In the

United States Court of Appeals

For the Seventh Circuit

Nos. 11-1382, 11-1492

ATA AIRLINES, INC.,

Plaintiff-Appellee, Cross-Appellant,

v.

FEDERAL EXPRESS CORPORATION,

Defendant-Appellant, Cross-Appellee.

Appeals from the United States District Court

for the Southern District of Indiana, Indianapolis Division.

No. 1:08-cv-00785-RLY-DML—Richard L. Young, Chief Judge.

ARGUED NOVEMBER 2, 2011—DECIDED DECEMBER 27, 2011

Before EASTERBROOK, Chief Judge, and POSNER and

WOOD, Circuit Judges.

POSNER, Circuit Judge. ATA filed this diversity suit for

breach of contract against Federal Express (which the

parties call “FedEx,” as shall we, even though it’s actually

a subsidiary of FedEx Corporation), and obtained a jury

verdict in the exact amount it had asked for: $65,998,411.

FedEx has appealed. ATA has filed a cross-appeal that

is conditional on our reversing the judgment; the crossappeal challenges the district court’s refusal to let ATA
2 Nos. 11-1382, 11-1492

present evidence that it incurred $27,842,748 in unrecoverable costs in reliance on a promise by FedEx in the

alleged contract, and that it is entitled to recover these

costs as reliance damages, either as an alternative to the

expectation damages awarded by the jury or pursuant to

the doctrine of promissory estoppel. The parties agree

that the substantive issues are governed by the law of

Tennessee, FedEx’s principal place of business, except

that FedEx defends the district court’s ruling that ATA’s

promissory estoppel claim is preempted by the federal

Airline Deregulation Act. See American Airlines, Inc. v.

Wolens, 513 U.S. 219 (1995); Morales v. Trans World

Airlines, Inc., 504 U.S. 374 (1992).

We begin there, and can be brief: the ruling was incorrect. Although the Act forbids a state to “enact or enforce

a law, regulation, or other provision having the force and

effect of law related to a price, route, or service of an air

carrier,” 49 U.S.C. § 41713(b)(1), it does not “afford[]

relief to a party who claims and proves that an airline

dishonored a term the airline itself stipulated. This distinction between what the State dictates and what the

airline itself undertakes confines courts, in breach-ofcontract actions, to the parties’ bargain, with no enlargement or enhancement based on state laws or policies

external to the agreement.” American Airlines, Inc. v.

Wolens, supra, 513 U.S. at 232-33.

Promissory estoppel, as the word “promissory” implies,

furnishes a ground for enforcing a promise made by

a private party, rather than for implementing a state’s

regulatory policies. A garden-variety claim of promissory

estoppel—one that differs from a conventional breach of
Nos. 11-1382, 11-1492 3

contract claim only in basing the enforceability of the

defendant’s promise on reliance rather than on consideration, In re Fort Wayne Telsat, Inc., No. 11-2112, 2011 WL

5924446, at *2 (7th Cir. Nov. 23, 2011); Garwood Packaging,

Inc. v. Allen & Co., 378 F.3d 698, 701-02 (7th Cir.

2004)—is therefore not preempted. “We do not read the

[Act’s] preemption clause . . . to shelter airlines from

suits alleging no violation of state-imposed obligations,

but seeking recovery solely for the airline’s alleged

breach of its own, self-imposed undertakings . . . . A

remedy confined to a contract’s terms” is not preempted.

American Airlines, Inc. v. Wolens, supra, 513 U.S. at 228-29.

Not so tort claims that override contract claims, see

United Airlines, Inc. v. Mesa Airlines, Inc., 219 F.3d 605 (7th

Cir. 2000), rather than just seeking a remedy “confined

to a contract’s terms.” But ATA is not alleging a tort; it

is trying to hold FedEx to a promise that it contends

FedEx made to it. We’ll see later that ATA’s promissory

claim fails, but not because of preemption.

We turn to the conventional contract issues, on which

ATA prevailed in the district court.

In the event of a national emergency, the Department

of Defense can use commercial aircraft drawn from

what’s called the “Civil Reserve Air Fleet” to augment

the Department’s own airlift capabilities. See Air Mobility

Command, “Factsheets: Civil Reserve Air Fleet,” www.

amc.af.mil/library.factsheets.factsheet.asp?id=234 (visited

Dec. 21, 2011). Composed of aircraft owned by commercial

air carriers but committed voluntarily to the Department

for use during emergencies, the Fleet is divided into

separate “teams” of airlines, each with a “team leader.”
4 Nos. 11-1382, 11-1492

The teams pledge portions of their fleets for use by

the Department during an emergency; the leader

assembles the team and submits the team’s bid to participate in the Civil Reserve Air Fleet.

The team members are not compensated directly for

their commitment, but are compensated indirectly

because in exchange for a team member’s commitment

the Department awards the member “mobilization value

points” in proportion to the scale of the commitment. The

more points a member has, the more non-emergency air

transportation for the Department the member can bid

on. The points are transferrable within teams. Smaller

carriers value providing non-emergency service to the

Department (for which of course they are compensated)

more than the bigger ones (such as FedEx) do. So they

want the larger carriers’ points and are willing to pay

for them, and as a result end up doing most of the nonemergency flying. The team leader—invariably a large

carrier that therefore has a large number of mobilization

value points because of its commitment to provide

copious emergency service if needed—transfers points

to the members of its team in exchange for a commission on their non-emergency military flights. The

commission rate is the price term in the contractual

arrangements between the team leader and each of the

team’s smaller carriers. (This case concerns the contractual relations among the members of one team rather

than the contracts between the teams and the Department.)

FedEx is the leader of one of the teams, which before

the alleged breach of contract included ATA and Omni Air

International—small passenger and charter airlines that
Nos. 11-1382, 11-1492 5

split between them the team’s allotment of non-emergency

military passenger service (as distinct from cargo service). The FedEx team’s annual revenues from the provision of non-emergency services to the Department

amount to about $600 million.

Relations among members of FedEx’s team are defined

in three separate contracts, each with a one-year term.

One contract fixes both the allocation of military

business among the team members and the commission

rate for the team leader. This contract is negotiated separately between the leader and each team member (so

actually it’s more than one contract, but we can ignore

that detail). A second contract identifies the team

members and the aircraft they will commit to the

military if the team’s bid is accepted. A third defines the

liability and insurance obligations of the team members. There are additional provisions in these contracts,

but we can disregard them. We’ll call the three contracts as a group the “tripartite contract.”

The tripartite contract has as we said only a one-year

term. (The year is the federal fiscal year, which runs

from October 1 of the previous calendar year to September 30, so that the 2002 fiscal year, for example, began

in October 2001. All our year references are to fiscal

years.) But it was the team’s practice to enter into a separate three-year agreement concerning the distribution

of business among the team’s members. Implementation

of the agreement depended on the Defense Department’s accepting the team’s bid; otherwise there would

be no business to divide among the team’s members. And
6 Nos. 11-1382, 11-1492

if the Department decided it wanted more or less service

from the team than had been bid, this might affect the

division of business, since a particular team member

might have insufficient capacity to provide its allotted

share of service if the service requirement increased, or

alternatively might be badly hurt by a reduction in that

requirement if its share were unchanged—there might

for example be limited demand for or profit in a participant’s nonmilitary business. The agreement also

assumed that the parties would all end up on the FedEx

team, though there was no contractual stipulation to

that effect.

With so many contingencies, especially ones dependent

on decisions entirely within the power and rights of

each party, the agreement was a planning document

rather than an enforceable contract. We have pointed out

that “if any sign of agreement on any issue exposed the

parties to a risk that a judge would deem the first-resolved

items to be stand-alone contracts, the process of negotiation would be more cumbersome (the parties would have

to hedge every sentence with cautionary legalese), and

these extra negotiating expenses would raise the effective

price.” PFT Roberson, Inc. v. Volvo Trucks North America, Inc.,

420 F.3d 728, 731 (7th Cir. 2005). Contract law “permits

parties to conserve these costs by reaching agreement

in stages without taking the risk that courts will enforce

a partial bargain that one side or the other would have

rejected as incomplete.” Id.; see EnGenius Entertainment,

Inc. v. Herenton, 971 S.W.2d 12, 17-18 (Tenn. App. 1997);

Restatement (Second) of Contracts § 27, comments b, c (1981).
Nos. 11-1382, 11-1492 7

ATA’s suit is based on one of these three-year “contracts,” signed in 2006, in which ATA and (maybe) Omni

agreed with FedEx that during the following three years

(2007 through 2009) the team’s passenger business would

be divided equally between those two carriers. The

“contract” is in the form of a letter from FedEx to them

that reads as follows:

The letter will serve as the agreement for the distribution between ATA and Omni of both fixed and expansion for both wide and narrow body passenger business in the AMC Long Range International Contract

for FY07-FY09.

It is agreed that the distribution for the above passenger segments will be fifty-fifty (50%-50%) respectively

for both wide and narrow body and for both fixed

and expansion.

Please indicate your concurrence by signing as indicated below and returning to the undersigned.

We look forward to a continued successful relationship over this period.

There is a space below the writer’s signature for signatures by representatives of ATA and Omni. Although

only ATA’s representative signed, the evidence indicates

that Omni concurred, and if so the omission of a signature by a representative of Omni is immaterial.

The tripartite contracts for 2007 and 2008 incorporated

the 50/50 division—but with a change in the 2008 contract:

ATA’s allotment was reduced by 10 flights per month

to enable them to be allotted instead to Northwest Air-
8 Nos. 11-1382, 11-1492

lines, a much bigger carrier, which wanted to start

flying for the Civil Reserve Air Fleet. Northwest was

already a participant in the FedEx team, but like FedEx

(though without FedEx’s responsibilities as team leader)

had heretofore been a guarantor of emergency service

to the military and thus a seller of points to the smaller

airlines; 2008 would be the first time it would be a

flying member of the team.

The change turned out to be pregnant with menace

for ATA. For later that year FedEx decided to drop ATA

from the team and, beginning in 2009, give the mobilization value points that would have gone to ATA to Delta,

which had acquired Northwest shortly after the signing of

the 2008 tripartite contract. FedEx’s decision to replace

ATA in 2009 caused ATA to withdraw from the team

prematurely, in the middle of 2008 (we’re not sure why).

The withdrawal precipitated it into bankruptcy because

it had very little nonmilitary business to fall back on.

ATA’s breach of contract claim should never have

been permitted to go to trial. Courts interpret and enforce

contracts; they don’t make contracts. A contract is

unenforceable if it is “indefinite” in the sense of missing

vital terms, such as price, that can’t be readily supplied

by a court, for example by reference to a price formula

agreed on by the parties. Doe v. HCA Health Services of

Tennessee, Inc., 46 S.W.3d 191, 196-97 (Tenn. 2001); Four

Eights, LLC v. Salem, 194 S.W.3d 484, 486-87 (Tenn. App.

2005); Restatement (Second) of Contracts § 33 (1981); 1 E.

Allan Farnsworth, Farnsworth on Contracts § 3.27, pp. 417-20

(3d ed. 2004). If the price or other vital missing term can’t
Nos. 11-1382, 11-1492 9

be reconstructed in that way, the “contract” shouldn’t be

called a contract at all, but an attempted contract; its

indefiniteness renders it unenforceable.

We’ve already seen that a great deal was missing from

the so-called contract to allocate the FedEx team’s passenger business for 2007-2009 between ATA and Omni. True,

“the fact that a contract is incomplete, presents interpretive questions, bristles with unresolved contingencies,

and in short has as many holes as a Swiss cheese does

not make it unenforceable for indefiniteness. Otherwise

there would be few enforceable contracts. Complete contingent contracts are impossible. The future, over which

contractual performance evolves, is too uncertain.” Haslund

v. Simon Property Group, Inc., 378 F.3d 653, 655 (7th Cir.

2004). But “a contract is rightly deemed unenforceable

for indefiniteness when it leaves out (1) a crucial term

that (2) a court cannot reasonably be asked to supply in

the name of interpretation.” Id.

The proper division of responsibility between the

contracting parties, on the one hand, and a court asked to

enforce a purported contract, on the other, requires the

parties to decide on the key terms of the contract (or at

least on a methodology that generates the key terms

more or less mechanically), such as price, and leaves

the court to resolve only issues that, being unlikely to arise,

the parties should not be required to have foreseen

and provided for. To require parties to negotiate every

contingency that might arise during performance would

be impossible, because as we said not every contingency

can feasibly be foreseen and provided for—the future is
10 Nos. 11-1382, 11-1492

too uncertain. Contract law supplies a set of standard

terms that the parties can change if they wish but that if

they don’t change supply a substitute for negotiation. But

there is no standard price term, and no agreed-upon

formula for calculating the price, for the service provided

by the leader of a team of the Civil Reserve Air Fleet.

The doctrine of indefiniteness that makes a contract

unenforceable when it omits a crucial term that cannot

be supplied by interpretation has particular force when

the contract is one between sophisticated commercial

entities and involves a great deal of money. PFT Roberson,

Inc. v. Volvo Trucks North America, Inc., supra, 420 F.3d at

730; Skycom Corp. v. Telstar Corp., 813 F.2d 810, 815 (7th

Cir. 1987); Farnsworth, supra, § 3.8, pp. 224-26. That

describes the letter agreement; ATA’s share of the

revenues that the tripartite contract generated each year

was, at its peak, $406 million, and in 2007 its profits

from the contract exceeded $90 million. Even if we assumed—unrealistically—that all the other holes that

we mentioned in the team structure for 2007-2009 could

be filled by a court from industry standards, course

of dealing, trade usage, or some other objective source of

guidance that enables judicial completion of an incomplete contract, the price term—FedEx’s compensation

for providing team leadership and transferring mobilization value points to team members—could not be

supplied from any such source. That compensation was

the result of ad hoc negotiations and thus was determined by the parties’ circumstances each year at the time

of contracting. It had usually been 7 percent but one year

had plunged to 4.5 percent.
Nos. 11-1382, 11-1492 11

And so the letter agreement was not an enforceable

contract. But it did contain a promise to divide the

military passenger service to be provided by FedEx’s

team equally between ATA and Omni. The doctrine of

promissory estoppel makes a promise enforceable even

though it is not supported by consideration or otherwise enforceable under conventional principles of contract law, provided that the promisee reasonably incurred

a cost in reliance on the promisor’s fulfilling the promise

and that the promisor should reasonably have anticipated

that the promisee would rely in that way and might

therefore be hurt if the promisor reneged. Calabro v.

Calabro, 15 S.W.3d 873, 878-79 (Tenn. App. 1999); Amacher

v. Brown-Forman Corp., 826 S.W.2d 480, 482 (Tenn. App.

1991); Restatement (Second) of Contracts § 90 (1981);

Farnsworth, supra, § 2.19, pp. 176-78.

One function of the doctrine of promissory estoppel, as

we noted at the outset of this opinion, is to allow reasonable reliance to be substituted for consideration. The

underlying idea is that a reasonable promisee wouldn’t

incur an unrecoverable cost in reliance on the promise’s

being fulfilled unless there really had been a promise,

and so reasonable reliance is as good a basis for inferring

the existence of a promise as consideration is. Garwood

Packaging, Inc. v. Allen & Co., supra, 378 F.3d at 702. In this

case, however, there is no question that there was a

promise—the promise to share business 50/50 between

ATA and Omni is in writing, in the letter agreement. The

question is whether the promise was (or could reasonably

have been understood to be) intended to induce, and could

reasonably induce, reliance to the tune of $28 million.
12 Nos. 11-1382, 11-1492

If someone tells you “I promise you X, but don’t hold

me to it,” the promisor is making clear that he is not

inviting reliance and the promisee cannot, by ignoring

the warning and relying on the promise to his detriment,

make the promise enforceable. Such a “promise” may

create an expectation but does not create a commitment,

and so the promisee relies at his risk. Risk taking is ubiquitous in business and is perfectly reasonable because

the expected benefits of a risky undertaking will often

exceed the expected costs. It may have been reasonable

for ATA to reckon that it had a good enough chance of

getting half the passenger business of the FedEx team in

the 2007-2009 period to justify its going ahead and acquiring the aircraft it would need to provide the service

because its existing fleet was inadequate; it is the $28

million in allegedly unrecoverable expenses relating to that

acquisition that ATA seeks to recoup by invoking promissory estoppel. But ATA could not reasonably have

believed that FedEx intended to commit itself to split the

passenger business equally between ATA and Omni

during that period when so much was left to be agreed

upon, and so FedEx cannot have been expected to anticipate that ATA would rely on the promise. ATA’s lawyer

acknowledged at the oral argument that his client may

have been “imprudent” in failing to recognize the possibility that Northwest would want more of the team’s

business; and Northwest was (and Delta, which swallowed

Northwest, even more so, is) to ATA as the Dreamliner

is to the DC-3. Acting on a hope is not reasonable reliance.

Classic Cheesecake Co. v. JPMorgan Chase Bank, N.A., 546

F.3d 839, 845-46 (7th Cir. 2008); Garwood Packaging, Inc. v.
Nos. 11-1382, 11-1492 13

Allen & Co., supra, 378 F.3d at 703-04; Wood v. Mid-Valley

Inc., 942 F.2d 425, 428 (7th Cir. 1991).

So ATA loses. But we do not want to ignore the jury’s

award of damages, which presents important questions

that have been fully briefed and are bound to arise in

future cases.

The award was based entirely on a regression analysis

presented by an expert witness, a forensic accountant

named Lawrence D. Morriss. FedEx objected to the admissibility of the analysis, citing Rule 702(2), (3) of the

Federal Rules of Evidence, which when this case was

tried conditioned the admissibility of expert evidence

on the expert’s having applied “reliable principles and

methods . . . reliably to the facts of the case.” The rule

has been reworded slightly, effective December 1 of this

year, but the Committee Notes state correctly that the

changes are purely stylistic.

There were, as we’re about to see, grave questions

concerning the reliability of Morriss’s application of

regression analysis to the facts. Yet in deciding that

the analysis was admissible, all the district judge said

was that FedEx’s objections “that there is no objective

test performed, and that [Morriss] used a subjective

test, and [gave] no explanation why he didn’t consider

objective criteria,” presented issues to be explored on

cross-examination at trial, and that “regression analysis

is accepted, so this is not ‘junk science.’ [Morriss] appears to have applied it. Although defendants disagree,

he has applied it and come up with a result, which apparently is acceptable in some areas under some models. Simple regression analysis is an accepted model.”
14 Nos. 11-1382, 11-1492

This cursory, and none too clear, response to FedEx’s

objections to Morriss’s regression analysis did not discharge the duty of a district judge to evaluate in advance

of trial a challenge to the admissibility of an expert’s

proposed testimony. The evaluation of such a challenge

may not be easy; the “principles and methods” used

by expert witnesses will often be difficult for a judge to

understand. But difficult is not impossible. The judge can

require the lawyer who wants to offer the expert’s testimony to explain to the judge in plain English what the

basis and logic of the proposed testimony are, and the

judge can likewise require the opposing counsel to

explain his objections in plain English.

This might not have worked in the present case;

neither party’s lawyers, judging from the trial transcript

and the transcript of the Rule 702 hearing and the briefs

and oral argument in this court, understand regression

analysis; or if they do understand it they are unable

to communicate their understanding in plain English.

But a judge can always appoint his own expert to assist

him in understanding and evaluating the proposed testimony of a party’s expert. Fed. R. Evid. 706; General Electric

Co. v. Joiner, 522 U.S. 136, 149-50 (1997) (concurring opinion). If he worries that the expert he appoints may not be

truly neutral, he can ask the parties’ experts to agree on a

neutral expert for him to appoint, as we suggested in

DeKoven v. Plaza Associates, 599 F.3d 578, 583 (7th Cir. 2010),

and In re High Fructose Corn Syrup Antitrust Litigation, 295

F.3d 651, 665 (7th Cir. 2002); see also Daniel L. Rubinfeld,

“Econometrics in the Courtroom,” 85 Colum. L. Rev. 1048,

1096 (1985). Also, the Federal Judicial Center has published
Nos. 11-1382, 11-1492 15

a nontechnical “Reference Guide on Multiple Regression”

written by Professor Rubinfeld, published in Reference

Manual on Scientific Evidence 303 (3d ed. 2011). Had the

district judge read the relevant portions of Rubinfeld’s

guide, he would have realized that Morriss’s regression

analysis was fatally flawed. Another good introduction

to the use of statistical analysis in litigation is David

Cope, Fundamentals of Statistical Analysis (2005).

The judge would have discovered in these or other

sources that he might have consulted that a linear regression is an equation for the straight line that provides

the best fit for the data being analyzed. The “best fit” is

the line that minimizes the sum of the squares of the

vertical distance between each data point and the line.

(Why the squares rather than the simple distances is

difficult to explain, and the jury can be asked to take

it on faith.) A simple linear regression (that is, one involving only two variables—one the dependent variable, the variable to be explained, and the other the independent variable, the variable believed to explain the

dependent variable) is easily visualized by plotting the

data points on a graph. The regression line is a straight

line that minimizes the aggregate of the squared vertical

distances from the points to the line. The equation that

generates that line can be written as Y = a + bX + u, where

Y is the dependent variable, a the intercept (explained

below), X the independent variable, b the coefficient of

the independent variable (that is, the number that

indicates how changes in the independent variable produce changes in the dependent variable), and u the regression residual—the part of the dependent variable that
16 Nos. 11-1382, 11-1492

is not explained or predicted by the independent variable

and the intercept, or in other words is “left over,” like

the change you receive after paying for a 99-cent item

with a $1 bill. 

To illustrate below we graph a regression of salary

(the dependent variable, on the vertical axis) on job

experience (the independent variable, on the horizontal

axis) for a hypothetical company. Each dot represents the

salary and job experience of a particular employee. The

intercept is the point at which the regression line

crosses the vertical axis on the left side of the graph; it is

thus the salary received by an employee who has no job

experience at all. (Because a is 26.9, the model predicts

that the starting wage of a new hire with no experience

would be $26,900.) The slope of the regression line is the

coefficient of the independent variable: it is a positive

number because the more job experience a worker has, the

higher his salary is likely to be. For example, b equals 2.2 in

the graph, so the regression model predicts that a 1-year

increase in job experience generates a $2200 increase in

salary. 

The relation between salary and job experience,

although positive, varies from employee to employee.

That is why not all the data points lie on the regression

line, the straight line that fits the data best; the best fit

is rarely a perfect fit. The variation in salary that the

regression line does not explain is the regression

residual, u in our equation.
Nos. 11-1382, 11-1492 17

Regression analysis is used to test hypotheses, in our

example the hypothesis that more experienced workers

get paid more (and how much more) depending on the

amount of their experience. But it is also used to predict—for example that when a new employee accrues

10 years of experience he will be paid $22,000 more than

his starting wage.

There is much more to regression analysis, even in

the simple case in which there is only one independent

variable; but we’ve now explained (and the judge could

readily have understood from the FJC guide) enough to

enable us to show why Morriss’s regression analysis

should never have been allowed to be put before a jury.

He used regression analysis to predict what ATA’s

military profits would have been had it not been dropped

from FedEx’s team. In a graph that he prepared which
18 Nos. 11-1382, 11-1492

we reproduce below, the dependent variable is ATA’s

annual costs of participating in the Civil Reserve Air Fleet

as a member of the FedEx team and the independent

variable is ATA’s total annual revenues from that participation. There are 10 data points, each representing ATA’s

costs and revenues for one year from 1998 through 2007.

As in our illustrative graph, the regression line in

Morriss’s graph slopes upward—when revenues rise,

costs rise. Notice that the data points are closer to the

regression line than the data points in our illustrative

graph. This means that the regression line in his graph

fits his data better than the regression line in our illustrative graph fits the data in that graph.

To calculate ATA’s damages, Morriss needed to

estimate its military revenues and costs for the second half
Nos. 11-1382, 11-1492 19

of 2008 (after ATA withdrew from the team), and all of

2009, on the counterfactual assumption that the airline

would have continued to belong to FedEx’s team for the

entirety of those two years rather than for just the first

six months of the period. Morriss estimated that ATA’s

revenues for 2008 would have been $286.5 million, a

figure he arrived at by multiplying the FedEx team’s

2008 military passenger revenue of roughly $600 million

by ATA’s historical share of the team’s annual

passenger revenue. Plugging his revenue estimate into

his linear regression (which, remember, treats costs as

a function of revenues), Morriss came up with a cost

figure of $253.8 million; and subtracting that from the

estimated revenues yielded an estimated net profit for

ATA in 2008 of $32.7 million.

Since FedEx was willing to keep ATA on the team

throughout 2008, it is doubtful that the loss of

profits that ATA experienced in the last half of 2008 by

reason of its premature withdrawal can be blamed on

FedEx. Yet Morriss believed that his inflated estimate of

ATA’s lost profits underestimated the loss in 2008

because the figure for costs that he used (and profits are

revenue minus costs, so the higher the costs the lower the

profits) included interest, taxes, depreciation, and amortization costs that he estimated amounted to $11.4 million in

2008. He thought these costs would not have been affected

by the company’s flying as part of the Civil Reserve Air

Fleet that year, and so should not be deducted from

revenues. There is some truth to this. Some of those costs

may have been fixed, and if so were properly subtracted

from the cost figure used to compute ATA’s lost profits.
20 Nos. 11-1382, 11-1492

Imagine that a firm has a fixed rental expense of $1 million

a year, and unexpectedly lands a very profitable contract. Because the rental would have to be paid even if

the firm had failed to obtain the contract, the rental

expense would not be a cost allocable to the contract and

so should not be subtracted in calculating the contract’s

profitability. Yet we’ll see that elsewhere in his analysis

he treated capital expenditures as current expenses, a

treatment that fails to match costs and revenues, just as

subtracting a fixed cost from the revenue generated by

the contract in our example would fail to match costs

and revenues.

Expunging the $11.4 million figure from Morriss’s cost

estimate increased his annual estimate of ATA’s lost

profits to $44 million for all of 2008. Last he assumed

that ATA’s profits would be identical in 2009, so he

multiplied $44 million by 1.5 (to calculate lost

profits for the period encompassing the latter half of

2008 and all of 2009) to yield a total lost profits estimate

of $66 million. As we said, the estimate was excessive

because it included ATA’s profits in second half

of 2008—the consequence of what appears to have

been a self-inflicted wound.

But these were the least of Morriss’s errors. His most

glaring error was to use costs as his dependent variable

and revenues as his independent variable. The dependent

variable as we know is a number sought to be explained

by the independent variable, as in any equation. In the

equation Y = bX, the effect of X on Y is quantified by

its coefficient, b; so, for example, if b is 3, then Y is three

times larger than X.
Nos. 11-1382, 11-1492 21

But revenue does not influence cost directly; nor is

it clear that it is closely correlated with unmeasured

variables that do influence costs. An increase in revenue

may be correlated with an increase in cost—and indeed

is likely to be if the increased revenue is the result of

increased sales, but not if it is the result of selling the same

output at a higher price. Increases in total costs are

driven by increases in component costs—labor, materials,

and so forth—not by revenues. What is true is that if

revenues plummet, the firm will try to cut its costs in

order to minimize the losses caused by the drop in revenues. But to the extent that those costs are fixed, it may

not be able to cut them in time to avoid bankruptcy—

which is what happened to ATA in 2008.

Morriss tried to justify his explaining cost by revenue,

rather than by more plausible variables such as fuel,

maintenance, and labor costs, on the ground that such

information was unavailable. It is hard to believe this,

because the information must have been recorded by

ATA’s accountants—how else could they have prepared

a balance sheet and income statement for the company?

In any event a plaintiff’s failure to maintain adequate

records is not a justification for an irrational damages

theory.

Even if we assumed that Morriss’s model were built

on a rational foundation, we would have to reject its

results because the model was improperly implemented.

In 2007, the last full year in which ATA participated in

the Civil Reserve Air Fleet, its profits were a minuscule

$2.1 million. If it would have had the same profits in
22 Nos. 11-1382, 11-1492

2008 and 2009 had it not been dropped from FedEx’s team,

its total damages would have been only $3.15 million

during the 18 months remaining in 2008 and 2009, rather

than the $66 million that ATA asked for and the jury

awarded (to the dollar). $2.1 million is only 6.4 percent

of the $32.7 million profit that Morriss’s regression

analysis predicted that ATA would have earned the

following year (as well as the year after that) had ATA not

been dropped from the team. (The $32.7 million is the

profit before the adjustment for the so-called fixed costs of

$11.4 million. The adjustment was not carried into the

calculation of ATA’s 2007 profits, which is why we are

expressing those profits as a percentage of the predicted

profit for 2008 and 2009.)

The following graph, based on one prepared by Morriss

and admitted into evidence, exhibits the fallacy of his

prediction. (We are not clear why his graph was truncated

at 2002, since ATA had joined the FedEx team earlier

and the record provides sufficient data to extend the

graph to 1998, as we have done.) The top line is ATA’s

annual military revenues; the lower line is its annual

costs; the vertical distance between the two lines measures

the company’s profits from its military business. We see

that revenues rose sharply from 2002 to 2005, then plummeted in 2006 and 2007. Costs rose more gently, and fell

more gently, over the 2002-2007 period, and in 2007, the

last year for which there are data, the two lines almost

intersect—it was because revenues were so close to costs

that profits were so meager that year. 
Nos. 11-1382, 11-1492 23

Morriss predicted that ATA’s military revenues would

have risen in 2008 and 2009 while its costs would have

continued to fall. The difference between his estimated

revenues and his estimated costs is the $66 million in

(imagined) lost profits. Remember that Morriss’s regression model, which is based on historical data (2002-

2007), found a positive relation between revenues and

costs: when revenues rise, costs rise, and when revenues

fall, costs fall. Remember too that he used the model to

predict that ATA’s costs would have continued to fall in

2008 and 2009 (the lower dashed line), even as revenues

rose. It’s this divergence in directions that turns a

modest predicted growth in revenues into a large

growth in profits.

What produced this odd result—costs falling as

revenues rise—is that ATA’s costs had increased much

more slowly than its revenues between 2002 and 2005,
24 Nos. 11-1382, 11-1492

resulting in big profit margins. To predict a comparable

(though somewhat smaller) profit margin in 2008 and

2009 (and thus produce a big lost-profits estimate), when

the uptick in revenues was expected to be much smaller

than it had been between 2002 and 2005, Morriss had

to make costs in those years fall. But for ATA’s costs to

fall as its revenues rose would make no economic sense,

as well as being inconsistent with Morriss’s underlying

assumption that costs are a positive function of revenues—that if revenues rise costs rise and if revenues fall

costs fall. That costs rise more slowly than revenues does

not imply that costs drop when revenues increase slowly.

No mechanism for such a reversal is suggested, and

revenues and costs had never moved in opposite directions during the preceding decade in which ATA had

actually been operating.

Morriss tried to explain away the embarrassingly minuscule profits that ATA earned on its military business

in 2007 as a fluke: the carrier, he said, had experienced

“nonrecurring” costs that year. The costs in question were

the costs of acquiring new aircraft. They were indeed

nonrecurring costs, but they were not 2007 costs; they

were capital expenditures, which is to say expenditures

expected to increase revenues or reduce costs over a

period of more than a year, and thus beyond the year

in which the expenditures were made. If a business buys

a piece of equipment in year 1 for $1 million that will

be usable for 10 years and will then be scrapped, to treat

this as a $1 million cost in year 1 and a zero cost in each

of the nine subsequent years would create a misleading

picture of the firm’s profits through time. Costs should
Nos. 11-1382, 11-1492 25

be matched with revenues to provide an accurate year-toyear picture of profitability. This is done by amortizing

(spreading) a capital expenditure over its useful life. In

the case of our hypothetical $1 million asset, this would

require assigning costs of $100,000 per year to each year

of the asset’s useful life. If that were done here, Morriss’s

estimate of lost profits in 2008 and 2009 would have

been lower than it was, because some of the nonrecurring

costs incurred in 2007 would have been reallocated to

those years.

Another mistake Morriss made was to model the relation

between cost and revenue as a straight line, as if, for

example, ATA’s costs were always exactly 75 percent of

its revenue (producing the linear regression equation c =

.75r), in which event the company would turn a 25

percent profit every year. Yet its actual profit margins,

as shown in the next graph, fluctuated between 0 and

25 percent of total revenue.
26 Nos. 11-1382, 11-1492

Still another mistake was Morriss’s basing a prediction

of what ATA’s costs would have been in 2008 and 2009

(had it remained a member of FedEx’s team) on a tiny

sample—10 observations, each consisting of ATA’s costs

in one of the 10 years on which the regression analysis

was based. Small samples are less representative of the

population being sampled than large ones. The population here would be the entire cost experience of ATA

and similar air carriers. 

Confidence intervals (familiar as the “margins of

error” reported in predictions of election outcomes) are

statistical estimates of the range within which there can

be reasonable confidence that a correlation or prediction

is not the result of chance variability in the sample on

which the correlation or prediction was based; 95 percent

confidence is the standard criterion of reasonable confidence used by statisticians. Consider our hypothetical

regression of wages on experience. A regression based on

a sample of 10 workers would yield a less precise prediction of what the average relation of wages to experience

was for the workers in a plant that had 1000 workers than

a regression based on a sample of 50 or 100 of the workers.

The 95 percent confidence interval for Morriss’s prediction of ATA’s 2008 costs was correctly calculated in the

report of FedEx’s expert to be $90 million. This means

that Morriss’s estimate that ATA would have costs of

$254 million was the midpoint of a range from $299 million

at the top ($254 million + $90/2 million) to $209 million

at the bottom ($254 million - $90/2 million)—and if its costs

were at the top of the range the result would have been
Nos. 11-1382, 11-1492 27

a $12.5 million annual net loss for ATA rather than

Morriss’s predicted $32.7 million profit (before the adjustment for fixed costs). All else aside, the confidence

interval is so wide that there can be no reasonable confidence in the jury’s damages award.

All this is not to say that it would be a surprise if ATA

had lost profits as a result of its expulsion from the

FedEx team, although its nonmilitary business was collapsing and it is doubtful that it could have survived

purely on its military business. But the only quantification

of damages presented at the trial was based on Morriss’s

regression, and as a result there was a failure of proof

of damages. It is not enough to prove injury in a

damages suit; the plaintiff must prove an amount

of damages and ATA failed to do that.

This is not nitpicking. Morriss’s regression had as

many bloody wounds as Julius Caesar when he was

stabbed 23 times by the Roman Senators led by Brutus.

We have gone on at such length about the deficiencies

of the regression analysis in order to remind district

judges that, painful as it may be, it is their responsibility

to screen expert testimony, however technical; we have

suggested aids to the discharge of that responsibility. The

responsibility is especially great in a jury trial, since

jurors on average have an even lower comfort level with

technical evidence than judges. The examination and crossexamination of Morriss were perfunctory and must

have struck most, maybe all, of the jurors as gibberish.

It became apparent at the oral argument of the appeal

that even ATA’s lawyer did not understand Morriss’s
28 Nos. 11-1382, 11-1492

analysis; he could not answer our questions about it

but could only refer us to Morriss’s testimony. And like

ATA’s lawyer, FedEx’s lawyer, both at the trial and in

his appellate briefs and at argument, could only parrot

his expert. FedEx’s expert did not testify; as is common

in damages cases, the defendant offered no alternative

measure of damages, doubtless fearing that the jury

would take that as a signal to split the difference—finding

liability but awarding the plaintiff less than the plaintiff asked for—rather than struggle to understand an

incomprehensible case. Both because FedEx tendered no

estimate of damages and because neither Morriss nor the

lawyers nor the judge presented an intelligible damages

analysis to the jury, it is no surprise that, having decided

that ATA should win, the jury simply awarded the exact

figure that ATA had asked for in damages.

If a party’s lawyer cannot understand the testimony

of the party’s own expert, the testimony should be withheld from the jury. Evidence unintelligible to the trier

or triers of fact has no place in a trial. See Fed. R. Evid.

403, 702.

The judgment is reversed with instructions to dismiss

the suit with prejudice.

REVERSED.

12-27-11