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Economists have become an increasingly important part of the US legal system, providing expert testimony to sway judges and juries in their deliberations.
A court case is now shedding some light on just how valuable these technocrats have become. It is a legal wrangle that is akin to the messy pay disputes for top bankers, lawyers and hedge fund traders that have been common for decades.
The case concerns Jonathan Orszag, a specialist in antitrust analysis who frequently testified in blockbuster court disputes and whose rates approached $2,000 per hour. He was fired by FTI Consulting in November after seeking more control and a bigger piece of the pie for his economic consulting unit, Compass Lexecon, that resided within the company.
FTI has now sued Orszag for allegedly violating his employment contract by, it says, seeking to form a competitor to Compass Lexecon and take hundreds of colleagues with him.
Orszag had earlier delivered a warning to FTI about the value of the services of Compass Lexecon, asserting that he and colleagues would not be so easily substituted as staff in law firms or management consultancies. In an email to FTI’s chief executive Steve Gunby, the economist stated bluntly: “In the vast majority of our matters, clients hire the expert and not the firm. That is why when economic experts change firms the clients generally move with them.”
The case comes amid increasing unease about the commercialism of expert witnesses who are supposed to provide dispassionate analysis. The American justice system is an “adversarial” one in which sides compete to persuade a judge or jury. Parties can then put forward their own experts to opine on areas such as valuations, damage estimates or market sizes.
Those experts with top credentials in economics and finance have then become highly sought after. Even one prominent jurist who recently chided a famed expert told the Financial Times the experts were often useful in cases.
The most entrepreneurial have created entire firms that lawyers could solicit when they needed a luminary to bolster their case to a judge or jury. Leading experts in the field include the likes of Glenn Hubbard, Guhan Subramanian, Daniel Fischel, Brad Cornell and Carl Shapiro.
The pitfalls of the expert witness industrial-complex are obvious. The work produced can seem results-oriented with estimates of valuation or damages widely diverging between the sides. In some cases, most of the work is done by a team of staffers who conduct the number-crunching, document review and other nitty-gritty tasks. The expert would guide the work, put their name on a report and show up in court, as necessary.
At a recent academic conference, the longtime US federal judge Jed Rakoff described the select coterie of experts who show up in big cases as simply “hired guns”.
Orszag came to FTI in 2006 when his firm, Competition Policy Associates (Compass), was acquired by the latter for $72mn in cash and FTI stock. Orszag was one of five co-founders which included his brother Peter Orszag, the economist who is now the chief executive of the investment bank Lazard.
FTI eventually combined Compass with another similar consulting firm, Lexecon, which it had previously acquired for $130mn and had been formed by famed scholars at the University of Chicago.
Orszag himself once faced criticism from a federal judge in a case where Compass Lexecon was representing both sides of an antitrust dispute. According to an investigation by ProPublica, a federal judge described his analysis as “unmoored” and one of the clients sued the firm saying that they did not know Compass Lexecon represented the plaintiff and defendant.
FTI, a diversified corporate consulting firm, has seen its stock price rocket seven times since 2006 when it closed the Compass acquisition and now has a market capitalisation of more than $7bn. Orszag, according to FTI’s complaint, boasted that he could build his own consulting firm that would be worth $2bn to $3bn. He has denied any violation of his agreement and believes the restrictive covenants FTI cites are not applicable or unenforceable.
At the recent conference, Rakoff had noted that other countries had legal models where expert witnesses for competing sides would co-operate rather than clash to put forth a common set of facts to present to the court. For now, that approach is eschewed in the US. And if Orszag and FTI proceed to a trial, they could, ironically, each be in the market for their own expensive experts.
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