Corporate Governance

US v. Nacchio: Curing an Affront to the Law and Economics Movement

By J. Robert Brown

The dispositive issue in the case was the decision to exclude Daniel Fischel, the former dean of the University of Chicago Law School as an expert. Ultimately, the two judges in the majority (Michael McConnell and Paul J. Kelly) concluded that the trial judge erred by not holding a hearing on whether to exclude the testimony. The majority did so despite the fact that the defendant did not request one until after the testimony had been excluded and only in a footnote to a motion for reconsideration. The dissent vigorously disagreed with the outcome of the decision.

Judge Kelly's vote was predictable. He noted inoral argument that the failure to hold a hearing was "the most simplistic thing I've ever seen." Judge McConnell's view is a bit more interesting. He is a University of Chicago graduate, the law school that has more or less dominated the law and economics movement. He has written an article with Judge Posner, one of the leading proponents of the movement. He appears, therefore, quite sympathetic to economic analysis.

Judge Nottingham's ruling with respect to Daniel Fischel under the Daubert standard was effectively a decision that the defendant had not established the reliability of the testimony. In other words, it was to some degree a rejection of economic analysis.  It is perhaps unsurprising that a judge steeped in the area would not allow the ruling to stand.

The opinion did not conclude that the judge was wrong but it did find a procedural deficiency. As the opinion noted:

• The judge could have put Professor Fischel on the stand to ask him about his methodology, allowed the government to do so, asked Mr. Nacchio’s lawyers if they would like to address the issue for the first time, or even simply let them speak to see if they had a meritorious objection. Having permitted none of those things, however, it would have been an abuse of discretion to make a Daubert finding of unreliability.

The tone of the opinion, however, suggests that had the trial judge done so, the appellate court viewed the testimony as admissible.  As the opinion noted:  

• We are persuaded that the exclusion of Professor Fischel was not inconsequential under any standard. The theory of Mr. Nacchio’s defense was that the stock price was not affected by his disclosures, that his conduct had an innocent explanation, and that a reasonable investor would not have found his inside information very important. Professor Fischel’s testimony, as described in the disclosure, could have addressed each of these issues, and if credited by the jury, might have changed the jury’s mind.

Any judge reading this will be loathe to exclude this type of testimony again.  It wasn't really about the process, therefore, it was about the merits. It isn't about just any testimony.  It is about economic analysis.  With the ruling, a slight to the law and economics movement was effectively expunged. 

For primary materials on this case, including the appellate briefs, go to theDU Corporate Governance web site.

Full post as published by The Race to the Bottom on March 18, 2008 (boomark / email).