Wednesday, December 29, 2010

Status of Total Offset Method In Pennsylvania

I have received permission from the writers of the Drug and Device Law Blog to copy their below recent December 23, 2010 post of note by David Walk here as a guest post.

I recommend that you check out their blog for excellent updates in this area of the law. Here's a link to their blog:

http://druganddevicelaw.blogspot.com/


Pennsylvania Supreme Court Appears Ready to Reconsider Its Unique Total Offset Method

In almost every jurisdiction in the U.S., an award of damages to compensate an injured plaintiff for wages the plaintiff would have earned in the future must be discounted to present value. In oversimplified form, the basic idea is clear: if you give someone in one lump sum the total amount of wages that the person would have earned over the next 20 years and the person invests it conservatively, that person will have more money after 20 years than the person who worked for 20 years, because the recipient of the lump sum will earn interest in excess of inflation. If you want to compensate the person accurately and put the person in the same position he or she would have occupied after working for 20 years, then you must give the person less than the total of 20 years of wages. If not, the person receives a windfall.

Pennsylvania marches to the beat of a different drummer in many ways, which we have chronicled repeatedly. This is one of them. For 30 years, Pennsylvania has followed its own unique rule called the “total offset method.”


Under the total offset method, a court does not discount the award to its present value but assumes that the effect of the future inflation rate will completely offset the interest rate, thereby eliminating any need to discount the award to its present value. . . . Since over the long run interest rates, and, therefore, the discount rates, will rise and fall with inflation, we shall exploit this natural adjustment by offsetting the two factors in computing lost future earning capacity.

Kaczkowski v. Bolubasz, 421 A.2d 1027, 1036-38 (Pa. 1980). The rule has the virtue of simplicity, but simplicity is not the highest virtue, or else Sarah Palin would be Pope.

We could be charitable and say that Kaczkowski made sense in 1980, when the inflation rate was 13.5%. After all, the Captain and Tennille and leisure suits made sense in 1980 to some people. But in fact, Kaczkowski was criticized from the moment it was decided. See, e.g., Michael T. Brody, Inflation, Productivity, and the Total Offset Method of Calculating Damages for Lost Future Earnings, 49 U. Chi. L. Rev. 1003 (1982). The comments from people who actually know something about the relationship between inflation and interest rates have been particularly biting: “Untroubled by economic theory, and characterized by spectacular award error rates, Kaczkowski epitomizes junk science in the courtroom.” Robert F. Pelaez, Pennsylvania’s Offset Rule: Fantasy Masquerading as Economics, 5 J. Legal Econ. 1 (Winter 1995). And, of course, the total offset rule totally overcompensates plaintiffs. One study found that the overcompensation to a young plaintiff with many years of lost wages could approach 100%. Id.

What Kaczkowski did was take a momentary economic blip – the “oil shock” generated inflation spike of 1979-80 – and cast it in the stone of stare decisis. The economic history of the next thirty years demonstrates that the economic assumptions in Kaczkowski are, with all due respect, 100% hogwash. A real interest rate does, in fact, exist. If it didn’t, that is, if inflation always equaled return on investment, then nobody would have much incentive to invest and the economy would have collapsed long ago.

All of this brings us to Helpin v. Trustees of University of Pennsylvania, Nos. 36 & 37 EAP 2009 (Pa. Dec. 21, 2010). Helpin was a breach of contract case brought by a doctor against Penn, and the doctor won an award of lost future income from the profits of a business. For whatever reason (it seems odd to us, but we are loath to second-guess counsel’s litigation strategy without knowing more than what is stated in the opinions), Penn did not ask the Pennsylvania Supreme Court to overturn Kaczkowski. Majority op. at 10 n.3, 17 n.6. Instead, Penn argued that Kaczkowski applied only to lost wages and not to lost profits. The Court rejected that argument and affirmed the damage award. Majority op. at 13-17.

That’s not what’s fascinating about Helpin. What’s far more interesting from our perspective is the dissent.

Even though Penn had purposely refrained from attacking Kaczkowski frontally, three Justices (out of seven on the Court) joined a dissenting opinion that eviscerated Kaczkowski and concluded that “lump-sum awards based on lost future income should be discounted to present value.” Dissent at 1. The dissent noted that most everyone agrees that the inflation rate actually does not totally offset rates on safe investments: “simply because the two rates ‘rise and fall’ together, it does not follow that they are numerically identical.” Id. at 3. The dissent also found that the total offset method was “overly compensatory,” widely criticized, and not required in any other jurisdiction. Id. at 6.

The majority responded to the dissent’s criticisms of the total offset method in a final footnote. Majority Op. at 17 n.6. The majority reiterated that the only question before the Court was whether Kaczkowski should be applied in this context, not whether it should be overturned. Id. The majority stressed that “[t]he instant case does not present an appropriate forum for a consideration of whether Kaczkowski was wrongly decided and ultimately should be overturned.” Id. The majority also noted that Kaczkowski’s flaws were not argued or ruled on below. “Thus, in the absence of any testimony or other evidence of record, it would be imprudent to conclude here that Kaczkowski’s theoretical underpinnings are weak and its basic assumptions are unsupportable.” Id.

In other words, even the majority did not say Kaczkowski was right, only that the issue was not properly presented. That does not bode well for the poor sap who will defend Kaczkowski after all these years when the issue is properly presented.

Here’s what this case means for defense lawyers handling personal injury cases governed by Pennsylvania law: now is the time to ask the Pennsylvania Supreme Court to overturn Kaczkowski. The three dissenting Justices appear poised to reverse this relic from 1980. Reading between the lines of footnote 6 of the majority opinion, one or more Justices in the majority might entertain reconsidering the total offset method if the question were properly presented. Although the ideal case would follow the majority’s suggestion to have “testimony or other evidence of record” showing that “Kaczkowski’s theoretical underpinnings are weak and its basic assumptions are unsupportable,” majority op. at 17 n.6, at least three Justices apparently would not require such a record. If an objection to the total offset method were lodged in the trial court and properly preserved, the basic economic facts that interest rates do not cancel out inflation rates can be established from many sources that the Court should accept.

So, Pennsylvania lawyers, eat your roast beast and figgy pudding or Chinese food, and then come back after the holidays and begin the assault on Kaczkowski. It is time to bring this outdated slice of Pennsylvania law into line with economic reality.

Posted by David Walk

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