Government Data Sources

One main government data source is the U.S. Department of Commerce. Much of the Commerce Department’s data is gathered by the U.S. Bureau of the Census. Unfortunately, there have been significant expenditure cutbacks at the Commerce Department, as a result of which data are not as readily available, and some data sources have been discontinued. One often‐cited data source is the U.S. Industry & Trade Outlook. This useful publication was temporarily discontinued by the Commerce Department after the 1994 edition appeared. It is now being published by Barnes & Co. and its current title is U.S. Industry and Market Outlook. It covers “120 major U.S. industries and 500+ minor industries.”¹ A sample of the data included in this publication is shown in Table 4.1.

Two other valuable sources of industry data are the Statistical Abstract of the United States and Business Statistics of the United States.² The Statistical Abstract used to be published by the U.S. Department of Commerce. While the Commerce Department ceased publishing this valuable book, it is now published by ProQuest/Rowman & Littlefield.³ A sample of the kinds of data that are available in this book is shown in Table 4.2. While this comprehensive volume is very handy for an expert to use quickly, the actual data are still available online from the Commerce Department.

Business Statistics of the United States is actually a private data source that features government data. It has some limited narrative and does not have the industry‐by‐industry description of recent trends that was featured in the U.S. Industry & Trade Outlook. Much of the data in Business Statistics of the United States is general economic data, although there are some broadly categorized industry data, such as those shown in Table 4.3.

The government data sources are good starting points from which to begin an industry analysis. However, the detail needed to complete a thorough industry analysis may not be sufficient for the litigation expert to submit a reliable and nonspeculative opinion on damages. The expert may then have to go beyond the published data sources and gather more detailed data. This can often be done by contacting the U.S. Department of Commerce directly. Often the expert will want to utilize the Annual Survey of Manufacturers, which is gathered by the U.S. Bureau of the Census.⁴ The Annual Survey of Manufacturers is designed to provide industry data for those periods that occur between the surveys that the Bureau of the Census takes every five years. Data are gathered from a representative sample of approximately 55,000 manufacturing establishments. These data include statistics on employment, hours, payroll, value added by the manufacturer, capital expenditures, materials costs, end‐of‐year inventories, and value of industry shipments. The last variable, value of industry shipments, is usually the most useful of the data that are included in the survey. A sample of how the data are displayed in the Annual Survey of Manufacturers is shown in Table 4.4.

Industry data in the Annual Survey of Manufacturers are organized using Standard Industrial Classification (SIC) codes. This is often the case for both government and private data sources. Knowing a business’s SIC code can enable the expert to locate industry data more quickly. It is therefore useful to have an understanding of this classification system.

Private Data Sources

Government industry data are available through the Commerce Department (such as through the Census of Manufacturers) and also through private vendors. Some of the vendors use government data, then repackage and analyze it. Some firms specialize in specific industries, while others provide reports on a variety of industries.

Another private source of useful industry data is industry associations. One source containing lists of industry associations is the Encyclopedia of Associations.⁸ Many industries, even some obscure ones, have an industry association that compiles data and may publish such data in a report. Care must be taken in the use of such data. The analyst should contact the association and learn how the data were gathered. Often data are gathered in a questionnaire from association members with little verification of data accuracy. If many of the members are closely held firms, the association may have limited ability to verify the data.⁹

Associations differ in how they gather their data. Some employ professional survey companies that try to gather and analyze the data in a more reliable and scientific manner. Some associations employ their own professionals in these areas and may be able to competently gather and analyze the data. Other associations do not gather the data in a reliable manner; the use of such data may be more open to challenge. Later in this chapter some examples are provided in which courts have rejected the use of industry data due to their questionable reliability.

Certain private vendors prepare industry reports on specific industries. These vendors include Packaged Facts, Frost and Sullivan, and the Freedonia Group. The Freedonia Group claims to have published over 1,500 studies since 1985.¹⁰ Packaged Facts produces studies on industries such as food, beverages and consumer goods. The benefit of industry reports is that they often include a variety of data broken down by relevant subcategories. In addition, such reports usually include a narrative discussion of the industry. This can be helpful to an expert who lacks a prior background in the industry. The testifying expert still needs to do an industry analysis, but such reports can be useful. While it may appear to raise the costs of the expert’s services, it may actually save money, for the expert is then not required to reinvent the wheel. By using such studies, the expert can draw on the work of others who have devoted considerable time to studying the particular industry.

Another source of private industry data on consumer goods is one that is very often used in the field of marketing: the data made available by A.C. Nielsen on fast‐moving consumer goods (FMCG).¹¹ The benefit of industry reports is that they often include a variety of data broken down by relevant subcategories. In addition, such reports usually include a narrative discussion of the industry. This can be helpful to an expert who lacks a prior background in the industry. The testifying expert still needs to do an industry analysis, but such reports can be useful. While it may appear to raise the costs of the expert’s services, it may actually save money, for the expert is then not required to reinvent the wheel. By using such studies, the expert can draw on the work of others who have devoted considerable time to studying the particular industry.

Another source of private industry data on consumer goods is one that is very often used in the field of marketing: the data made available by A.C. Nielsen on fast‐moving consumer goods (FMCG).¹² This data set includes information compiled from scanner data, which is, in turn, gathered at supermarkets, drugstores, and other outlets.¹³ However, most of these data are cross‐sectional rather than time series. Being cross‐sectional, the data set is more useful for determining market shares and size of markets as of the survey date. Therefore, the data set is not as useful for determining trends. Nonetheless, it may play a role in a commercial damages analysis for certain consumer goods. One way in which such data can be helpful is in analyzing what market shares are implied by various forecasts. The data can be used to determine what percent of total market revenues are implied by a plaintiff’s revenue projection. The reasonableness of such market shares can then be considered. Market share analysis may be useful in a basic industry analysis and may be invaluable in doing an antitrust analysis.

Industry Publications

Many industries have their own publications. Some have several that may be directed at various segments of the overall industry. These contain industry data that may be produced by some associations covering the industry. The expert can learn about important developments and trends that affect the performance of the industry. Published articles on the plaintiff may provide useful information on the company’s performance; they may yield alternative explanations for a downturn in the plaintiff’s performance, performance that it is attributed to the defendant. These publications can often be accessed through online data sources. Other industry publications may be marketed by private vendors. In the tobacco industry, for example, one such publication is The Maxwell Report, which publishes data in sales of specific brands by specific manufacturers.¹⁴ In the telecommunications industry another private vendor, Atlantic ACM, produces various reports on specific segments of that industry. Private vendors also gather data on tobacco sales by brand and manufacturer for specific markets (such as sales by states). Other industries, however, may not be as closely studied. Each industry is different and presents different data sets for the expert.

Annual Reports and 10Ks

In cases where a significant percent of the industry includes public firms, the analyst can take advantage of the public filing requirements of securities laws by gathering data from the annual reports and other filings such as 10Ks. Annual reports generally have more information than 10Ks since they contain verbiage that may include management’s spin on the facts. If the analyst can isolate some major companies that comprise a large percent of industry sales, then such reports, and the data they contain, such as revenue and total costs data, may allow for some useful disaggregation of the total industry revenue data. Annual reports may be used to establish what are some typical margins, such as the gross, operating, and net margins. This may give some indication as to average industry profitability and the magnitude of the major cost areas. These data are summarized in other publicly available sources, such as Value Line.¹⁵ Sometimes, however, this avenue does not prove fruitful, because major companies are diversified and are not required to provide significant detail on divisions. Therefore, total reported revenues and costs may include many industries that are not the object of the analysis. In addition, larger segments of the industry may be private or non‐U.S. firms that do not have to abide by the same U.S. securities laws.

Securities Markets Analysts Reports

In cases where a significant component of the industry comprises public companies, it is often possible to find industry analysts at brokerage firms who study the firms and the industry in general. For example, the tobacco industry is followed by several securities firms that issue reports and make them available for clients. New developments of interest to investors are summarized by such analysts. Tobacco is such a large industry that several major brokerage firms such as Citigroup, Goldman Sachs, and Morgan Stanley have issued various reports on it. Their reports include discussions on important recent trends in the industry as well as other valuable data, such as market share and industry growth data. The reports contain specific data that can be helpful in conducting an industry analysis. They provide other information such as a discussion of the plaintiff’s other problems that may be unrelated to the defendant’s actions but could be the cause of the plaintiff’s losses. The expert may be able to follow up on such reports by contacting the market analysts who wrote the report. Such investigations may unearth the true cause of the plaintiff’s losses. Once again, how available and useful such reports may be varies widely from case to case.

Regional Industry Data

If the plaintiff’s is a regional business, then the expert may want to try to gather industry data on a regional basis. This is dependent on the availability of such data. Many industry associations do not publish regional data, but instead merely aggregate all of the data they gather across the nation. If there are significant differences across the nation for the industry, this may be a problem. When such regional data are available, they can be added to the presentation.

Exhibit 4.2 depicts the shipments of computer and electronic products in the State of California compared to the United States. This example is selected to show how regional variation can be significantly different than the national variation. In 1998 and 1999 shipment growth was higher than national growth. However, shipments in California rebounded more slowly in California and growth remained negative for the five‐year period 2001–05, whereas shipment growth turned positive for the nation as a whole starting in 2004.

Industry Growth and Industry Life Cycles

High industry growth implies higher firm sales. However, merely applying the industry growth rate to a firm’s revenue projection is simplistic and possibly erroneous for a couple of reasons. The industry growth rate cannot be applied blindly to the firm involved in the litigation since the industry might be at a different stage of growth from the injured firm. For example, the industry could be in a mature state while the firm is a new entrant. Such new firms would be expected to experience high rates of growth initially and then experience a lower growth rate as they mature. In addition, in cases where the plaintiff is an established firm but is marketing a new product line, the industry growth rate may understate the expected growth rate of such new products.

Various firm‐specific factors, in addition to industry factors, may explain the firm’s historical sales trends. That is, the firm’s growth may follow a life cycle such as that shown in Exhibit 4.3. Stage I is the early part of a firm’s life. In this stage, growth rates often are high. In Stage II, a company’s growth rate slows as the firm becomes more mature. In Stage III, the firm’s growth has leveled off and may even be in decline. Where a plaintiff is located in its life cycle affects the growth rate that an expert uses for the loss projection. Companies in Stage I may warrant higher growth rates than those in Stages II and III. It is important, however, to understand that this is a generality. Not all companies go through such staged growth, although many do. Each case and plaintiff is different and the expert needs to consider many factors other than simply the stage in which the company is in its life cycle.

Measuring the Strength of Association: Industry Versus Firm

Statistical analysis, such as correlation analysis, can be used to assess the closeness of association between the historical industry performance and that of the firm. This is the same type of analysis as was used to establish the strength of association between the performance of the national or regional economy and the performance of the firm. In order for such analysis to yield fruitful results, sufficient historical data must be available to allow the results to be statistically reliable.

Changing Level of Competition

These include competitive factors, such as the degree of competition in the industry. Several different market structures in microeconomics (also called price theory) vary in terms of the level of industry profitability and in how price and output are determined. These structures are briefly reviewed in Table 4.8.

If new entrants have increased the level of competition, then profit margins derived from a historical period may no longer apply. In such a case, the new level of competition should be considered when computing the plaintiff’s new profitability; greater competition often implies lower profitability.

New Product Innovations

Some industries are very volatile. The computer and telecommunications industry are good examples. Historical data derived from an environment that was unaffected by important new product introductions may not be as relevant to projections made for a period that will include such products. New product introductions in an industry may increase the future sales within that industry. However, new product introductions in other industries could enhance or reduce the sales of the company in question. If more attractive product substitutes have been introduced in another related industry, the future performance of the plaintiff may be adversely affected. Many of the issues that relate to measuring the sales of new businesses, discussed in Chapter 5, are also relevant to discussions of new product introductions.

Structural Changes in an Industry

The expert needs to be cognizant of any important structural changes in an industry. If these changes are significant, they could have an impact on the future of firms in that industry. They may include regulatory change or changes in the distribution channels within an industry. For example, numerous changes have occurred in the carpet industry over the past several decades. The changes affect all levels of the industry. There has been great horizontal consolidation among the larger carpet manufacturers; the market shares of many of the surviving companies have increased greatly. In addition, the industry is now a vertically integrated industry, meaning manufacturers sell directly to retailers. This has caused the industry position and profitability of middlemen or distributors to deteriorate. Many such firms have gone out of business as manufacturers went direct as part of their expansion process. An expert projecting losses for a carpet distributor would have to be aware of this trend; it limited the market and profit potential of such firms. While losing business to manufacturers who are going direct, revenues may fall and retailers, which now have the option of buying direct, would not be willing to pay the same prices for products. Distributors might have to provide better and more costly service to keep revenues from falling while accepting lower margins on the revenues they maintain.

The 1990s and early 2000s witnessed the fifth merger wave in U.S. economic history.¹⁷ Many industries consolidated as companies merged with others. The consolidation of industries continued during the sixth merger wave of 2004–07 and resumed again in years following the Great Recession of 2008–09. Some of these corporate restructuring transactions resulted in many efficient companies competing more aggressively.¹⁸ Smaller companies that were not able to take such efficiency‐enhancing steps could find it difficult to maintain prior levels of profitability in such a competitive environment. Such changes could be important when trying to extrapolate future results from historical data.

An example of such restructuring occurred in the banking and telecommunications industries. Partly induced by a changing regulatory environment, these industries are undergoing dramatic changes. Both industries consolidated as competitors merged to form larger companies. The structural changes in these industries are manifested on both the national and regional level. Moreover, the recent subprime crisis has wrought major changes in the financial services sector. The expert needs to be aware of all of the relevant structural changes in the plaintiff’s industry and know what impact, if any, they have on the plaintiff and its claim of losses.

Subsectors of an Industry

An industry can have several subsectors or “subindustries.” For example, we could have a case involving a marketer of specific liquors. When the expert is seeking to access the growth of the industry, he or she has to decide how the relevant industry will be defined. One first step could look at the trend in total liquor sales in the U.S. While this might be useful to know, we also know that within that broad category we have many subcategories such as beer, spirits, wines, and sparkling wines and champagnes. If the company in litigation is, for example, a marketer of lower‐priced sparkling beverages from Italy, then a narrower definition would be more useful. It may be good to know what beer sales have been in the U.S. but this may have little relevance to the sales of the product in question. In addition, while annual total wine sales may be more relevant, the expert may need to narrow the focus even more. The next step could be to focus just on total sales of champagnes and sparkling wines.

Technically, only sparkling beverages that can be traced to a specific region of France can be marketed under the name of champagne. Within the champagne category there are many products. Outside of France, such as in the U.S., there are many fine comparable products, such those from the Jordan winery, but these have to be marketed as sparkling wines. However, there are also many other European sparkling wines that compete against one another and the brand in question in our example. These include proseccos from Italy and cavas from Spain. Such wines, while also sparkling in nature, have lower prices.

It may make little sense to use data for the high‐end champagne brands, such as Krug or Dom Perignon, which typically sell at prices such as $200, when evaluating the sales of a low‐cost product that may be priced at $7 per bottle and may be sold at stores like Walmart. There is some cross elasticity between prosecco sales and sales of champagnes in general. However, the expert may find more value from gathering data on sales of specific brands. In this industry, such focused data are available. Thus, those data would send more light on relevant trends than more aggregated data from the same “industry.”

Courts’ Position on the Use of Industry Averages

Courts have typically taken a very commonsense and intuitive approach to the use of industry averages. They tend to accept them when their use was clearly appropriate. For example, in Bob Willow Motors, Inc. v. General Motors Corp., the court held that the use of industry sales trends was a useful guide to help project the lost sales of the plaintiff, who was an automobile dealer.¹⁹ In this case, the averages served as guides in selecting the appropriate growth rate to use to project “but for” revenues. In commenting on the expert’s reliance on industry data to project lost revenues and profits of Bob Willow Motors, the court stated:

Strachota (the plaintiff expert) relied on actual sales by the plaintiff during periods when sufficient vehicles were delivered to the plaintiff’s dealership by the defendant manufacturer. Strachota further relied on national and regional sales to determine sales trends and market conditions in his efforts to determine those sales which the plaintiff should have experienced for the pertinent periods. …

To arrive at a lost profits figure, Strachota took a baseline figure (e.g., for Chevrolet he used 1980 when Willow sold 309 cars) and adjusted it by national sales trends. This assumed that Willow would do at least as well as the national sales trends. (This was not without good reason. From 1979 to 1980, sales declined nationally by 18 percent while Willow’s sales increased 83 percent.)…

Damages of course may not be speculative or conjectural, but neither are they required to be calculated with scientific precision or mathematical certainty. To calculate damages, Willow had to estimate the number of cars it would have sold – and thus what its profits would have been – had GM not engaged in unconscionable practices.

Courts’ Rejection of the Applicability of Industry Averages

Courts have rejected the flawed use of averages when the data were not comparable. For example, in Midland Hotel Corp. v. Reuben H. Donnelly Corp.,²⁰ one of many cases involving alleged losses caused by erroneous telephone listings and incorrect or omitted advertisements, the Illinois Supreme Court rejected the use of data on industry hotel occupancy rates because the time period being used was not relevant to the loss analysis to which they were being applied. However, in this case it was not the use of industry averages that was the problem. Rather, it was the use of averages from one time period to explain losses in another time period; the court determined other explanatory variables had an impact during the loss period and that the industry averages did not reflect these factors. This is clear from these excerpts from the opinion:

The plaiwntiff ssought $1,359,857 in lost net profits from July of 1981 to July of 1984. Net profits from July of 1982 to July of 1984 were sought as the consequence of the residual effect of being omitted from the 1981 Guide. John Jaeger, an accountant and plaintiff’s expert witness, testified that the damages figure was arrived at by measuring the variance between the plaintiff’s occupancy percentage and the average occupancy percentage of other downtown Chicago hotels as derived from a trade publication entitled Trends in the Hotel Industry (Trends). Jaeger’s calculation of lost occupancy assumed the plaintiff’s occupancy percentage would have equaled the downtown trends average for the three‐year period. Jaeger then added the lost revenue from the food and beverage sales as well as lost telephone revenue and deducted from this the plaintiff’s variable expenses to arrive at the total lost net profits.

Defendant’s expert witness, James Adler, an accountant, testified that Jaeger’s calculation of damages was invalid since it incorrectly assumed that plaintiff’s occupancy percentage would have otherwise equaled the downtown Trends average. Adler noted that for numerous months prior to July of 1981, plaintiff’s occupancy percentage was trailing the Trends average and that therefore there was no basis for the assumption that the plaintiff would otherwise have equaled the Trends average after July of 1981. …

Defendant maintains that as the plaintiff’s occupancy rate had been consistently trailing the Trends average prior to the issuance of the Guide in July of 1981, there was therefore no basis upon which to conclude that the plaintiff would have otherwise performed as well as the Trends average.

Defendants can learn a lesson from Midland Hotel Corporation v. The Reuben H. Donnelly Corporation: a useful defense to a lost profits analysis based on industry averages may be to challenge the relationship between the industry average and the historical revenue and/or profits (depending on what industry data are being used: revenue or profits). If the defendant can statistically show that there was no historical relationship, then it may be able to challenge the use of the industry data as a predictor of lost revenues. This means that the plaintiff’s expert must make sure that such a historical relationship really does exist. If possible, the closeness of association should be measured statistically, and demonstrated graphically through the use of exhibits.

Courts’ Position on the Reliability of Industry Association Data

The courts have also been sensitive to data quality issues, particularly when the data‐gathering methods employed by industry associations are suspect. An example of this sensitivity is found in Polaris Industries v. Plastics, Inc., a case in which a manufacturer of snowmobiles (Polaris) sued a manufacturer of plastic fuel tanks (Plastics). In this case, the Supreme Court of Minnesota rejected the use of data culled from a snowmobile industry association because there was little assurance that the data reported by the association was accurate.²¹ In agreeing with the trial court, the appeals court pointed out that some members did not report data, thus making the data a partial sample containing information of questionable reliability:

Of crucial importance to the plaintiff’s proof was the testimony of Joseph Buchan, the director of management services with the accounting firm of Touche, Ross & Co., who had considerable experience with calculating lost profits caused by business interruptions. Mr. Buchan’s testimony was excluded almost in its entirety after an extensive offer of proof, in which the witness was examined and cross examined before the court in the absence of the jury. The trial court found the testimony, exhibits, and conclusions of the witness to lack foundation.

The principal objection made to some exhibits used by Buchan and the conclusions drawn from them was they utilized data from International Snowmobile Industry Association surveys which were found unreliable after it was determined that it was not known how many snowmobile manufacturers were ISIA members, how many members reported to ISIA, or whether those who did report did so with some degree of accuracy. Since the exclusion of the ISIA reports was proper, the exclusion of the exhibits that graphically displayed the ISIA data was proper.

The above reveals another opportunity for defendants who face a plaintiff’s damages analysis based on the use of industry data. Defendants may want to explore the reliability of the data being used for the projection. In addition to measuring the strength of the association between the historical data and the plaintiff’s revenues/profits, the plaintiff’s expert must make sure that the data are reliable. It may not be reasonable for the plaintiff to embark on an extensive analysis of the industry association data. However, some research should be done to determine that the data were gathered and analyzed in a reliable manner. If the defendant can find, as it did in Polaris Industries v. Plastics, Inc., that the data are unreliable, then the projection itself may be preempted.

The court’s position in Polaris Industries v. Plastics, Inc. highlights the problems that can occur in using industry association data. The reliability of such data can vary greatly. As noted earlier, some associations pay greater attention to the quality of the data gathering and analysis than others. Some are able to enlist the support and compliance of their members more than others. Sometimes the associations contract out the surveying process to competent firms that specialize in such work. When specialized firms have conducted the surveying and analysis of the data, there may be higher comfort level with the data and results. When the association does this work itself, the expert should make sure that it was done competently.

One solution is to have more than one source of industry data. If there is more than one industry association, such as when there are different components of the industry and each has its own data, then these data can be compared. Larger industries, such as the automobile industry, may have several industry subcomponents; some of these have their own data. The trends in these data can be compared for consistency.