valeur à l économétrie et aux régressions pour la détermination des marchés, dans la mesure où, pour toute régression, il est possible d en présenter une autre qui donne un résultat différent. Pour M. Jenny, la régression est utile pour le jugement des affaires dans lesquelles elle confirme l intuition initiale du juge. M. Jenny hésite un peu à répondre à la deuxième partie de la première question, car il n est pas certain de la signification des mots «présentation détaillée». Si cela désigne les détails quant aux questions posées, il répondrait par l affirmative ; en revanche, si l exhaustivité consiste à indiquer tous les détails fastidieux de l expertise technique, sa réponse serait négative car les juges risquent de se perdre dans les détails. M. Jenny déclare par ailleurs qu une présentation précoce des problèmes économiques posés est utile, dans la mesure où elle aide les juges à savoir dans quelle direction ils devront mener leurs recherches au cours de l occasion d une affaire. En France, un avocat désigné par l ensemble des parties concernées est généralement chargé de piloter les recherches et passe environ une demi-heure à définir les caractéristiques de base de l affaire. Le Juge Ginsburg relève la remarque faite par M. Jenny concernant l intuition des juges. Selon lui, il faut faire appel à cette intuition tout en l éclairant ; des exemples familiers sont utiles à cet égard. Il est nécessaire de trouver dans chaque cas l illustration du principe en cause d une manière qui fasse appel à l intuition du tribunal. Le Président note que les commentaires antérieurs sur le langage courant restent toujours pertinents. Les autres participants proposent ensuite leurs commentaires. Le délégué du Brésil convient que les juges peuvent être embarrassés par les problèmes économiques et que des graphiques et documents visuels peuvent leur être utiles et leur donner des éclaircissements. Il donne l exemple d une affaire traitée dans son pays dans laquelle les graphiques ont été particulièrement utiles. La délégation brésilienne demande plus de précisions sur le processus de décision aux États-Unis. Le Juge Ginsburg explique que lorsque des rapports d experts économiques sont présentés aux États-Unis, ils le sont souvent sous une forme écrite dont un résumé est présenté lors de l audition. La valeur réelle de ces données est déterminée par le déroulement de l examen contradictoire au cours duquel un avocat s efforce de discréditer les dires de l expert de la partie adverse. Il n est pas réellement utile de s efforcer de discréditer les références d un expert dans la mesure où, en général, celui-ci a été bien choisi. En revanche, il faut discréditer son raisonnement économique. Il n y a pratiquement pas de cas où les experts sont autorisés à se poser mutuellement des questions. La procédure a lieu par l intermédiaire des avocats qui doivent se familiariser avec ce type de dossier pour procéder à un examen contradictoire efficace d un témoignage de l adversaire. M. Jenny revient à la remarque concernant les différences entre les systèmes accusatoires et inquisitoires. En France, les experts des deux parties ne communiquent pas entre eux tandis que le juge attendrait de connaître le résultat définitif de leur échange de vues. Toutefois, les juges peuvent poser des 102

198 DAF/COMP(2008)31 questions aux experts. Selon M. Jenny, cela pose un problème majeur : les juges posent rarement des questions aux experts soit parce qu ils ne savent pas quelles questions poser soit parce qu ils ne comprendraient pas la réponse. M. Jenny a assuré à des juges une formation spécifique dans ce domaine. Selon lui, le test Daubert 1 aux États-Unis est utile. M. Jenny a mis au point une série de 20 à 25 questions que tout juge peut poser à tout expert afin d être en mesure d évaluer l avis d expert qui lui est donné. Ces questions «assez simples» développent les idées de fiabilité, de pertinence, de cohérence interne, de publication éventuelle de la théorie en cause etc. M. Jenny a eu connaissance de cas dans lesquels l utilisation de ces questions a été efficace. Selon lui, une formation des juges leur permettant de savoir quelles sont les questions à poser contribue à replacer le processus de décision entre leurs mains ; elle contribue à faciliter la discussion et, par conséquent, améliore la capacité du juge de décider si l expertise proposée est utile dans le cadre de l affaire qu il a à traiter. Mme Csorgo s interroge sur l utilité du système accusatoire lorsqu on examine les données économiques. La procédure d examen contradictoire permet en général au juge de déterminer «ce qui reste» après que les deux parties aient présenté leurs dires. Cependant, en présence de témoignages économiques, il est possible que le juge ne soit pas très bien placé pour déterminer effectivement les conclusions à tirer de la procédure d examen contradictoire, notamment si les économistes utilisent cette procédure pour communiquer indirectement entre eux à un niveau qui dépasse la compréhension des non-spécialistes. Le délégué d Afrique du Sud note certains aspects exceptionnels du régime de la concurrence dans son pays. L Afrique du Sud applique un système accusatoire comportant des pouvoirs inquisitoires. En pratique, les commissions du tribunal exigent des éléments de preuve et des communications additionnelles, chargent des experts d établir des rapports et des documents complémentaires et interrogent ces experts en cas de nécessité. Ceux-ci répondent à toutes les questions par écrit. Il est fait observer que, si des examens contradictoires solides interviennent, les experts ne communiquent pas entre eux et il n existe pas de véritable «examen par les pairs» de leur témoignage au sens strict du terme. Pour le délégué d Afrique du Sud, l un des moyens d introduire ce type de composante dans la procédure consisterait à faire en sorte que les économistes communiquent directement entre eux oralement et par écrit. La publicité des auditions est également mentionnée comme un instrument de discipline efficace en ce qui concerne les économistes. En fait, il est fait observer qu en Afrique du Sud le caractère public des auditions apparaît comme une contrainte très efficace pour inciter les experts en économie à se montrer plus rigoureux. Le Président demande ensuite aux membres de la commission s ils ont eu des expériences d interventions simultanées («hot tubbing») c est-à-dire de cas où les experts et le tribunal communiquent directement entre eux. Le Juge Ginsburg déclare qu il n a jamais assisté à une telle pratique mais il connaît un juge qui l a trouvée très efficace. Le Juge Ginsburg a en revanche eu recours dans son tribunal à une pratique très comparable qui lui a semblé très efficace : après avoir entendu les arguments successifs des conseils des parties au moment du recours, il rappelle le premier expert, fait venir les deux experts à la barre et s adresse à eux à tour de rôle afin de préciser la question dans la mesure du possible. M. Jenny n a pas connaissance d exemples mais il estime qu une telle pratique pourrait être utile au juge car elle permettrait d évacuer les questions annexes sur lesquelles il existe un consensus. Le Président précise qu il oblige les avocats à faire en sorte que leurs experts s expriment en langage courant lorsqu ils procèdent à des examens contradictoires de manière à ne pas induire le juge en erreur. 1 Daubert v. Merrell Dow Pharmaceuticals 509 U.S. 579 (1993). 103

199 DAF/COMP(2008)31 Sur la question de savoir s il faut donner la préférence à un témoignage oral ou écrit, le Président souhaite demander des éclaircissements à la délégation finlandaise. Dans sa communication, celle-ci a souligné l avantage des communications orales ; mais celles-ci doivent-elles constituer un complément aux communications écrites ou un substitut à celles-ci? Le délégué de la Finlande répond qu il s agit d un complément au document écrit. En Finlande, la procédure judiciaire est lancée sur la base de documents de référence écrits qui peuvent s appuyer sur des théories et analyses économiques très approfondies. Toutefois, au cours de la procédure judiciaire, on a estimé que les conclusions d ensemble ou témoignages étaient plus efficaces lorsqu ils sont présentés par des experts confirmés qui sont en mesure de traduire les théories en langage courant. Cela a contribué à confirmer la solidité ou la légitimité des fondements théoriques qui sont utilisés pour déterminer le pouvoir de marché ou pour prouver l existence d un préjudice causé au consommateur. De plus, ces présentations offrent trois possibilités : (a) rendre l approche utilisée compréhensible par des non-spécialistes ; (b) résumer les principales conclusions et arguments ; et (c) fournir un cadre pour l utilisation d arguments contradictoires d une manière constructive. Le Président pose ensuite les questions suivantes : une présentation simplifiée et convaincante peut-elle être efficace (en d autres termes comment conciliez-vous le risque de trop entrer dans les détails par une longueur ou une technicité excessive avec le désir de ne pas tomber dans l excès inverse par une approche excessivement simpliste qui ne donne guère d explications)? ; quels sont les obstacles qui empêchent un juge ne disposant pas d une formation spécialisée en économie de comprendre une analyse relativement complexe? ; et Un juge doit-il rejeter une analyse économique qu il/elle ne comprend pas totalement parce que celle-ci n a pas été bien expliquée, et dans l affirmative, que doit faire le juge dans une telle situation? M. Jenny estime que le juge doit effectivement rejeter une analyse qu il/elle ne comprend pas bien. Sur la seconde question, il souligne qu il existe un très important problème de terminologie. Pour illustrer ce point, il donne l exemple des différentes significations du mot «prix» (s agit-il en effet de la somme effectivement versée ou du point où l offre est égale à la demande). Dans certains cas, M. Jenny s est trouvé embarrassé par le fait que cette différence d interprétation du «prix» a joué un rôle dans la prise de décision. Il souligne que le véritable obstacle à la compréhension de l analyse économique par un juge n est pas l utilisation de termes techniques ou le mode de présentation, mais le fait que l économiste part d une hypothèse ; cela est incompréhensible pour le juge parce que cela signifie que l hypothèse peut n être pas valable et risque donc d induire en erreur. M. Jenny admet qu il existe un niveau de complexité à éviter devant un tribunal. Mme Csorgo met l accent sur la première question. Elle convient que la présentation économique doit être intuitive et utiliser un langage technique clair et simple. Elle souligne par ailleurs le fait qu il est nécessaire de veiller à ne pas simplifier à l excès tout en rendant la théorie accessible. Le Juge Ginsburg revient à la remarque précédente de M. Jenny concernant la probabilité. Il fait observer que le contrôle des fusions est essentiellement prédictif et que la loi américaine prévoit un jugement prédictif. Le Juge Ginsburg ne pense pas que les juges américains soient embarrassés par la prise en compte du fait qu il faille envisager la probabilité de survenance d un événement donné. Il affirme que si le gouvernement a été débouté dans un certain nombre d affaires de fusions ces dernières années, ce n est pas à cause d un rejet par les juges de la notion de probabilité. 104

200 DAF/COMP(2008)31 M. Jenny développe ses commentaires antérieurs concernant les hypothèses à retenir. Il fait observer que, dans tout cas de pratiques abusives il faut partir de l hypothèse que l entreprise s efforce de maximiser son profit ; on part de cette hypothèse de rationalité et on l applique à une entreprise dominante. En Europe, les juges trouvent cela un peu troublant. Selon M. Jenny, il n y a qu un domaine qui ne semble pas poser de problème aux juges : la prédation. La prédation est une pratique anticoncurrentielle si l on admet que toute personne qui la pratique a en fait un comportement rationnel : elle subit une perte financière afin d éliminer la concurrence. Selon M. Jenny, la raison pour laquelle les juges n ont pas de difficulté avec la prédation n a rien à voir avec le fait qu ils admettent l hypothèse selon laquelle les personnes qui la pratiquent ont un comportement rationnel ; elle est plutôt due au fait que ce comportement est perçu comme manifestement déloyal. Le Juge Ginsburg examine ensuite la troisième question. Il fait observer que, si les juges ne comprennent pas l analyse économique, ils ne savent pas si c est parce qu elle n a pas été bien expliquée ou parce qu elle est inexplicable ; de toute manière, elle doit être rejetée. Selon le délégué des États-Unis, certains avocats préfèrent couper les analyses économiques dans leur argumentation et passer directement des faits à la conclusion. Cependant, le juge souhaite en général entendre les analyses économiques, s efforcer de les comprendre et souvent il est en mesure de le faire si les explications données sont appropriées. Il n est presque jamais souhaitable de laisser de côté certains éléments d analyse économique. Néanmoins, il peut être nécessaire de les simplifier, en particulier quant aux termes utilisés. Le Président passe ensuite aux questions suivantes : Y a-t-il des moyens de faire en sorte que la procédure ou la présentation utilisée maximise les chances que les arguments soient bien expliqués et que le juge les comprenne mieux? Un système accusatoire a-t-il plus de chances de faire la lumière sur les questions traitées qu un système inquisitoire? Faut-il prévoir des exposés écrits ou oraux d avocats ou d économistes? Qu en est-il du rôle à donner aux économistes nommés par le tribunal par opposition à ceux qui sont choisis par les parties? Qu en est-il de la notion de formation de base? Le Juge Ginsburg déclare que le meilleur moyen d adapter les présentations économiques aux besoins du tribunal est de partir d un niveau aussi basique que possible, et de demander au tribunal s il est prêt à aller au-delà. Cette approche serait beaucoup moins risquée qu une présentation trop complexe qui pourrait embarrasser les juges ou les dissuader de poser des questions. En ce qui concerne les fonctions d experts nommés par le tribunal, le Juge Ginsburg note que les règles applicables aux États-Unis autorisent la nomination d un expert par décision d un tribunal et que cette procédure est relativement peu controversée lorsqu elle a lieu conformément aux règles applicables (c est-à-dire de manière transparente) : les parties savent qui est l expert ; l expert auprès des tribunaux présente un exposé ou transmet une communication par écrit aux différentes parties. Cependant, le Juge Ginsburg note qu à plusieurs reprises d importants juristes ont estimé qu une cour d appel devait être en mesure de citer ses propres experts, soit qu elle les ait spécialement désignés à cette fin, soit qu ils soient choisis ponctuellement dans chaque cas d espèce. Il est fait observer qu une telle idée serait peu commode : la procédure d appel pourrait devenir si complexe et comporter tant de redites par rapport à la procédure suivie devant le juge du fait que le jeu n en vaudrait pas la chandelle. 105

201 DAF/COMP(2008)31 M. Jenny examine les questions dans leur application à la France. Dans son pays il n y a pas réellement de choix entre une présentation écrite et une présentation orale : tout argument qui n a pas été écrit dans les conclusions n est pas considéré comme recevable. Le procès doit débuter par une présentation écrite. Par conséquent l accent est mis sur la manière dont les économistes ou les experts interviennent. Selon l expérience de M. Jenny, en général, il est nettement préférable que l avocat comprenne les arguments économiques. Cela s explique surtout par le fait que c est lui qui est connu des juges et il sait en général mieux comment s adresser à eux que les économistes. M. Jenny note que, lorsque des éléments de preuve économique commencent à être utilisés dans des affaires antitrust, les économistes sont prêts à donner des arguments sur presque tous les points et qu il n existe pas de contrôle de qualité concernant leurs déclarations. Au fil du temps, certains de ces économistes ont acquis la réputation de soutenir n importe quoi ; par conséquent, aucun juge n accepte de les écouter. M. Jenny souligne qu il faudra du temps pour préparer le terrain à l autodiscipline. Mme Csorgo fait part de ses commentaires sur les économistes nommées par le tribunal. Au Canada, il existe des règles destinées à faire en sorte que toute nomination soit transparente. Le rapport de l expert nommé par le tribunal est disponible et les dires de l économiste peuvent faire l objet d un examen contradictoire des parties ainsi que des membres du tribunal. En fait, au Canada, l ensemble des présentations écrites et orales des économistes des parties sont disponibles, ainsi que les arguments des économistes nommés par le tribunal. La procédure est accusatoire, même lorsqu elle est menée face à un tribunal spécialisé. Mme Csorgo estime que cette procédure fonctionne bien. Lorsqu il n existe pas de tribunaux spécialisés, il est fait observer qu il serait très utile que les juges aient à leur disposition des questions leur permettant de tester la crédibilité des experts, comme l indique M. Jenny. Le Président note que la communication de l Allemagne mentionne la possibilité de faire intervenir des experts nommés par le tribunal. Le Président demande à la délégation de l Allemagne de traiter la question de savoir ce que peut faire l autorité de la concurrence pour aider le juge, soit dans le choix de l expert, soit dans la détermination de son mandat dans le cadre de la procédure. Le délégué de l Allemagne répond que l autorité de la concurrence de l Allemagne (le Bundeskartellamt) juge nécessaire que le tribunal nomme un expert expérimenté et neutre. En Allemagne, les décisions peuvent faire l objet de recours devant un tribunal spécialisé en première et en seconde instance, mais les juges n ont en général qu une formation juridique et non économique. Il est fait observer qu en principe le Bundeskartellamt et ses économistes semblent plus proches du monde de l économie et des personnes qui pourraient intervenir dans un tribunal en tant qu experts. En conséquence, ils pourraient contribuer à la recherche d experts et conseiller les tribunaux sur ceux qui auraient les connaissances les plus approfondies et l expérience requise concernant une question donnée. Quant aux questions qui pourraient être formulées, le délégué de l Allemagne fait observer qu il est essentiel de les énoncer aussi précisément que possible et définit les faits et les données qui devraient être utilisés comme base de l analyse afin de faire en sorte que les conclusions de l expert puissent être vérifiées à un stade ultérieur. Le Président fait observer que de nombreuses autorités de la concurrence disposent d une expertise économique en interne et ont le choix soit d utiliser cette expertise dans la présentation des données soit de faire appel à un expert extérieur. Il note que l exposé de l autorité de la concurrence du Portugal met l accent sur le fait que celle-ci a recours exclusivement à ses propres experts. Le Président demande au délégué du Portugal de donner des précisions sur le recours aux experts internes. Le délégué du Portugal donne l exemple d une affaire concernant une entente sur le marché du sel dans son pays. Dans cette affaire, l autorité portugaise de la concurrence a trouvé des preuves concluantes de l existence de cette entente à la suite de descentes à l aube dans quatre entreprises qui contrôlaient 80 % du marché. Outre ces preuves indiscutables, l autorité a également trouvé des preuves convaincantes concernant le mécanisme de rémunération que ces entreprises avaient mis en place dans le cadre de cette 106

202 DAF/COMP(2008)31 entente. Ces données ont permis à l autorité de calculer d une manière très simple, intuitive et mathématique les avantages économiques que ces entreprises tiraient de leur comportement. Cette simplicité a été maintenue au cours de la procédure judiciaire de manière à éviter l emploi de termes économiques complexes. Selon le délégué du Portugal, bien que l une des parties ait présenté une autre méthode sous une forme plus technique devant le tribunal, pour des raisons liées à la compréhension, la position de l autorité de la concurrence a été confirmée non seulement en première instance mais aussi en appel. Le Président demande ensuite au délégué de la Corée de résumer brièvement l expérience de la Korean Fair Trade Commission (KFTC) concernant les avantages et les inconvénients du recours à des experts économiques extérieurs. Le délégué de la Corée note que, dans 14 affaires entre 2005 et 2007, la KFTC a eu recours à des experts extérieurs. Le recours à de ces experts présente un certain nombre d avantages, surtout lorsque l obtention de données économiques est essentielle pour trancher une affaire en cours. En général, le juge a tendance à faire confiance à un tiers objectif du secteur public plutôt qu au personnel de la KFTC. En d autres termes, le recours à des experts extérieurs est préférable pour assurer la crédibilité des données économiques transmises par la KFTC. Selon le délégué de la Corée, à la fin de 2005, la KFTC a créé une nouvelle unité désignée sous le nom d Équipe d analyses économétriques qui est composée de plusieurs économistes afin de renforcer les capacités d analyse économique. Cependant, elle ne dispose pas actuellement d un personnel suffisant pour mener à bien ses analyses. La KFTC a rencontré des problèmes pour obtenir la contribution d experts extérieurs, notamment du fait du choix limité d économistes dont elle disposait. Le budget relativement limité de la KFTC, notamment si on le compare à celui des parties adverses, est également un facteur négatif. Le Président demande au Royaume-Uni de commenter les questions posées. Le délégué du Royaume-Uni déclare que le message essentiel de sa communication est de «rester simple». Dix principes sont énumérés dans cette communication 2 ; ils comprennent l idée d utiliser un langage simple et non technique et de s assurer que l aspect économique de l affaire correspond bien à son aspect juridique. Ils soulignent la nécessité de s assurer que la théorie économique est bien fondée par rapport aux données concernant l affaire. Deux citations judiciaires sont données pour montrer que les juges peuvent être embarrassés par des données économiques. Pour le délégué du Royaume-Uni, tous les arguments économiques doivent être testés jusqu à leur remise en cause par des collègues qui mettront l accent sur la question de savoir si de tels arguments sont compréhensibles pour le juge ; en aucun cas il ne faut partir de l hypothèse que ces arguments sont compris. Le délégué du BIAC intervient et note que cet organisme a établi une liste qui se trouve être très proche de celle qui figure dans la communication du Royaume-Uni ; elle contient dix recommandations «simples». En particulier, elle recommande une présentation simple des données économiques qui fait appel à la logique du tribunal et qui relève de l intuition. Le délégué du BIAC note qu il y a eu des cas dans lesquels les économistes se sont efforcés d adopter pour postulat une théorie ou de démontrer une certaine méthodologie qui ne cadrait pas avec l analyse juridique, ce qui est à éviter. Si les économistes s appuient sur des théories solides et non sur des théories qui n ont pas été acceptées par un grand nombre de leurs pairs, les chances de voir rejeter leur argumentation par un tribunal se trouvent nettement réduites. Plus généralement, le BIAC souligne la nécessité, pour les tribunaux, de maîtriser l économie : l aspect économique est important dans de nombreux cas, dans la mesure où il peut montrer où se trouve le dommage ou l absence de dommage. Le BIAC serait favorable à des mesures générales ainsi qu à des mesures spécifiques permettant d améliorer la perception des données économiques par les tribunaux. 2 Voir DAF/COMP/WP3/WD(2008)24, 4 à

203 DAF/COMP(2008)31 Le Président remercie le BIAC de sa communication et demande aux membres de la Commission de faire part de leurs conclusions. Pour Mme Csorgo il est clair que la théorie économique doit s appuyer sur les faits. Toutefois, les données qui, pour une raison ou pour une autre, ne sont pas pertinentes pour l affaire en cause présentent également un intérêt (il est vrai moindre). Ces données présentent des avantages, dans la mesure où beaucoup de faits qui sont laissés de côté ajoutent un éclairage intéressant à une affaire. L expert économiste peut jouer un rôle en expliquant pourquoi un certain ensemble d informations par ailleurs intéressant n est pas réellement pertinent pour ce que l on essaie de décider et d expliquer. M. Jenny souhaite faire observer que, même si la présentation de données économiques aux juges présente des difficultés, des progrès ont été accomplis dans ce domaine. Les juges cherchent à comprendre et les problèmes posés ne sont pas dus à une étroitesse d esprit de leur part. Pourtant, ce qui les inquiète c est la méthodologie utilisée et ils souhaiteraient mieux la comprendre et mieux participer aux débats. Selon M. Jenny ce point est positif. Le Juge Ginsburg reprend la remarque formulée par le Royaume-Uni sur la nécessité de ne pas invoquer d arguments nouveaux ou d arguments qui n ont pas résisté à une analyse approfondie au fil des années. Le droit de la concurrence est singulier et peut-être unique en son genre, dans la mesure où il fait référence à un corps de connaissances et de sciences sociales qui sont essentiellement sujettes à une évolution, à de nouveaux progrès et à l infirmation de certaines hypothèses à mesure que l on progresse. Les avocats ont tendance à utiliser tout argument qui peut leur permettre de gagner. Le Juge Ginsburg note qu une importante responsabilité des autorités de la concurrence consiste à ne pas permettre à leurs avocats d évoquer des arguments économiques entièrement nouveaux ; prendre des décisions fondées sur les derniers numéros des revues économiques si c est seulement pour voir ces opinions rejetées quelques années plus tard ne présenterait aucun avantage pour le droit de la concurrence. Le Président remercie les délégations pour leurs communications ainsi que les trois membres de la Commission et clôt les travaux de la Table ronde. 108

204 Fosmire v. Progressive Max Insurance Company, et al Doc UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE ELAINE FOSMIRE, v. Plaintiff, CASE NO. C JLR ORDER PROGRESSIVE MAX INSURANCE COMPANY, et al., Defendants. I. INTRODUCTION This is a putative class action based on Plaintiff Elaine Fosmire s allegations that Defendants Progressive Max Insurance Company ( Progressive Max ), Progressive Casualty Insurance Company ( Progressive Casualty ), Progressive Direct Insurance Company ( Progressive Direct ), and Progressive Corporation (collectively, Progressive ) sold automobile insurance policies in Washington State and throughout the United States that contained coverage for underinsured and uninsured ( UIM ) ORDER- 1 Dockets.Justia.com

205 property damages. (See Am. Compl. (Dkt. # 105) 1.2.) Ms. Fosmire alleges that Progressive s standard form UIM policies uniformly obligated Progressive to pay to the policyholder damages which an insured is legally entitled to recover from the owner or operator of an uninsured/underinsured motor vehicle. (Id.; see also id. 9.3; Class Cert. Mot. (Dkt. # 64) at 1.) Ms. Fosmire contends that Washington and the other states in which Progressive issues UIM insurance policies require Progressive to pay its insured not only for the cost to repair their damaged vehicle, but also for the diminution in value that is associated with the repairs. Ms. Fosmire alleges that diminished value losses result from the irreparable residual damage that remains even though a vehicle has been properly repaired. (See Am. Compl. 1.3.) Ms. Fosmire further claims that Progressive has breached its contractual obligations to pay diminished value losses to her, as well as to the other putative class members. There are two motions before the court: (1) Ms. Fosmire s motion for class certification (Dkt. ## 64 (sealed) & 91 (redacted)), and (2) Progressive s motion to exclude the expert report of Dr. Nayak L. Polissar in support of the class certification (Dkt. # 87). Having reviewed the relevant law and the papers submitted in support and opposition to the motions, and having heard the oral argument of counsel on October 7, 2011, the court GRANTS Progressive s motion to exclude the expert report, and DENIES Ms. Fosmire s motion for class certification. 20 II. FACTUAL AND PROCEDURAL BACKGROUND On June 5, 2007, Ms. Fosmire s 2007 Mazda was damaged in a collision with an uninsured motorist in King County, Washington. (Am. Compl. 6.1.) Ms. Fosmire was ORDER- 2

206 insured by Progressive Max, and her insurance policy included UIM coverage for physical damages. (Id. 6.2.) Progressive paid for repairs to Ms. Fosmire s vehicle. (Id.) After the repairs were complete, Ms. Fosmire had her vehicle inspected for diminished value loss and made a demand for this loss. (See id. 6.4.) She was advised, however, that her policy did not cover diminished value loss. (Id. 6.5.) In response, Ms. Fosmire brought suit against Progressive in the form of a putative class action for breach of contract, as well as for declaratory and injunctive relief. (Id ) She asserts that Progressive did not fully inspect her vehicle for diminished value loss, did not fully compensated her for diminished value loss, and did not inform her about diminished value loss and her right to recover it. (Id. 6.6.) Although Progressive acknowledges the potential for diminished value loss (see Hansen Decl. (Dkt. # 65) Ex. 2 ( Progressive Claims Standards ) at 56), Ms. Fosmire asserts that Progressive nevertheless avoids paying this loss under its UIM coverage by design (see Class Cert. Mot. at 1). Ms. Fosmire alleges that when a Progressive insured reports a UIM claim for property loss, Progressive does not disclose to the insured that they may make a claim for diminished value, but rather unfairly burdens the insured to learn about, pursue, and prove a claim for diminished loss independently. (See Am. Compl. 8.6, 8.8.) Progressive does not consider a claim for diminished value until such time as a customer specifically states that he or she would like to make a claim for diminished value and presents some type of proof. (See, e.g., Hansen Decl. Ex. 3 ( Hicks Dep. ) at (Progressive does not consider a diminished value claim until the insured says Hey, I would like to present a [diminished value] claim and then presents some ORDER- 3

207 type of proof); Id. Ex. 16 ( Norris Dep. ) at ; Progressive Claims Standards at 57 ( It is the claimant s duty to establish that damage for diminution of value was sustained. ).) Ms. Fosmire refers to this as Progressive s don t ask, don t tell policy concerning diminished value. (See Class Cert. Mot. at 2-3, 6-10.) On August 31, 2010, the court dismissed Ms. Fosmire s claims with respect to Progressive Casualty, Progressive Direct, and Progressive Corporation without prejudice, but also granted Ms. Fosmire leave to move to amend her complaint as appropriate (Dkt. # 40 at 5-6, 10), and to conduct discovery into the relationship between Progressive Max and the dismissed Progressive entities (see Min. Ord (Dkt. # 48). Class discovery also proceeded between Progressive Max and Ms. Fosmire with regard to the seven states 1 in which Progressive Max issues policies. (See Resp. to Mot. to Am. (Dkt. # 67) at 2.) On March 3, 2011, Ms. Fosmire filed a motion to amend her complaint to include additional allegations concerning the inter-relatedness of the four original defendants, and to add again the three defendants that the court had previously dismissed based on the inadequate pleading in Ms. Fosmire s original complaint. (Dkt. # 59.) On September 26, 2011, the court granted Ms. Fosmire s motion for leave to amend her complaint to re-add the previously dismissed defendants. (Dkt. # 104.) These three defendants issue UIM policies in an additional 17 states. (See Resp. to Mot. to Am. at 2.) Those states are Georgia, Ohio, Rhode Island, South Carolina, Virginia, Washington, and West Virginia. (Class Cert. Mot. at 1 n.2.) ORDER- 4

208 1 2 3 On March 8, 2011, Ms. Fosmire also filed her present motion to certify her class action. (Dkt. # 64.) On April 5, 2011, Progressive filed its present motion to exclude Ms. Fosmire s expert s report. (Dkt. # 87.) 4 III. ANALYSIS A. Motion to Exclude the Expert Report of Dr. Polissar 2 The proper scope of the court s inquiry into an expert s testimony at the class certification stage is presently unclear. Citing American Honda Motor Company, Inc. v. Allen, 600 F.3d 813, (7th Cir. 2010), 3 Progressive urges the court to conduct a full Daubert analysis 4 of Dr. Polissar s expert report. (See Mot. to Exclude (Dkt. # 87) at 2-3.) The Ninth Circuit, however, has not yet resolved whether a full analysis under Federal Rule of Evidence 702 and Daubert is required at the class certification stage. See Dukes v. Wal-Mart Stores, Inc., 603 F.3d 571, 603 n.22 (9th Cir. 2010) ( We are not Along with her response to Progressive s motion to exclude Dr. Polissar s expert report, Ms. Fosmire submitted a declaration by Dr. Polissar. (See Polissar Decl. (Dkt. # 96).) Progressive asks the court to strike this declaration as an untimely and unpermitted supplemental expert report. (Reply (Dkt. # 97) at 1.) The court finds that Dr. Polissar s declaration represents a proper evidentiary submission in response to Progressive s motion to exclude his expert report. Further, Progressive had adequate opportunity to respond to Dr. Polissar s declaration in its reply memorandum, and thus has not been prejudiced by its submission. Accordingly, the court denies Progressive s motion (contained within its reply memorandum) to strike Dr. Polissar s declaration. 3 In American Honda, the Seventh Circuit held that when an expert s report or testimony is critical to class certification,... a district court must conclusively rule on any challenge to the expert s qualifications or submissions prior to ruling on a class certification motion. That is, the district court must perform a full Daubert analysis before certifying the class if the situation warrants. Am. Honda, 600 F.3d at See Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 597 (1993). ORDER- 5

209 convinced... that Daubert has exactly the same application at the class certification stage as it does to expert testimony relevant at trial. However,... we need not resolve this issue here. ) (citation omitted), rev d on other grounds, --- U.S. ---, 131 S. Ct (2011). Nevertheless, the Supreme Court recently suggested that a full Daubert analysis may be required even at class certification. See Wal-Mart Stores, Inc. v. Dukes, --- U.S. - --, 131 S. Ct. 2541, (2011) ( The District Court concluded the Daubert did not apply to expert testimony at the [class] certification stage.... We doubt that it so.... ). 5 Despite the Supreme Court s dictum in Dukes, at least one circuit court has rejected the notion that a trial court is required to conduct an exhaustive and conclusive Daubert inquiry at the class certification stage, opting instead for a focused Daubert analysis which scrutinize[s] the reliability of the expert testimony in light of the criteria for class certification and the current state of the evidence. In re Zurn Pex Plumbing Prods. Liab. Litig., 644 F.3d 604, 613, 614 (8th Cir. 2011). This court believes that Zurn has struck the right balance. It honors the Supreme Court s dictum in Dukes by applying Daubert at class certification, but it does so in a manner that recognizes the specific criteria under consideration, as well as the differing stage of discovery and state of the evidence, at the class certification stage. Further, Zurn is consistent with previous rulings by this court. See Hovenkotter v. Safeco Ins. Co., No. C JLR, 2010 WL , at *4 (W.D The Ninth Circuit has advised that although Supreme Court dicta bear greater weight than dicta from other courts, such pronouncements are still not binding on lower courts. United States v. Montero-Camargo, 208 F.3d 1122, 1132 n.17 (9th Cir. 2000). ORDER- 6

210 Wash. Oct. 11, 2010) ( [T]he court s consideration of the [experts ] opinions requires it to determine whether their opinions tend to show commonality of claims and damages among the class members; the court need not conduct a full Daubert analysis as to the admissibility for trial of the expert s opinions. ) (citing Dukes, 603 F.3d at 603 ( At the class certification stage, it is enough that [the expert] presented scientifically reliable evidence tending to show that a common question of fact... exists with respect to all members of the class. )). Regardless, the court need not decide whether a full Daubert analysis or something less is required here because even under the more relaxed approach, Dr. Polissar s expert report does not pass scrutiny. Ms. Fosmire s position is that although individual damages will vary, the amount of individual damages and aggregate classwide damages can be calculated using a methodology to be developed by Dr. Polissar and information contained in Progressive s records. According to Ms. Fosmire, Dr. Polissar will use the data collecting protocol established by another expert in the field, Dr. Bernard Siskin (who will not testify at trial), to isolate the effect of diminution value from the total value of the vehicle. Dr. Siskin, a former expert employed by Plaintiff s counsel for purposes of a different litigation, collected his underlying data approximately 10 years ago by sending inspectors to various car auctions throughout the United States. (See Mot. to Exclude at 5 (citing Polissar Report (Ex. F to Class Cert. Mot.)).) At these various auctions, the inspectors collected information on both damaged and undamaged vehicles, which Dr. Siskin used to create his database. (Id.) 22 ORDER- 7

211 Dr. Polissar's expert report is deficient in several ways. First, although his opinions are based on Dr. Siskin s data and methodology, there is nothing in the record to indicate that Dr. Polissar has tested Dr. Siskin s underlying data to ensure its reliability or that Dr. Polissar even has access to Dr. Siskin s underlying data. (See Donohue Decl. (Dkt. # 88) Ex. A ( Polissar Dep. ) at 161:12-20; Polissar Decl. (Dkt. # 96) 39 ( Defendant notes that the [Siskin] data collection forms have been destroyed and cannot 7 be compared to the current data. That is true. ).) 6 In fact, although Ms. Fosmire asserts 8 9 that Dr. Polissar intends to carry out his own analysis of the data (see Resp. to Mot. to Exclude (Dkt. # 94) at 9; Polissar Decl. at 6), there is no evidence that he has done so to 10 date. 7 In response to these criticisms, Dr. Polissar asserts that Dr. Siskin s dataset has been accepted in other cases. (Polissar Decl. at 2, 27.) This fact, however, is of no import here where Dr. Siskin apparently will not be available to testify at trial or available for cross-examination. Federal Rules of Evidence 702 and 703 permit an expert to rely upon facts or data that is of a type reasonably relied upon by experts in the field. See Fed. R. Evid. 702 & 703. The rules do not permit an expert to rely upon opinions developed by another expert for purposes of litigation without independent verification of the underlying Dr. Polissar does testify that he nevertheless has confidence in the conversion of the original data to electronic format. (Pollisar Decl. 39.) Dr. Polissar s confidence, however, does not alleviate the underlying evidentiary problem surrounding the destruction of the original data collection forms upon which Dr. Siskin s original analysis was based. 7 See Hovenkotter, 2010 WL , at *5 ( Essentially, Dr. Polissar is parroting the opinions developed by Dr. Siskin. ) ORDER- 8

212 expert s work. See In re Imperial Credit Indus., Inc. Secs. Litig., 252 F. Supp. 2d 1005, 1012 (C.D. Cal. 2003) (holding that it was improper for an accountant to testify to the information found in an expert report authored by a purported residual valuation expert regarding another litigation). Under such circumstances, courts have held the expert s testimony to be inadmissible. Id. at 1013 (citing cases); see also Alphamed Pharm. Corp. v. Arriva Pharm., Inc., 432 F. Supp. 2d 1319, (S.D. Fla. 2006) (holding that expert s reliance on another expert s analysis developed for use in another litigation, in the admitted absence of his own verification of that analysis, was inadmissible). Further, although Progressive produced electronic information to Ms. Fosmire on October 11, 2010, regarding UIM claims that Progressive Max paid to its insureds during the class period, Dr. Polissar does not base his opinions on this data or incorporate it into his expert opinion. Indeed, he has never seen Progressive Max s data. (Polissar Dep. at 27:17-21; Polissar Decl. 10.) Remarkably, he has never even seen a description of the class. (Polissar Dep. at 192:12-193:22.) Instead, his opinion is based solely upon Dr. Siskin s data. (See id. at 31:5-10; 143:23-144:2.) However, the Siskin data is approximately ten years old. (Polissar Decl. 10.) Thus, the court concludes that the Siskin data is not representative of the vehicles in the class Ms. Fosmire seeks to certify. Dr. Polissar s own testimony is definitive on this point: Q: So if I can clarify your answer, your answer is that you agree that... the auction survey data is not representative of the class sought to be certified, but you don t believe that that s going to be a problem for you down the road? A: Well, wait, I have not seen a description of the class that will be applied [sic] to yet, so certainly in terms [sic] age I don t think it s going to be ORDER- 9

213 representative of them. I mean age excuse me, the year of determination, the year of activity of the car won t be representative. ************ But as far as a, you know, mixture of makes and models and age at the time of wreck and mileages and so forth, I have not seen a description of the class that we will be applying this to, so I don t I can t comment on that yet. (Polissar Dep. at 193:3-19.) 8 Finally, Dr. Polissar has conceded that he has not yet developed a specific model based on the Siskin data. (Polissar Dep. at 28:8-16; 31:15-19.) In his declaration, Dr. Polissar states that he will use various diagnostic methods to determine if the [linear regression] model is appropriate for the data being considered. (Polissar Decl. 5 (italics added).) He also states that a second method of model-building will be explored, if needed: classification and regression tree (CART). (Id. 8.) He states further that through the progression of the case,... the diminished value modeling may change as needed...., [but] such analysis is certainly possible given the dataset available. (Id. 9 (italics added).) Citing Negrete v. Allianz Life Insurance Company, 238 F.R.D. 482, 495 (C.D. Cal. 2006), Ms. Fosmire asserts that, at the class certification stage, she need not actually Although Dr. Polissar attempts to minimize the significance of this deposition testimony in his later filed declaration (see Polissar Decl ), he nevertheless acknowledges that [i]t is within the realm of possibility that we will find some important difference between the Progressive class vehicles and those studied in the auto auction survey a difference in the relationship of damage to sales price (id. 25). He states that if this occurs, he will certainly address that issue, but never indicates how. (See id.) ORDER- 10

214 supply a precise damages formula, but rather need only show that her proposed method for calculating class damages is plausible. (Resp. at 6; see also id at 3 (asserting that she merely needs to offer a propose method for determining damages that is not so insubstantial as to amount to no method at all ) (quoting In re Online DVD Rental Antitrust Litig., 2010 WL (N.D. Cal. Dec. 23, 2010) (internal quotations omitted)).) 9 In Negrete, the plaintiffs expert not only identified two methods to calculate damages, but had also analyzed the vast majority of annuities at issue in th[e] case. 238 F.R.D. at 494. Here, by way of contrast, Dr. Polissar has examined none of Progressive s data, and has not even received a description of the proposed class. See Sommers v. Apple, Inc., 258 F.R.D. 354, (N.D. Cal. 2007) (where expert conceded that he had not yet developed a model or worked with any data in the context of the specific case, the court concluded that the plaintiff had failed to meet her burden of establishing a reliable method for proving common impact ). If Progressive had not yet made its data available to Ms. Fosmire, the court s view may have been more lenient. Ms. Fosmire, however, has had the relevant data from Progressive available to her since October 11, and yet Dr. Polissar has not even examined a representative The court doubts that the lax standard set forth in In re Online DVD Rental remains viable following the Supreme Court s decision in Duke and its dicta indicating that some form of Daubert analysis is applicable at the class certification stage. See Dukes, 131 S. Ct. at On October 11, 2010, Progressive produced to Ms. Fosmire information on 11,882 uninsured or underinsured motorist claims that Progressive had paid to its insureds from May 2004 to June 2010 in the seven states in which Progressive Max issues UIM policies. (Donohue ORDER- 11

215 sample, let alone attempted to test either one of his proposed models. Under the foregoing specific facts, the court finds that Ms. Fosmire has failed to demonstrate that Dr. Polissar s report meets the scientific reliability standard necessary at this stage in the proceedings. The court, therefore, GRANTS Progressive s motion to exclude Dr. Polissar s expert report. B. Motion for Class Certification under Rule 23(b)(2) and/or 23(b)(3) Ms. Fosmire moves to certify a nation-wide class action under Federal Rules of Civil Procedure 23(b)(2) and 23(b)(3) with regard to her breach of contract claim. Progressive Max issues UIM policies in seven different states. The other three defendants, which the court recently allowed Ms. Fosmire to add back into her amended class action complaint, issue such policies in an additional 17 states. Ms. Fosmire proposes two separate classes to prosecute her breach of contract claim: (1) a Rule 23(b)(3) class seeking monetary relief, and (2) a Rule 23(b)(2) seeking only injunctive relief. 1. Standards for Class Action Certification A district court may certify a class only if all of the requirements of Federal Rule of Civil Procedure 23(a) are met, including: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; Decl. 2.) The data was produced in an excel spreadsheet and contained information, including: claim year, claim number, claim report, policy identification number, policy start date, policy end date, total loss indicator, vehicle manufacturer, vehicle model, vehicle model year, odometer mileage, vehicle identification number ( VIN ), feature total payment amount, and total deductible amount. (Id.) ORDER- 12

216 (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class. Fed. R. Civ. P. 23(a); see also Rodriguez v. Hayes, 591 F.3d 1105, 1122 (9th Cir. 2010). These Rule 23(a) prerequisites are often referred to in shorthand as numerosity, commonality, adequacy, and typicality. Certification is proper only if the trial court is satisfied, after a rigorous analysis, that the prerequisites of Rule 23(a) have been satisfied. Dukes, 131 S. Ct. at 2551 (quoting Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147, 161 (1982)). In addition to meeting the Rule 23(a) prerequisites, the party seeking class certification must also fall into one of three categories under Rule 23(b). Zinser v. Accufix Research Inst., Inc., 253 F.3d 1180, 1186 (9th Cir. 2001), amended by 273 F.3d 1266 (9th Cir. 2001). Here, Ms. Fosmire seeks class certification of her claim for damages under Rule 23(b)(3) on the basis that questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy. Fed. R. Civ. P. 23(b)(3). Ms. Fosmire also seeks class certification of her claim for injunctive relief under Rule 23(b)(2), which applies when the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole. Fed. R. Civ. P. 23(b)(2). Rule 23 does not set forth a mere pleading standard. Dukes, 131 S. Ct. at A party seeking class certification must affirmatively demonstrate his compliance with ORDER- 13

217 [Rule 23] that is, he must be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact, etc. Id. [S]ometimes it may be necessary for the court to probe behind the pleadings before coming to rest on the certification question. Id. (quoting Falcon, 457 U.S. at 160). The class determination generally involves considerations that are enmeshed in the factual and legal issues comprising the plaintiff s cause of action. Id. (quoting Falcon, 457 U.S. at 160). If a court is not fully satisfied that the requirements of Rules 23(a) and (b) have been met, certification should be refused. Falcon, 457 U.S. at Rule 23(a) Prerequisites To satisfy Rule 23(a) s numerosity prerequisite, Ms. Fosmire asserts that there are potentially thousands of class members. Progressive does not dispute Ms. Fosmire s assertion that the numerosity prerequisite is satisfied. Although Progressive vigorously disputes that common questions predominate over individual questions under Rule 23(b)(3), Progressive does not mount any serious opposition to Ms. Fosmire s assertion that Rule 23(a) s commonality prerequisite is met as well. Progressive does, however, dispute that Ms. Fosmire satisfies either the typicality or the adequacy prerequisite. a. Typicality To demonstrate typicality, Ms. Fosmire must show that her claims are typical of the class. Fed. R. Civ. P. 23(a)(3). The test of typicality is whether other members have the same or similar injury, whether the action is based on conduct which is not unique to the named plaintiffs, and whether other class members have been injured by the same course of conduct. Ellis v. Costco Wholesale Corp., --- F.3d ----, 2011 WL ORDER- 14

218 , at *11 (9th Cir. Sept. 16, 2011) (quoting Hanon v. Dataproducts Corp., 976 F.2d 497, 508 (9th Cir. 1992) (citation omitted)). Typicality refers to the nature of the claim or defense of the class representative, and not to the specific facts from which it arose or the relief sought. Id. (internal citation and quotation marks omitted). [A] named plaintiff s motion for class certification should not be granted if there is a danger that absent class members will suffer if their representative is preoccupied with defenses unique to it. Hanon, 976 F.2d at 508 (quoting Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 903 F.2d 176, 180 (2d Cir.1990)). Progressive asserts that Ms. Fosmire s claim lacks typicality with the putative class for two reasons. First, Progressive asserts that her automobile has suffered from damage from other accidents during time periods when Progressive was not her insurer, both prior to and after the accident at issue, rendering it virtually impossible to determine whether any diminished value loss should be attributable to the 2007 accident. (Resp. to Class Cert. Mot. (Dkt. # 89) at 20.) Second, Progressive asserts that when she purchased her policy, she made a material misrepresentation regarding who would drive her car, and that it was not until after her accident in 2007 (during which her fiancé was at the wheel) that Ms. Fosmire acknowledged that her fiancé was a regular driver in her household who should be added to the policy. (Id. at (citing Glade Decl. (Dkt. # 90) Ex. D ( Fosmire Dep. ) at 53:9-55:13 & 56:14-17, & Exs. I, J, & K).) In response, Ms. Fosmire asserts that, at the time of her vehicle inspection, Progressive recorded any repaired or unrepaired damage from prior accidents so that ORDER- 15

219 such losses could be segregated from diminished value with respect to the 2007 accident. (Reply to Class Cert. Mot. (Dkt. # 98) at 2.) She also argues that subsequent damage to her vehicle is irrelevant as damages are calculated at the time that Progressive inspects a vehicle. (Id.) The court finds it likely that many automobiles among the thousands within the proposed class may have sustained damage prior to the accident that qualifies them as part of the purported class. While the issue of other accidents related to subject vehicles in the proposed class may impact the issue of predominance under Rule 23(b)(3), it does not render Ms. Fosmire s claim atypical of the proposed class under Rule 23(a). The court is, however, more concerned about the second issue, namely: whether Ms. Fosmire made a material misrepresentation upon her insurance application by failing to identify her fiancé as an additional driver of her automobile. While Ms. Fosmire asserts that she did not make a material misrepresentation because her fiancé did not meet the definition of an additional driver (Reply to Class Cert. Mot. at 2 n.4), the court is concerned that litigation concerning this defense will preoccupy Ms. Fosmire 16 to the detriment of class claims irrespective of whether she ultimately prevails. 11 In addition, it threatens to undermine her credibility at trial, which also undermines the 11 Whether a misrepresentation is made with an intent to deceive is a question of fact under Washington law. See Cutter & Buck, Inc. v. Genesis Ins. Co., 306 F. Supp. 2d 988, 1004 (W.D. Wash. 2004) (citing Wilburn v. Pioneer Mutual Life Ins. Co., 508 P.2d 632, 635 (Wash. 1973)). The Washington Supreme Court has noted, however, that [w]hen a false statement has been made knowingly, there is a presumption that it was made with intent to deceive.... Id. (citing Music v. United Ins. Co. of Am., 370 P.2d 603, 606 (Wash. 1962). Further, in the absence of credible evidence that the alleged false representations were made without an intent to deceive, the presumption prevails. Id. ORDER- 16

220 element of typicality. See, e.g., Drake v. Morgan Stanley & Co., No. CV ODW (RCx), 2010 WL , at *5 (C.D. Cal. Apr. 30, 2010) (questions concerning the named plaintiff s lack of credibility, in part, renders her claim atypical). The court finds that the existence of this potential defense to coverage under Ms. Fosmire s policy, as well as associated questions concerning her credibility, threaten to become a preoccupation of the trial in this matter. Accordingly, the court concludes that Ms. Fosmire has failed to establish the typicality requirement of Rule 23(a). b. Adequacy Rule 23(a)(4) provides that class representatives must fairly and adequately protect the interests of the class. Fed. R. Civ. P. 23(a)(4). The adequacy inquiry under Rule 23(a)(4) serves to uncover conflicts of interest between named parties and the class they seek to represent. Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 625 (1997). In Washington, stigma damages are not considered diminished value. Degenhart v. AIU Holdings, Inc., No. C RBL, 2010 WL , at * 5 (W.D. Wash. Nov. 26, 2010). Rather, diminished value loss arises when a vehicle sustains physical damage in an accident, but due to the nature of the damage, it cannot be fully restored to its pre-loss condition. The remaining physical damage, such as weakened metal which cannot be repaired results in diminished value. Id. (citing Moeller v. Farmers Ins. Co., 229 P.3d 857, (Wash. Ct. App. 2010)). Accordingly, Ms. Fosmire has defined the class to exclude any claims for stigma damages. (See Reply to Class Cert. Mot. at 2-3.) While this decision may maximize Ms. Fosmire s ability to assert commonality between her claim and other class members ORDER- 17

221 claims under Rule 23(a)(2), as well as the predominance of common questions over individual questions under Rule 23(b)(3), it creates other issues with regard to the adequacy of Ms. Fosmire s representation of the putative class. As a result of Ms. Fosmire s claim splitting, class members from other states who have both diminished value claims arising from residual property damage, as well as stigma damages, cannot bring their stigma damages claims in this lawsuit. Progressive asserts that these class members risk being prevented by the doctrines of claim or issue preclusion from ever pursuing stigma damages in another lawsuit. (Resp. to Class Cert. at 22.) The court agrees, and concludes that Ms. Fosmire s attempt to split her putative class members claim by excluding stigma damages creates a conflict between her interests and the interests of the putative class, rendering her an inadequate class representative. See, e.g., Sanchez v. Wal Mart Stores, Inc., No. 2:06-CV JAM- KJM, 2009 WL , at *3 (E.D. Cal. May 28, 2009) (finding that plaintiff s strategic claim-splitting decision creates a conflict between Plaintiff s interests and those of the putative class, and renders Plaintiff an inadequate class representative ); Kruegger v. Wyeth, Inc., No. 03cv2496 JLS (AJB), 2008 WL , at *2-*4 (S.D. Cal. Feb. 19, 2008) ( [T]he existence of claim splitting constitutes a compelling reason to deny class certification. ). 3. Rule 23(b)(3) Criteria Even assuming that Ms. Fosmire s claim met the foundational requirements of typicality and adequacy under Rule 23(a), her claim still would not qualify for class certification under the requirements of Rule 23(b). Ms. Fosmire alleges that common ORDER- 18

222 questions of law or fact predominate over individual questions because (1) the relevant language in the various policies is highly similar (see Class Cert. Mot. Ex. A.); (2) Progressive s don t ask, don t tell policy is consistent throughout the relevant states; (3) the breach of contract claims have similar elements in all relevant states; (4) the states at issue recognize that diminished value is recoverable under tort law (see id. Ex. B); and (5) according to Ms. Fosmire, a class-wide determination of diminution of value damages is possible. 12 The court, however, concludes that individual, and not common, questions will predominate in this lawsuit. There are at least seven states in which Progressive Max issues policies with UIM coverage, and at least 17 forms of those policies. In addition, as a result of the court s prior ruling granting Ms. Fosmire s motion to amend her complaint to add once again the other three Progressive Defendants (see Order (Dkt. # 104)), there 13 may ultimately be a total of 24 states in Ms. Fosmire s purported class. 13 UIM coverage is a creature both of statute and of contract. That is, the source of the obligation to offer UIM coverage is statutory,... while the contractual relationship between the insured and the insurer governs the scope of coverage, subject to the minimum coverage requirements set forth in the UIM statute. Mansker v. Farmers Ins. Co. of Wash., C JLR, It is unclear to the court how Ms. Fosmire can establish class damages following the court s order that her damages expert, Dr. Polissar, failed to establish the requisite level of scientific reliability for this stage of the proceeding. (See supra III.A.) In any event, the court concludes that class certification is also unwarranted on grounds unrelated to Dr. Polissar s expert report. 13 At oral argument, counsel for Ms. Fosmire represented that she intended to file an additional motion seeking class certification for these additional 17 states. ORDER- 19

223 WL , *4 (W.D. Wash. Sept. 14, 2010) (internal citations and quotation marks omitted). Thus, the court s evaluation of the applicability of Rule 24(b)(3) here requires an analysis of both the statutory or legal source of coverage in each of the class states, as well as the specific contract language issued by Progressive in each of these states. Although Ms. Fosmire asserts that tort law in the seven states in which Progressive Max issues UIM policies uniformly requires Progressive to pay diminution in value (see, e.g. Class Cert. Mot. Ex. B), in fact only one of the states at issue, Georgia, has addressed and affirmatively ruled on the availability of diminution of value damages in addition to the cost of repair under a UIM policy. See State Farm Mut. Auto. Ins. Co. v. Mabry, 556 S.E. 2d 114, 123 (Ga. 2001). Further, the language of each UIM statute varies to some degree. (See Glade Decl. (Dkt. # 90) Ex. DD.) Thus, determining whether each statute requires diminution damages would require an evaluation of the interplay between the statutory language and the tort law in each state. In addition, every policy is governed by a different state s breach of contract law, which in turn is determined by the contract s choice-of-law provision. Each state s breach of contract jurisprudence varies to some degree, including with respect to the length of the applicable statute of limitations, forms of recovery, and available contract defenses. All of these distinctions must be evaluated in light of the differing contract language in each of the various policy forms. While much of the language in these form policies is similar, there are nevertheless distinctions in the operative policy language and in the definitions of damages. (Class Cert. Mot. Ex. A.) Finally, there are also serious due process issues entailed in certifying a multi-state class in which a court sitting in ORDER- 20

224 Washington with no personal jurisdiction over a class member in another state (for example, Georgia) other than that he or she did not opt out of this class action, determines his or her claim for diminution in value under Washington law, as Ms. Fosmire proposes. See, e.g., Phillips Petro. Co. v. Shutts, 472 U.S. 797, (1985) (applying forum s state law in class action to out-of-state class plaintiff without significant contacts to forum violates due process). Yet, Ms. Fosmire asks this court to make a determination as to the availability of diminution damages in at least seven (and perhaps 24) different states. Because Ms. Fosmire seeks certification of a multi-state class for which the law of so many states potentially applies, she bears the burden of demonstrating a suitable and realistic plan for trial of the class claims. See Zinser, 253 F.3d at 1189 (internal quotations omitted). Based on the foregoing discussion, the court finds that Ms. Fosmire has failed to meet this burden. See, e.g., Schnall v. AT & T Wireless Servs., Inc., 171 Wn.2d 260, , 259 P.3d 129 (Wash. 2011) (citing survey of federal cases denying certification of multistate class action when doing so would require the application of multiple states laws); see also Hovenkotter, 2010 WL *1, *7 (denying class certification of UIM multi-state class action for similar reasons). Accordingly, the court denies Ms. Fosmire s motion to certify her putative class action under Rule 23(b)(3). 4. Rule 23(b)(2) Criteria For similar reasons, the court also denies certification under Rule 23(b)(2). Rule 23(b)(2) provides that a class action may be maintained if the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final ORDER- 21

225 injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole. Fed. R. Civ. P. 23(b)(2). Based on this language, courts have held that class claims under Rule 23(b)(2) must be cohesive. See Grayson v. 7-Eleven, Inc., No. 09- CV-1353 MMA (WMc), 2011 WL , at * 2 (S.D. Cal. June 10, 2011) (citing Dukes, 603 F.3d at 622 (describing Rule 23(b)(2) as highly cohesive )); Sweet v. Pfizer, 232 F.R.D. 360, 374 (C.D. Cal. 2005) ( [C]ourts have held that even though Rule 23(b)(2), unlike Rule 23(b)(3), does not specifically contain predominance and superiority requirements, a class under Rule 23(b)(2) must not be overrun with individual issues. ); Lewallen v. Medtronic USA, Inc., No C RMW, 2002 WL , at *3 (N.D. Cal. Aug. 28, 2002) ( [T]o be certified under Rule 23(b)(2), the class claims must be cohesive.... [T]he requisite cohesiveness is lacking where individual issues predominate. ). These authorities suggest Rule 23(b)(2) requires that a common legal ground be generally applicable to the class. Grayson, 2011 WL , at *2. Because, as described above, the individual issues contained with this proposed multistate class action overrun the common issues, the cohesiveness requirement for class certification under Rule 23(b)(2) is not met here. In addition, the Supreme Court has recently held that class certification under Rule 23(b)(2) is not appropriate with respect to claims for monetary relief, at least where monetary relief is not incidental to the injunctive or declaratory relief. Dukes, --- U.S. ---, 131 S. Ct. at In Dukes, the Supreme Court referenced the Allison v. Citgo Petroleum Corp., 151 F.3d 402 (5th Cir. 1998), definition of incidental. See Dukes, 131 S.Ct. at In Allison, the Fifth Circuit stated that incidental damages should at ORDER- 22

226 least be capable of computation by means of objective standards and not dependent in any significant way on the intangible, subjective differences of each class member s circumstances and should not entail complex individualized determinations, rather such damages should be more of a nature of a group remedy. 151 F.3d at 415. As discussed above, the individual issues contained within this putative multi-state class action predominate, and thus the monetary damages sought by Ms. Fosmire and the putative class are not incidental. Ms. Fosmire, nevertheless, asserts that this case is distinguishable from Dukes because she has sought to certify a separate class with regard to her damages claim under Rule 23(b)(3), and thus only injunctive or declaratory relief will be awarded under Rule 23(b)(2). (See Plaint. Supp. Resp. (Dkt. # 103).) The court, however, is unconvinced by Ms. Fosmire s attempt to distinguish her putative Rule 23(b)(2) class from Dukes. First, her original class certification motion expressly requests equitable compensation as part of the relief sought in her Rule 23(b)(2) putative class action. (See Class Cert. Mot. at ) Further, the court has already found the class certification under Rule 23(b)(3) is inappropriate (see supra III.B.3) and thus Ms. Fosmire s putative Rule 23(b)(3) class is not available to serve as a separate vehicle for class damages. Accordingly, the court finds the Supreme Court s ruling in Dukes is applicable, and denies Ms. Fosmire s motion for class certification under Rule 23(b)(2). 5. Plaintiff s Request for Sub-Classes In a footnote in her original motion, Ms. Fosmire states that [s]hould the court find it appropriate to certify a subclass consisting of less than all Class States or ORDER- 23

227 Washington-only, Ms. Fosmrie requests the Court utilize its discretion in certifying such a subclass. (Class Cert. Mot. at 24, n.49.) Ms. Fosmire also makes a request for the designation of subclasses in a paragraph of her reply memorandum. (Reply to Class Cert. Mot. at 10.) In her reply, she proposes a subclass that includes only those states in which Progressive admits diminished value is owed and yet knowingly under pays it, and a second subclass comprised of those states where Progressive denies diminished value claims based on an overly restrictive view of the states law. (Id.) Alternatively, she requests that the court certify a subclass comprised of only Washington insureds. (Id.) The court does not bear the burden of constructing subclasses or otherwise correcting Rule 23(a) problems; rather, the burden is on the plaintiff to submit proposals to the court. Hawkins v. Comparet-Cassani, 251 F.3d 1230, 1238 (9th Cir. 2001) (quoting U.S. Parole Comm. v. Geraghty, 445 U.S. 388, 408 (1980)). Thus, Ms. Fosmire bears the burden of establishing the appropriate subclasses and demonstrating that each subclass meets the Rule 23 requirements. Rivera v. Bio Engineered Supplements & Nutrition, Inc., No. SACV JVS(RNBX), 2008 WL , at *3 (C.D. Cal. Nov. 13, 2008). She must come forward with the exact definition of each subclass, its representatives, and the reasons each subclass meets the prerequisites of Rule 23(a) and (b). Id. (citing Zinser, 253 F.3d at 1190). Neither the footnote in her original motion or the paragraph contained within her reply memorandum serve to satisfy Ms. Fosmire s burden here. Further, as noted above, the Rule 23(a) foundational requirement of typicality is lacking with regard to Ms. Fosmire due to her alleged material misrepresentation on her UIM insurance application. (See supra III.B.2.a.) The ORDER- 24

228 1 2 subclasses proposed by Ms. Fosmire would not resolve this issue. Accordingly, the court declines to exercise its discretion to certify subclasses. 3 IV. CONCLUSION Based on the foregoing, the court GRANTS Progressive s motion the exclude the expert report of Dr. Polissar (Dkt. # 87), and DENIES Ms. Fosmire s motion for class certification (Dkt. ## 64 (sealed) & 91 (redacted)). Dated this 11th day of October, A JAMES L. ROBART United States District Judge ORDER- 25

229 IN THE UNITED STATES MOCK TRIAL COURT IN RE: ANTITRUST LITIGATION MDL No MOCK EXPERT REPORT OF PLAINTIFF EXPERT REGARDING DAMAGES DUE TO ALLEGED CONSPIRACY Highly Confidential Pursuant to Protective Order

230 Table of Contents I. INTRODUCTION AND QUALIFICATIONS... 1 II. ASSIGNMENT... 1 III. PERTINENT FACTS RELEVANT TO THE CASE AND THE DAMAGE MODEL... 2 IV. THE ECONOMETRIC MODELOF DAMAGES... 3 A. Methodology... 4 B. Results... 6 V. CONCLUSION... 7

231 I. INTRODUCTION AND QUALIFICATIONS 1. I am a Vice President at Damages Calculation Inc. an economic and finance consulting firm with offices in the United States as well as internationally. I have a Ph.D. in Economics and have spent the last 10 years working as an economic consultant in litigation. In my work, I have studied and analyzed various forms of business conduct and how that conduct may affect the performance of markets and individual firms. I have analyzed such business conduct in antitrust cases, in other forms of commercial litigation, and in government regulatory proceedings. I have submitted testimony in the courts and in private arbitrations. I have served as an expert in litigation related to claims of conspiracy in other matters including, for example, claims brought against drug companies by a class of direct purchasers, claims brought against insurance companies brought by a group of insureds, among other cases. A copy of my curriculum vitae, including a list of matters in which I have testified as an expert in the past five years, is included as Exhibit 1. My normal and customary billing rate is $1,000 per hour. My compensation is not contingent or based on the content of my opinions or the outcome of this matter. II. ASSIGNMENT 2. At the request of counsel for Plaintiffs, I have been asked to evaluate Plaintiffs allegations of conspiracy and to build a model to estimate damages attributable to the conspiracy. Plaintiffs claim that the Defendant Chemical Producers participated in a conspiracy to control and limit the supply of Advanced Bio Carb ( ABC ) resulting in artificially inflated prices during the period of January 2000 through December For this analysis, I have reviewed and considered legal pleadings, deposition transcripts, expert reports, proprietary materials produced by the Defendants in this matter, and third party materials. The full list of materials on which I have relied is provided as Exhibit 2 to this report. My investigation is continuing and, if asked, I can evaluate and incorporate any material evidence developed subsequent to the submission of this report. Highly Confidential Subject to Protective Order 1

232 III. PERTINENT FACTS RELEVANT TO THE CASE AND THE DAMAGE MODEL 3. The relevant market facts include: Plaintiffs are buyers of the chemical ABC. ABC is a chemical used to produce many different types of tubing used in the economy, including tubing used in the automotive industry, in the oil and gas industry and the computer and electronics industry. ABC is produced when two chemicals Bio and Carb are used together in a sophisticated chemical reaction. Defendants are the only producers of ABC. There are substitutes for ABC for some applications, however, the substitutes do not work as well as ABC. 4. A simplified diagram of the ABC business is shown below as Figure 1. Highly Confidential Subject to Protective Order 2

233 IV. THE ECONOMETRIC MODELOF DAMAGES 5. In my analysis, I utilize a standard, widely accepted and reliable methodology, multiple regression analysis, to measure the damages due plaintiffs as a result of the alleged conspiracy. The methodology relies on a reduced-form multiple regression model that relates the prices of ABC paid by Plaintiffs to the important supply and demand factors that affect those prices; and that shows prices during the conspiracy period were elevated above competitive levels. 6. A graph of the prices paid by one plaintiff is shown below. The graph includes price data from periods prior to the alleged conspiracy, during the alleged conspiracy and after the alleged conspiracy. Each of the three periods is identified in the graph. The data show a clear pattern of increased prices to this plaintiff during the alleged conspiracy period, compared to the other periods. The regression model takes account of the possibility that factors other than the conspiracy, for example, costs increased during the alleged conspiracy, causing the prices to rise. As is discussed below, even after accounting for such variables, prices are higher during the alleged conspiracy than they were in the benchmark period. Highly Confidential Subject to Protective Order 3

234 A. Methodology 7. The methodology used to calculate damages is econometrically reliable and robust. The regression model includes more than 50 million individual transactions taken from the defendant s database. It is estimated using the data at the individual transaction level as well as using weighted average prices for each Billing ID included in defendant s transaction databases. All models were estimated first using all transactions, and then again, consistent with accepted econometric principles, after trimming statistical outliers. In every case, the results were both statistically significant and economically sensible, and the ultimate conclusion was inescapable: prices were elevated above competitive levels during the alleged conspiracy period. 8. The most common methodology used to estimate damage models in antitrust cases is called Weighted Least Squares, or WLS. The reason for this is that in most applications the variability of unit prices is inversely related to the quantity purchased. In other words, as the quantity purchased increases, both the unit price and the variability in unit price tend to decrease. That is, for most goods the greater the quantity purchased, the lower the unit price customers pay. In addition, when the transaction data are available to allow the analysis of many customers purchases, one also usually observes a tighter clustering of the unit prices corresponding to large quantity purchases than for small quantity purchases. In statistical parlance, the variance of prices tends to decrease as the quantity purchased increases. 9. The importance of WLS, versus more simple estimation methods such as Ordinary Least Squares ( OLS ) is demonstrated below. The first panel in the shows the OLS residuals while the second panel shows the WLS residuals for the same model. I have plotted these against the square root of quantity since that is the variable used to transform the variables in the model. Note that the OLS residuals have a funnel shape (with the mouth of the funnel on the left), with significantly more variability for low quantity than for high quantity. This violates the constant variance assumption underlying the OLS methodology. The funnel effect is absent in the plot of the WLS residuals, where the residual variability is relatively constant over the range of quantity. As a result, the WLS methodology is superior to OLS. Highly Confidential Subject to Protective Order 4

235 10. The econometric model relies on the natural logarithm of prices paid by plaintiffs. The model includes, as explanatory variables, certain costs of making and selling widgets, as well as a number of demand variables. In addition, I added indicator variables for each Billing ID to account for characteristics that may affect the prices different customers pay. Highly Confidential Subject to Protective Order 5

236 11. I use the model to estimate the but-for prices for each Billing ID s transactions during the damage period. By comparing the but-for price with the actual price for each transaction during the damage period, I find the overcharge for each Billing ID. 1 B. Results 12. The regression results from my econometric model based on average prices, where outliers have been excluded, are shown below in Table 1. 2 Table1: Regression Results [Average logged prices/outliers excluded] Variable Coefficient T-Statistic Constant *** Cost of Bio ** GDP *** Purchases of automobiles Time Trend Conspiracy Variable# *** ** Significant at the 95% level. *** Significant at the 99% level. # Conspiracy period of August 1999-July I use the regression results shown in Table 1 to calculate but-for prices for each Billing ID during the alleged conspiracy period. Table 2 below shows the average price paid, the 1 In order to recover the but-for price, the results of the regression model are used to find the but-for logarithm of the price. These but-for logarithm of prices are then transformed with the following formula: But-For Price = exp [log( but-for price) + s2/2] where s2 is the variance of the regression equation. See, for example, Johnson, Norman L.; Kotz, Samuel; Balakrishnan, N., "14: Lognormal Distributions", Continuous Univariate Distributions. Vol The models also include fixed effects for each Billing ID which are used in the calculation of but-for prices. Highly Confidential Subject to Protective Order 6

237 average but-for price, and the difference, or the overcharge due to the alleged conspiracy for four Billing IDs. Overall Billing IDs, damages are $242 million. Table 2: Actual Price, But-For Price, Overcharge, and Damage For Four Billing IDs Actual Price But For Price Overcharge Quantity Purchased (Thousands) BILID20985 $120 $110 $ BILID21125 $150 $115 $ BILID21032 $110 $111 $ BILID21006 $165 $160 $ Total Damage (Millions) V. CONCLUSION 14. The econometric model establishes that over the alleged conspiracy period, plaintiffs suffered approximately $242 million. Highly Confidential Subject to Protective Order 7

238 MOCK DEPOSITION BACKGROUND 1 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DISTRICT OF COLUMBIA William T. Hoops, Plaintiff, STIPULATED CASE BACKGROUND & SUMMARY OF FACTS v. Collegiate Amateur Athletic Association, Defendant. INTRODUCTION For the last century, the Collegiate Amateur Athletic Association (CAAA) has been synonymous with college athletics. Organized and governed by its members more than a thousand colleges and universities across the country the CAAA is responsible for setting and enforcing the rules of the game and ensuring fair and equitable play, both on and off the field, for all college sports. Central to its mission has been to preserve the amateur status of college athletes. Amateurism, in the CAAA s view, is the hallmark of college sports. Not only does it shield college athletics from the perceived excesses and commercialism of professional sports; it ensures that college athletics remain an integral part, but only a part, of student-athletes overall college experience, allowing them to balance their educational commitments and to integrate into the college student body at large. One of the principal means by which the CAAA has attempted to preserve amateurism in college sports has been to forbid college players from being paid anything beyond scholarships covering tuition, room and board, and incidental expenses, for their athletic talents. This antitrust lawsuit challenges the CAAA rules that prohibit college athletes from being paid to play. The plaintiff, William (Billy) T. Hoops, a star sophomore point guard at perennial basketball powerhouse Federal College in the District of Columbia, claims that these rules are anticompetitive. Rather than protecting student-athletes, Hoops claims, these rules prevent them 1 The facts for this mock deposition exercise are completely made up, and were originally created for a Mock Trial exercise with the ABA. CLI v3

239 from receiving a fair share of the hundreds of millions of dollars that the CAAA and its members earn annually under contracts with cable and television companies to broadcast college sporting events like the CAAA s National Basketball Championship Tournament. More specifically, Hoops claims, colleges and universities are competitors: They compete against one another not only on the field (or the court) but in the marketplace; they should have to compete and pay for the services of the student-athletes on which the television revenues are based (it is after all the players that viewers want to see). And so, by agreeing not to pay student-athletes market rates for their services, they are breaking the antitrust laws. THE PARTIES Plaintiff William (Billy) T. Hoops is a hometown hero in Washington, D.C. Born and raised in the District, Hoops has been a basketball phenom since junior high school, rising to play point guard in high school at the prestigious Washington Friendship Academy, which he attended on academic scholarship. For college, Hoops accepted a full scholarship to the District s Federal College (the Fed), one of the seven premier, Division I CAAA basketball programs that aggressively recruited him. Hoops scholarship at the Fed covers all of his tuition, room, and board, which together total about $40,000/year. (Billy received comparable offers from each of the other six programs that recruited him.) After a heartbreaking loss as a freshman in the semifinals of last year s CAAA Championship Basketball Tournament, the fans (and the oddsmakers) believe that Hoops could lead the Fed this year to a record-breaking seventh national basketball championship, if the Fed can defeat its cross-country arch-rival, and six-time national champion, California State University. Defendant Collegiate Amateur Athletic Association (CAAA). Established in 1915, the CAAA is the governing body responsible for regulating all college athletics. Today, the CAAA includes 1,100 member institutions, colleges and universities of all sizes from across the country. These institutions govern the activities of the CAAA as voting members of its general congress and various committees formed to address particular issues, ranging from the rules and regulations of particular games, to the academic and eligibility standards for student-athletes, to the negotiation of contracts for broadcasting rights for CAAA-sponsored championship games. The CAAA is led by its president, for the past three years, Dr. Joseph(ine) Langdon, who previously served for fifteen years as the president of California State University. CLI v3 2

240 STIPULATED FACTUAL BACKGROUND 1. CAAA Charter & Bylaws. The CAAA s Charter & Bylaws set out the rules governing the college athletic programs of its 1,100 member institutions, including those relating to student-athlete admissions, eligibility, financial aid, and recruiting. CAAA rules are enacted by majority vote of CAAA member institutions; and each member institution agrees to comply and to ensure its administrators, faculty, coaches, staff, and student-athletes comply with all CAAA rules. A member institution that fails to comply with CAAA rules is subject to disciplinary and corrective action, including financial penalties, suspension, or expulsion from the CAAA. Article 2 of the CAAA s Charter & Bylaws contains a set of Core Principles that are intended to guide and provide the foundation for the governance of the CAAA, its member institutions, and their activities. Chief among these core principles is athletic/academic balance: Athletic/Academic Balance. Athletics and academics are integral features of, and mutually beneficial to, the growth, education, and development not only of every student-athlete but also to the student body at large of every member institution. The CAAA and its member institutions shall enact rules to ensure an appropriate balance between academics and athletics to promote the growth and prevent the exploitation of student-athletes. [Article. 2.1.] This core principle reflects the sentiment of college sports fans. In multiple random sample surveys conducted by academics in the last ten years, 77 percent of college sports fans on average responded that the core principle of athletic/academic balance was important or very important to their interest in college athletics; and 84 percent responded that they would be less interested in a college s sport program if its student-athletes tended to leave school without graduating. Interestingly, however, the CAAA itself recently concluded a study showing that average player graduation rates at seven of the top ten most popular CAAA Division I basketball programs (with regard TV ratings, ticket sales, attendance, and memorabilia sales) were 25 percent lower than the average graduation rates of all student-athletes, and 23 percent lower than the average graduation rates of all students, at those institutions. The principle of athletic/academic balance is buttressed by additional principles concerning academic standards, amateurism, competitive balance, and ethics and sportsmanship. The principle of amateurism, in particular (but not exclusively), informs the CAAA s prohibition on payments to student-athletes that Hoops challenges here: CLI v3 3

241 Amateurism. The CAAA and its member institutions shall enact and observe rules to ensure that all student-athletes are and remain amateurs in order to protect them from the commercial exploitation and excess of professional sports and to ensure the primacy of, and that college athletes receive, the educational and physical benefits provided by the college student-athlete experience. [Article 2.3.] The CAAA s rules regarding student-athlete scholarships, as well as its prohibition of other player compensation, have evolved over the years. The CAAA s original charter prohibited member institutions from providing financial assistance or compensation of any kind to studentathletes based on their participation in athletic activities. This absolute prohibition reflected the prevailing view at the time that financially rewarding athletic performance would corrupt college sports, taking the focus away from the mental and physical benefits of participating in college sports, and threatening disharmony and potential animosities between athletes and non-athletes in the student body. It also reflected an era in which no college sports programs generated significant revenues, given the absence of paid media coverage and low ticket prices. The CAAA first revised these rules in the 1930s, ironically, after public revelation of widespread and pervasive payments to college athletes at leading programs by alumni and other donors. After a series of congressional hearings that revealed through sworn testimony of college administrators, alumni, and student-athletes that payments often were used to cover room and board and other day-to-day living expenses of athletes, the CAAA amended its charter to allow for member institutions to provide athletic scholarships covering such expenses based on a student s participation in CAAA-sanctioned athletics. And, then, in the 1950s, the CAAA amended its rules yet again to allow coverage of tuition and other costs of attendance (e.g., books, lab fees, etc.) in order to reduce the financial burden on, and expand academic opportunities for, students who could not otherwise afford to attend college. The CAAA s restrictions on player compensation today are reflected in Articles 4 and 5 of its Charter & Rules. Article 4 (Amateurism) states that [o]nly amateur student-athletes may participate in CAAA athletic activities, and that [i]f a student-athlete accepts a Payment or promise of Payment relating to the use of his or her athletic skills, then the student-athlete forfeits his or her amateur status, and is no longer eligible to participate in CAAA athletic activities. Payments are defined to include the receipt of any funds, benefits, or remuneration of any kind, except what is termed Permissible Financial Aid defined in Article 5 as a scholarship from a member institution relating to the use of [the student-athlete s] athletic CLI v3 4

242 skills. But the maximum amount of such Athletic Scholarships is capped at the total cost of tuition and fees, room and board, books and supplies, transportation, and other expenses related to attendance at the institution. For Hoops, the maximum value of his Athletic Scholarship to Federal College thus is effectively capped at $40,000 per year. There is frequent discussion in the popular press and sports media questioning whether the $40,000 is too low. Survey evidence from fans earlier indicates that most fans (98 percent) would have no problem with student athletes earning an additional living stipend of $30,000 or less. 2. CAAA Organization & Membership. The 1,100 member institutions of the CAAA are divided into three divisions. Each division has different requirements for membership, which impose different levels of financial and programming commitments on member institutions. Division I has the fewest members (300) but includes all of the largest member institutions, and certainly the biggest and best-known athletics programs in the country, like Federal College s and California State s basketball programs. To be a member of Division I, a member institution must sponsor at least seven varsity men s sports (including at least two team sports) and at least seven varsity women s sports (including at least two team sports) and must award a minimum of 50 full athletic scholarships, split evenly between men s and women s sports, in addition to those for men s football and men s and women s basketball. By contrast, Division II and III include more (350 and 450, respectively) but generally smaller member institutions (about 2,500 students on average) that tend to maintain smaller athletic programs and to make smaller investments in them. Division II member institutions must sponsor at least five varsity men s sports (including at least two team sports) and at least five varsity women s sports (including at least two team sports); and award a minimum of 20 full athletic scholarship grants, split evenly between men s and women s sports. Division III member institutions must sponsor at least four varsity men s sports (including at least two team sports) and at least four varsity women s sports (including at least two team sports); but Division III member institutions award no athletic scholarships. The divisions also impose different requirements relating to the number of athletes an institution must field and the number of games in which the institution must compete in a given sport. For example, each Division I varsity basketball team (men s and women s) must include 13 players, and must play a minimum of 30 regular season (non tournament) games at least 25 against other Division I teams with at least 10 played at a home arena and at least 10 played CLI v3 5

243 away. By contrast, Division II and Division III varsity basketball teams also must include at least 13 team members; but as they have smaller student bodies (and fan bases), they are required to play fewer regular season (non tournament) games (22 for Division II, and 18 for Division III), thereby reducing the costs of maintaining the teams. 3. CAAA Operations & Finances. Quite different from its austere beginnings, the CAAA today earns substantial revenues. In , the CAAA expects to earn approximately $850 million, having earned only slightly less in each of the past two years. Nearly all of its revenue is earned from television and marketing rights fees from the CAAA s Division I Championship Basketball Tournament held at the conclusion of the college basketball season each March. In terms of its popularity, this tournament is one of the premier sporting events (amateur or professional) in the United States bar none. Starting with a field of 128 teams, it continues through a series of single-elimination games over four weeks, until the final game when the national champion is crowned. Over the past 40 years, the CAAA has successfully capitalized on the outsized and seemingly ever-growing fan interest and enthusiasm in the tournament. In 1975, the CAAA earned $1 million in television revenues from the tournament in a one-year deal; in 1985, $50 million on another one-year deal. But in 2012, the CAAA entered into a 10-year contract with Sports Network, one of the leading cable sports channels, valued at more than $10 billion. Under that contract, the CAAA earned $750 million in the season and in each of the past two seasons. When the contract was announced, the sports press widely reported on negative reactions by basketball fans to the infusion and influence of big money on amateur sports. But an analysis by an independent sports media consultancy shows ticket sales and viewership for Division I championship basketball games has grown 4 percent annually in each of the last 5 years. The CAAA distributes 95 percent of its annual revenues to its member institutions; the remaining 5 percent is held in the CAAA s reserve fund, which now totals about $500 million. Division I member institutions receive the vast majority (about 80 percent) of the distributed revenues, while member institutions in Divisions II and III split about 15 percent of the revenues. CLI v3 6

244 CAAA Revenue Distribution 8% 5% 8% Division I Division II Division III Reserve 80% Sixty percent of the revenues distributed by the CAAA to Division I schools is allocated (and must be used by member institutions) for three purposes: funding student-athlete scholarships (scholarships: 25%); funding academic programs to assist student athletes (extra student assistance: 20%); and funding additional sports beyond the minimum 14 required for division membership (sports sponsorships, 15%). These funds are shared equally by the 300 Division I member institutions. The remaining 40 percent of distributed revenues is allocated exclusively to the 128 member institutions that participate each year in the CAAA s Division I Championship Basketball Tournament. This 60/40 allocation of distributed revenues was adopted by resolution through a vote of the CAAA member institutions in It reflects a compromise among the Division I member institutions acknowledging that the Division I Championship Basketball Tournament is the source of a substantial portion of the CAAA s revenues---and rewarding the teams that drive those revenues. CLI v3 7

245 Division I Revenue Distribution 20% 25% 15% Scholarship Basketball Award Sports Sponsorship Extra Student Assistance 40% Each member institution that participates in the Division I Championship Basketball Tournament receives funds based on the number of games that institution s team plays in the tournament. Following the tournament, $272 million will be paid out through the Basketball Fund. No member institution will receive less than $1.07 million (the award for playing one game); the tournament finalists each receive about $7.50 million for having played in seven games, from the initial round of 128 through the finals. There is no restriction on how member institutions receiving so-called Basketball Awards may use those funds. 4. Member Institution Finances and the (Un)Profitability of Collegiate Athletic Programs. Notwithstanding the popularity and revenues generated by certain college sports like Division I basketball and football, the overall athletic programs of only ten of the 1,100 CAAA member institutions (including all the sports they are required to sponsor to maintain their respective memberships in the CAAA) are profitable in the sense that the direct revenues they generate in a given year (from the NCAA, ticket sales, and memorabilia at games) are large enough to cover the direct costs of providing sports teams to student/athletes (e.g., uniforms, travel, healthcare, etc.). Each of those ten institutions is in Division I, and each sponsors championship-contending men s basketball and football teams. California State is one of the ten; with no football program, Federal College is not. These ten programs, moreover, are profitable, on net, only because of the revenues they earn from licensing the rights to televise their regular season and championship basketball and football games. CLI v3 8

246 No other college sport, besides Division I basketball and football, at any CAAA member institution is profitable standing alone. None generates even 0.5 percent of the $750 million the CAAA now earns annually from its broadcasting contract for the Division I Championship Basketball Tournament. Rather, to cover the costs of student-athlete scholarships, coaches, facilities, and other expenses (e.g., uniforms, travel, healthcare, etc.), these other sports depend upon a mix of ticket sales, alumni and corporate contributions, CAAA distributions, and most importantly, direct funding from the sponsoring member institution s general fund. The Fed s basketball program (standing alone) is profitable but only as a result of the CAAA Basketball Fund distributions the Fed receives based on its performance in the Division I Championship Basketball Tournament. However, like other major college sports programs in recent years, the Fed s costs have increased, straining the profitability of even its premier basketball program. To retain its long-time head basketball coach, Coach Russell college basketball s all-time overall winningest coach for what likely will be the last four years of his coaching career (not to mention the duration of Hoops college career), the Fed last year agreed to a new four-year contract that will pay Russell $9.0 million a year. Almost double the average coaching salary at top-25 Division I basketball programs, Coach Russell s contract reportedly has set the floor for California State s upcoming negotiations with its head basketball coach, Coach Jackson, the winningest coach in Division I s Championship Basketball Tournament, who is rumored to be considering competing offers for a head coaching job in the Professional Basketball League (PBL). The escalation in coaching salaries (and the resulting cost pressures on even previously profitable programs) provoked expressions of dissatisfaction by some Division I member institutions. In letters to the CAAA, they stated their view that such salaries are only feasible for (and were being paid by) the most successful teams and permitting them jeopardized any semblance of competitive balance and risked creating a two-tiered system within Division I in violation of the CAAA s Core Principles. As a result, the CAAA formed a committee on head coaches compensation and its effects on competitive balance. The committee has undertaken an examination of two peer-reviewed studies. The first, commissioned and published by the PBL, analyzed the cap on each PBL team s total player salary expenditures. That cap, implemented in the 1995 season, was adopted as a means to distribute talent and level the playing field among teams. The study shows that in the 20 years before the cap was implemented, five teams won at CLI v3 9

247 least three championships. By contrast, in the 20 years since the cap was implemented, only one team has won three or more (four to be exact) championships. It also showed that television ratings for PBL games increased by 25 percent and average per game attendance increased by 10 percent in the twenty years after the cap was implemented as compared to the twenty years before the cap (after accounting for other factors like population and disposable income growth). The second study analyzed the impact of professional baseball player salaries over the last twenty years on the popularity of MLB, which imposes no cap on players salaries. That study found that despite a nearly 400 percent increase in average player salaries between 1990 (when player salaries averaged about $1 million) and 2015 (when player salaries average about $3.8 million), the popularity of MLB has grown, with television ratings for MLB games increasing on average by 5 percent a year and per game attendance growing on average at 7 percent a year. 5. Recent Developments. Not long after the Fed sealed its new contract with Coach Russell, it also announced the ground-breaking for a new $300 million, 17,000 seat basketball arena and state-of-the-art training facility. Reporting on the announcement, Fed News, the Fed s student-run newspaper, quoted Hoops, then a new-arrival on campus, as saying he was really excited about playing in the new arena, and that the opportunity to play not only for Coach Russell but in the new arena had been major factors in his decision to remain in the District and to play basketball at the Fed. Not only are basketball recruits excited about the facility, so is the broader student population the Fed has experienced a bump in student applications by 20% since the announcement of the new facility. Fed News also reported that while the Fed s administration anticipated being able to finance construction of the new arena largely with alumni and corporate contributions (among other features, the new arena will include loge seating and luxury boxes available for corporate sponsorships). The Fed also believes that the combination of the new facility and its retention of Russell as coach, will position them favorably in negotiations for the renewal of their regular season TV contract in 2 years. Despite all of this, there remains a risk that some costs would need to be paid out of the Fed s general operating fund, which could lead to reductions in funding for other CAAA-sanctioned sports and even non-caaa sanctioned student extracurricular activities. In response, the Fed s student council president was quoted as saying: There is no room for a privileged elite at the Fed Hoops is not King. Reached for comment when the story broke nationally, CAAA President Langdon said, The CAAA only encourages CLI v3 10

248 its member institutions to invest in their programs, and would not seek to deprive a member of any advantage it may obtain by doing so. But, he added, CAAA rules do require member institutions to maintain and adequately fund a specific number of teams, and failing to do so would be a violation and could lead to appropriate corrective action. CLI v3 11

249 2 Excerpt from Expert Report of Dr. Ricchetti My analysis in this report focuses on two economic questions. The first question I analyze is: do the current rules prohibiting compensation to student athletes cause harm to competition in the labor market Division I men s college basketball? The second question I analyze is: Do the three alleged pro-competitive benefits of these rules identified by the CAAA outweigh the harm caused to competition? I focus my analysis on the three alleged procompetitive benefits identified by the CAAA protection of amateurism, integration of student athletes into academic life. Expert Report of Dr. Bryan Ricchetti, 9/21/16,

250 Exhibit 1: Share of College Basketball Fans That Would Continue to Watch Games if Student-Athletes Were Paid Up to a $30,000 Annual Stipend Source: Survey Data Midwest (2015) Northeast (2013) South (2012) Southeast (2015) West (2006) 100% 90% 99.5% 97.1% 98.2% 97.4% 80% 70% 77.7% 60% 50% 40% 30% 20% 10% 0%

251 Exhibit 2: Share of DI Men's Basketball Players Who Are 4/5 Star Recruits and Share of 4/5 Star Recruits Who Choose DI Men's Basketball Source: Recruiting Data 100% 90% 7.8% 3.7% 80% 70% 60% 50% 40% 92.2% 96.3% 30% 20% 10% 0% Share of DI-MB Players With 4/5 Star Ranking Share of 4/5 Star Recruits Who Choose DI-MB

252 Speaker Biographies Peter Boberg, vice president at Charles River Associates, specializes in econometric work and economic modeling for antitrust cases and mergers. His experience at CRA has included the design and implementation of econometric models used in numerous large-scale merger analyses, particularly for markets involving differentiated products or discrete demand. Dr. Boberg has worked on mergers in numerous industries; worked on numerous antitrust, IP, and commercial damage cases; and has testified on damages in a matter before the American Arbitration Association s International Center for Dispute Resolution. Dr. Boberg has managed expert testimony and assisted experts with liability and damage analyses in numerous cases involving allegations of predation, price fixing, monopolization, and patent infringement. Dr. Boberg has also innovated econometric and simulation methods for estimating patent value that have been employed in several recent patent damage cases. Michelle Burtis, vice president at Charles River Associates, is an expert in antitrust litigation, damages, and intellectual property matters. She has testified in numerous direct and indirect purchaser class actions in federal and state courts and provided economic analysis on high profile antitrust litigation matters. She has also provided analyses related to the competitive effects of mergers to the Federal Trade Commission and Department of Justice. Dr. Burtis has significant experience in applying economic analysis to alleged horizontal conduct such as price fixing and claims of attempted monopolization. She has analyzed various intellectual property issues, including damages claims. Her work encompasses a broad range of industries, including natural resources, consumer products, computer software, and service industries. She has published articles on antitrust and intellectual property issues for the Antitrust Law Journal, Journal of Business Valuation, Supreme Court Economic Review, and antitrust publications for the American Bar Association. Andrew Dick, vice president at Charles River Associates, is an expert in analyzing the competitive effects of mergers and acquisitions, alleged collusion, and a variety of business practices. In both government service and private practice, Dr. Dick has provided economic analysis in support of antitrust litigation. He has practical antitrust experience in a broad array of industries and, since joining CRA in 2003, has appeared before the US Department of Justice, the Federal Trade Commission, and various state and foreign competition agencies to assist clients with respect to a wide range of transactions and antitrust issues. He has submitted expert reports in proceedings in U.S. district court and has testified on antitrust issues in US district court. Before joining CRA, Dr. Dick was acting chief of the Competition Policy Section of the DOJ s Antitrust Division. His articles have appeared in such leading publications as Antitrust Law Journal, Journal of Law and Economics, and Antitrust Magazine. Damian G. Didden is a partner who practices in Wachtell, Lipton, Rosen & Katz s antitrust department, where he advises clients on various aspects of competition law matters. Mr. Didden s particular focus is analyzing the antitrust risk of mergers and acquisitions, and guiding clients through the merger review process before federal, state, and international regulators. He has advised clients engaged in a diverse spectrum of sectors, including telecommunications, banking and financial services, entertainment and media, Internet-based services, technology and software, defense, retail operations, and manufacturing. Mr. Didden became partner at Wachtell Lipton in January Bryan Gant is a partner in White & Case s Global Antitrust Practice based in New York. His practice focuses on complex commercial litigation and counseling, particularly in the antitrust area. He represents clients in the pharmaceutical, financial services, and petroleum sectors. Notable recent clients include Pfizer, Actavis, Boehringer Ingelheim, Experian, Novartis, OPEC, and Warner Chilcott. His knowledge and experience span a range of issues, including reverse payment settlements of patent disputes, product innovation and product retirement (so-called product hopping ), price fixing, fraudulent procurement of patents and other misconduct before the U.S. Patent and Trademark Office, sham litigation, sham petitioning of the FDA, product bundling, and other antitrust theories. He is a regular contributor to Antitrust Law Developments, and a member of the Antitrust Section of the American Bar Association. Kostis Hatzitaskos, a principal at Cornerstone Research, focuses on antitrust and competition matters, spanning both merger reviews and litigation. He is an industrial organization economist with a specialization in econometrics. Dr. Hatzitaskos has extensive experience leading case teams in high-stakes matters involving complex statistical analysis of large proprietary datasets. He has worked on matters in multiple industries, including distribution, food and agriculture, high-tech consumer products, information technology, telecommunications, semiconductors, and financial services. Dr. Hatzitaskos has experience in all phases of the merger review and litigation process and has taken multiple cases through trial. Karen Kazmerzak is a partner at Sidley Austin LLP. A former Federal Trade Commission attorney, she has a broad practice counseling clients regarding antitrust matters involved in mergers and acquisitions and concerning antitrust issues in licensing, distribution, pricing, and competitor collaborations. She represents clients seeking merger clearance from the FTC and the U.S. Department of Justice, and clients that are third-party market participants subpoenaed by the government or that oppose an acquisition. Ms. Kazmerzak also works closely with co-counsel and economists around the world to develop the best global strategy for clients

253 advocacy across several jurisdictions, including in the United States. Her recent experience spans a range of industries, including records storage, consumer products, energy, transportation, telecommunications, healthcare, pharmaceuticals, and technology. Kivanc Kirgiz, vice president at Cornerstone Research, has 15 years of experience applying economic and financial analysis to large-scale antitrust matters involving allegations of collusion, price-fixing, monopolization, and exclusionary conduct. He has worked with counsel to develop case strategy and has managed case teams that have analyzed class certification, liability, and damages issues for testifying experts. Dr. Kirgiz has experience in a variety of industries, including energy, chemicals, synthetic rubber, transportation, retail, and pharmaceuticals. In addition to supporting testifying experts, he has served as class certification and damages expert, and he has consulted with attorneys on government investigations and during all phases of litigation, including deposition, and trial. Prior to joining Cornerstone Research, he taught economics at Duke University. Howard P. Marvel, professor emeritus of economics at The Ohio State University, is an expert in industrial organization and its application to antitrust and regulation law and policy. Professor Marvel has testified as an expert in antitrust litigation and other business disputes involving price fixing, monopolization, vertical restraints, and other distribution issues. His work has been cited widely by courts and antitrust authorities, notably in both the majority opinion and the dissent in the Supreme Court s landmark ruling in Leegin Creative Leather Products Inc. v. PSKS Inc. Professor Marvel has provided testimony in court and at deposition, and he has submitted numerous expert reports. He has served as an expert in matters involving several industries, including consumer and intermediate products, energy, insurance, automotive, and construction products. Sean May, vice president at Charles River Associates, specializes in industrial organization, econometrics, and labor economics. He has extensive experience providing consulting expertise in the health care industry, including analyzing the competitive effects of health plan mergers and hospital mergers. Dr. May has worked before the Department of Justice and state departments of insurance on health plan mergers for clients that include UnitedHealth Group, Anthem/WellPoint, and Humana. He also worked on behalf of Evanston Northwestern Healthcare in the Federal Trade Commission s challenge of Evanston s acquisition of Highland Park Hospital. In addition, Dr. May is an expert in econometrics. He worked on behalf of the National Association of Attorneys General in connection with the Master Settlement Agreement to estimate a complex model of brand-level demand for cigarettes and as a statistical consultant to the Department of Justice in connection with a lawsuit concerning youth smoking. Julie A. North is a partner in Cravath s Litigation Department. Her broad litigation practice encompasses general commercial, securities, and mergers and acquisitions litigation, among other areas. Ms. North advises clients on antitrust regulatory clearance issues in connection with mergers and acquisitions. She also has experience in advising and defending clients in matters involving the Foreign Corrupt Practices Act. She has represented various financial institutions in connection with litigation over high profile leveraged finance transactions, including URI, Clear Channel, and Huntsman. She has also advised outside directors of financial institutions in connection with the 2008 credit crisis and defended Credit Suisse in actions around the country relating to residential mortgage backed securities. In 2016, Ms. North was recognized for her antitrust work by The Legal 500 United States. Ms. North was named a National Star in securities litigation by Benchmark Litigation from 2010 through 2016 and has also been recognized by that publication as a Local Litigation Star in the New York area for securities and general commercial litigation. She was featured in Benchmark s Top 250 Women in Litigation from 2012 through Jonathan B. Pitt cochairs Williams & Connolly s antitrust practice group. He handles a wide variety of complex civil and criminal trial and appellate matters. Some of Mr. Pitt s recent matters have included his participation on the trial team representing AstraZeneca in the In re Nexium Antitrust Litigation jury trial that resulted in a defense verdict for AstraZeneca, his representation of a major animation studio in the In re Animation Workers Antitrust Litigation pending in the Northern District of California, his representation of Google in connection with both the Federal Trade Commission investigation into online search and search advertising, his work on an antitrust class action regarding the distribution of Google services for Android mobile devices, and his representation of the nation s largest dairy cooperative in multiple antitrust matters in various federal and state courts. Mr. Pitt has served as antitrust counsel to major trade associations, has represented corporations in matters before the FTC, and regularly advises corporations on the antitrust implications of their business operations. Mr. Pitt is an adjunct professor at Georgetown University Law Center, where he has been teaching antitrust law since Katherine A. Rocco is a partner at Kirkland & Ellis in their Antitrust and Competition group, where her current matters include antitrust deal work, cartel investigations, and antitrust litigation. Before joining Kirkland, she was at Cravath for seven years, where her practice focused on antitrust litigation, antitrust deal work and complex commercial litigation and investigations. She has been to trial three times in the last four years. She graduated magna cum laude from Fordham Law School, where she was an editor of the Fordham Law Review.

254 Matthew J. Reilly, a former Assistant Director of the Federal Trade Commission (FTC), Bureau of Competition, is widely recognized as an authority in his field. He represents clients in high-profile antitrust matters, including litigation, transactions, antitrust counseling and government investigations. He is recognized as a leader in his field by Chambers USA, The Legal 500,and Euromoney s Benchmark Litigation. He was also recently named among The National Law Journal s Top Outside Counsel to America s Outstanding General Counsel. In his time at the FTC, he served for five years as the head of the Mergers IV division, and previously served as Deputy Assistant Director for the Mergers I division. Matt is a frequent lecturer on a wide range of substantive antitrust and litigation topics. Katrina Robson, a partner at O Melveny & Myers, LLP, represents clients in complex, high-profile antitrust and competition litigation. Ms. Robson has extensive experience briefing and litigating disputes against both government agencies and private parties, including defending the US Airways American Airlines merger against the Department of Justice s request for an injunction, blocking Qualcomm s petition to obtain discovery of Samsung through U.S. courts for use in a proceeding before the Korean Fair Trade Commission, and obtaining summary judgment on a motion for reconsideration for gaming technology company IGT (subsequently affirmed by the Federal Circuit). She is vice chair of the Trial Practice Committee in the ABA Antitrust Section and an editor of the just-released Consumer Protection Law Developments, Second Edition. Bryan Ricchetti is a principal at Cornerstone Research. He specializes in analyzing economic and statistical issues in matters involving antitrust, labor, market manipulation, and consumer fraud/product liability. Dr. Ricchetti has particular expertise in issues that arise at class certification; and in matters involving large, complex, proprietary datasets. Among the industries that Dr. Ricchetti focuses on are retail, food and agriculture, Internet competition, technology, and sports economics. As a consultant, Dr. Ricchetti has worked on matters related to a range of competition issues, including horizontal price fixing, vertical exclusionary practices, attempted monopolization or monopsony, class certification and impact, regulatory disputes, and merger review. As an expert witness, Dr. Ricchetti has prepared reports, been deposed, and testified at trial. Hartmut Schneider is a U.S. and German-qualified lawyer who practices antitrust law primarily before US agencies and courts. He has extensive experience in securing merger clearance for transactions in a diverse range of industries. He also regularly counsels clients on legal issues at the intersection of antitrust and intellectual property law, as well as on the compliance of joint ventures, other horizontal cooperation agreements and vertical distribution agreements with the antitrust laws. Before relocating to Washington in 2005, Mr. Schneider worked in the Antitrust and Competition Department of the firm s Brussels and Berlin offices, as well as in the New York office. In addition to his US antitrust law expertise, Mr. Schneider has significant experience in EC and German competition law.

255 CORNERSTONE RESEARCH Economic and Financial Consulting and Expert Testimony We are pleased to be a sponsor of the 43rd Annual Conference on International Antitrust Law and Policy and a presenter of this year s Antitrust Economics Workshop. For information about Cornerstone Research, please contact: Kostis Hatzitaskos: / khatzitaskos@cornerstone.com Kıvanç Kırgız: / kkirgiz@cornerstone.com Bryan Ricchetti: / bricchetti@cornerstone.com cornerstone.com Boston Chicago London Los Angeles New York San Francisco Silicon Valley Washington

256 Take a closer look CRA competition economists have provided economic analysis and testimony in numerous competition matters throughout the United States, Europe, Australia, and Canada. Many of our experts have served in government antitrust agencies or are members of premier academic economics and law faculties. Whether before a court or a regulatory agency, CRA sets a high standard for the clear communication of sophisticated economic analysis in complex cases. Visit for more information.