By Authors: Bernard Pettingill, PhD.; Brittany Wolfe, JD; Lawrence Curtis, JD,
Gerald Meunier, JD
The maritime landmark case Culver v. Slater Boat Co., 722 F.2d 114, at 117 (Culver II) prescribed a method for the calculation of future economic loss in the trials of maritime personal injury and wrongful death cases. In this three-step analysis: the fact finder (1) must estimate the diminishment or loss of work-life resulting from the injury or death, (2) calculate the total amount of earnings lost due to this work-life reduction, and (3) discount the amount to its present value by offsetting future investment and interest gains against future inflationary factors. This article will review both the post-Culver II jurisprudence and the economic landscape since Culver II was decided upon. Also, it will examine both the legal perspective and an economic expert’s personal viewpoint while addressing the question whether and to what extent current economic variables can be accommodated by this longstanding jurisprudential method for loss calculation.
In a landmark case decided thirty-eight years ago, the United States Court of Appeals for the Fifth Circuit prescribed a method for the calculation of future economic loss in the trials of maritime personal injury and wrongful death cases. See Culver v. Slater Boat Co., 722 F.2d 114 (5th Cir. 1983) (en banc), cert. den’d sub nom., St. Paul Fire & Marine Ins. Co. v. Culver, 469 U.S. 819, 105 S. Ct. 90, 83 L. Ed. 2D 37 (1984) (“Culver II”). This method involves a three-step analysis: the fact finder (1) must estimate the diminishment or loss of work-life resulting from the injury or death, (2) calculate the total amount of earnings lost due to this work-life reduction, and (3) discount the amount to its present value by offsetting future investment and interest gains against future inflationary factors. See id. at 117.
The intervening decades have seen dramatic changes in the economic variables which form this methodology; and yet, the Culver II decision remains authoritative as an analytic point of reference both for trial counsel and expert economists in quantifying future economic damages for jury consideration. This article will review both the post-Culver II jurisprudence and the economic landscape since Culver II was decided upon. Also, it will examine both the legal perspective and an economic expert’s personal viewpoint while addressing the question whether and to what extent current economic variables can be accommodated by this longstanding jurisprudential method for loss calculation.
In Culver v. Slater Boat Co., 688 F.2d 280 (5th Cir. 1982) (en banc) (“Culver I”), the Fifth Circuit announced that the finder of fact should consider inflation in deciding an award of damages for lost income in maritime personal injury cases but declined to endorse a “single method’ for considering future economic conditions.” 688 F.2d at 299 n. 23. As the Fifth Circuit was considering an application for rehearing in Culver I, the United States Supreme Court rendered its decision in Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523, 103 S. Ct. 2541, 76 L., Ed.2d 768 (1983). Citing Culver I, the High Court affirmed that inflation should be considered in assessing a present damage award for future loss, but likewise did not specify a single loss-calculation method. It also cautioned the lower courts to avoid converting “[t]he average accident trial…into a graduate seminar on economic forecasting.’” Pfeifer, 462 U.S. at 548, 103 S. Ct. at 2556.
The Fifth Circuit then granted the requested rehearing in Culver I, withdrew its opinion insofar as it declined to adopt one specific method for addressing inflation as a relevant factor, and announced that, absent stipulation of the parties, “fact-finders shall determine and apply an appropriate below-market discount rate as the sole method to adjust loss-of-future earnings awards to present value to account for the effect of inflation.” Culver v. Slater Boat Co., 722 F.2d 114, at 117 (Culver II) (emphasis added).
Notwithstanding the Culver II articulation of what it considered a “sole” method of loss calculation, however, the holding was not a judicial fiat in regard to case-specific discount rate outcomes. The Court in fact recognized that differences in quantifying the “below market discount rate” would be inevitable in the trial of cases. Absent a stipulation between the parties regarding the discount rate, the parties were expressly invited to advocate for a specific discount rate through the introduction of competing expert economic testimony. See 722 F.2d at 122. The Court even predicted that “establishing an appropriate below-market discount rate [would be] difficult, “given that “[e]conomists do not yet fully understand the relationship between inflation and interest.” Id. at 121.
A distinction thus is to be made between the methodology of Culver II and the resulting discount rate reached through that methodology. While the former remains established by the decision as the means of calculation, the rate outcome itself is dependent on the evidence at trial, albeit the Court felt it important to announce evidentiary guidelines or parameters for litigants and jurists to follow:
In judge-tried cases, a trial court adopting a pre-tax discount rate between one and three percent will not be reversed if it explains the reasons for its choice. This guideline, however, goes only to the reasonableness of the correlation between the pre-tax market interest and the inflation rate…[T]his pre-tax discount rate must then be adjusted for tax effects. In jury trials, the jury should be instructed in the usual fashion concerning the weight to be given expert opinion evidence. The jury may then be permitted to return a single figure award for damages or it may be required to answer interrogatories stating, among other items, the amount of loss of future earnings for each year for which it makes an award, and the discount rate it chooses to apply [emphasis added].
As stated in a 1997 journal publication surveying the case law for the fifteen-year period after Culver II, the ‘below-market discount’ method has continued to govern the calculation of future earnings loss in maritime cases brought in the Fifth Circuit.” Gerald E. Meunier, Elements of Recovery in Maritime Personal Injury Cases, 72 TULANE L. Rev. 2 & 3, 805, 821 (Dec. 1997) [emphasis added]. And, indeed, the same can be said today from review of the most current court decisions. In both the Fifth and Eleventh Circuits, district judges since Culver II have routinely endorsed its methodology for the calculation of future lost wages in maritime cases, and the resulting one-to-three discount rate has most frequently resulted. At the same time, when the Culver II methodology has been applied to propose a discount rate outside of the rate endorsed in Culver II, the Fifth Circuit review on appeal has reached divergent results dependent on the reasonableness of the applied discount rate; even where the result was a negative discount rate. See Muckleroy v. OPI Inter, Inc., 42 F.3d 641, 93-7696, 1994 WL 708830 at *1 (5th Cir. 1994) (unpub’d). For example, in Masinter v. Tenneco Oil Co., 929 F.2d 191 (5th Cir. 1991), the Court rejected the plaintiff’s challenge to the defendant’s economist utilizing a 5.75% discount rate to reduce the award of future lost wages to present value. Noting that Culver II “did not mandate any specific discount rate…[and the] parties may introduce expert opinion concerning the appropriate rate[,]” the Court found the 5.75% was adequately supported by the record and affirmed. On the other hand, Rhodes v. Guiberson Oil Tools, 82 F.3d 615 (5th Cir. 1996), an Age Discrimination in Employment Act (“ADEA”) case, the Fifth Circuit found that the district court erred in adopting a market discount rate of 7.0% to calculate the present value of the plaintiff’s lost future wages. Rhodes, 82 F.3d at 622-23. By failing to apply a below-market discount rate to account for inflation and instead applying a market discount rate, the district court failed to justify departure from the range of parameters set forth in Culver II, and thereby committed reversible error. See id.
In short, the post-Culver II jurisprudence effectively confirms that, from the outset, the Culver II calculation methodology made necessary allowance for discount rate flexibility, specifically in regard to quantifying future economic variables. The Court in Culver II even went so far as to encourage the judiciary, as well as Congress, to fashion new permutations for calculations if and when what it characterized the “sole” methodology no longer reflected in the then-current state of the economy. The following language from the decision is notable in this regard:
Just as we cannot ignore the realty of inflation, we cannot ignore the fact that long term economic conditions may change or that economic forecasting may become more certain…Should counsel for any party in any future case think this decision no longer reflects long-term economic facts or contemporary economic theory, a proffer of evidence may be made in the trial court to preserve the issue for an appellate panel and, thereafter, for en banc consideration. Culver II, 722 F.2d at 122-23 (internal citations omitted).
Whether the Culver II “guidelines” for a discount-to-present-value rate between one and three percent still reflect the realities of today’s economy or whether even the Culver II calculation methodology warrants policy-based review, and whether the presentation of evidence in the trial of cases can survive admissibility or appellate challenges if Culver II’s proposed one-to-three percent discount range holds up, the methodology is seen as outmoded.
Economics defines inflation as the change in overall monetary value of the same basket of goods and services at two different time periods when that change is both uneven and unexpected. If all goods and services in the market basket changed in the same direction and by the same amount, the changes cancel out. The calculation of future economic loss, resulting from permanent injury or death, fairly assumes that funds recovered today are not revisited, i.e., put at risk through higher-yield investments.
An economist asked to address the potential investment gains from a current award for future wage loss, proceeds on the necessary premise that the interest rate used for present value calculations and discounting should be that of “the best and safes investments”, i.e., the interest rate available on short, intermittent and long-term U.S. government securities (the safest investment worldwide, backed by the full faith and credit of the U.S.).
Below in Table I is the listing for the period 1990-2021, of the inflation/CPI rate in Col. A and the 30-year Treasury Yield Rates for the same period in Col. B. The differential between these rates is shown in Col. C. Technically, by subtracting the inflation rate from yield on U.S. government securities, the resultant below-market discount is derived. The below-market rate satisfies one of the three criteria for computing future economic wage losses in maritime cases. But, this methodology breaks down as it is contraindicated by the 1% to 3% rule in many of the years. (See 2008, 2009, and, more recently, 2021). So, what is the court left to decide?
As the Table reflects, in only three of the past 30+ years has the CPI outstripped the yield on U.S. Treasury securities. A significant -4.1% rate differential occurred in the year 2021. These numbers suggest as a matter of economic history that the future interest/investment rate contemplated in Culver II is outmoded. Similarly, the intended “below-market” discount rate necessarily depends upon both sides of the interest/inflation equation. A wage base as adjusted going forward by the current rate of inflation at 6.2% in 2021) can therefore increase the present-value calculation of future loss by a substantial seven-figure amount.
As stated above in Pfeifer, 462 U.S., any discussion about the proper inflation and discount could easily evolve into “a graduate seminar on economics forecasting.” A measure of inflation is needed to estimate the real yield on government securities. To accomplish this, economists subtract the percent rate of inflation from the normal yield on government securities; but there are many distortive factors in measuring inflation such that neither the current point nor long-range estimates are accurate. The federal court has a strong incentive to look for a simple approach to this problem, such as the one percent to three percent range which held true for decades.
The fifth federal circuit prefers a point estimate of inflation on a case-by-case basis in order to avoid an arbitrarily fixed “standard” [number]. A fixed standard number implies that inflation is constant over time which conflicts with the historic record. (See Table I below). On the other hand, the 11th Federal Circuit readily estimates between one and three percent for this rate.
To prove the infallibility of this argument, inflation has exceeded 3% some 9 times out of 30 years between 1990 and 2020, or 31% of the time; thus, the courts must consider new options:
• Widen the range favored by the 11th circuit to a 5% ceiling and 1% floor except in extraordinary circumstances;
• Accept the Federal Reserve Board’s inflation target by setting a 2% floor on the inflation rate; or
• Continue to have independent economists forecast the relevant components of inflation and the appropriate time horizon with jurors open to each side of this discussion.
Applying the range of discount between 1% ad 3% based on the “below-market” rate endorsed and historically used since Culver II, therefore would ignore the current differential between inflation and the 30-year yield of -4.1% in a way that has a dramatic impact on the outcome.
One way to appreciate such a discrepancy in the year 2021 is to give an example of what a jury might hear by two equally qualified economists in a federal maritime case today. Assuming a Jones Act Seaman, permanently injured at age 42 and with a work-life expectancy of 25 years until age 67.0, earning $45,000 per year with no benefits at the time of injury. Counsel at trial might present expert economic testimony reflecting the current differential between bond yields and CPI of -4.1%, even as opposing counsel’s, equally-qualified expert offers testimony based on a long-term trend of acceptable below-market rates of 1% to 3%. The difference in the respective expert opinions is a loss of $2.92 million on behalf of the plaintiff, versus $878,000 proposed by the defendant. The trier of fact is expected to reconcile two possible economic loss awards differing in amount by $1.149 million, all due to the sole difference in the below-market discount rates applied.
Admittedly, utilizing one year (2021) to forecast a 25-year inflationary trend is not sound economics; but utilizing a 25-year trend, namely, an average differential of 1.3% versus 2%, produces similar results. A 1.3% net discount rate results in a plaintiff award of $955,238 in the above example, whereas the defendant’s mid-range discount rate of 2% yields a loss calculation of $878,000, a difference of over $76,600. Seemingly small rate differentials clearly can result in dramatically different loss amounts over the expected work-life of a permanently-disabled, middle-aged Jones Act worker.
In short, assuming equally qualified economic experts as determined in part by the landmark case Lake Hospital and Clinic, Inc. v. Silversmith, 551 Southern 2nd 538, 545-Florida Fourth DCA 1989 and rev. denied, 563 Southern 2nd, 634-Florida 1990; and assuming that there is no direction from the federal judge regarding how the calculations should be made, a huge difference between economic conclusions can result, regardless if current rates or historic below-market discount factors are applied. As shown above, a million-dollar difference could result by applying equally acceptable methods.
In summary, what the trier of fact is left to consider is that the judge will be forced to rule on the acceptable methodology used in presenting economic testimony in maritime cases or else, given the large range of figures produced above, using equally acceptable methods of calculating damages, verdicts in the Fifth Circuit, Eleventh Circuit, or any Circuit whereby maritime cases are tried, may result in an almost automatic certain appeal to a higher court.