## In the



# U n ited S ta tes Co urt o f Ap p ea ls

F o rth eS e v e n th C ir cu it
N os. 11

- 1382 , 11

- 1492 ATA A IRLI NES, I NC ., Plai nt i f f

-Appe l l e e, Cr os s -Appe l l ant, v. F EDERAL E XPRESS C ORPO RA T I ON, D efend a nt-A pp ella nt, C ross-A pp ellee

.
A pp ealsfr o m the United S t ates Di strictC our t fo r the S outhernDi stricto f Indian a, Indian apolisDiv isi on. No . 1:08- cv-00785- RLY-DML

—Richar d L . Y oun g, Chief Ju dge

.
A RG UE D N OVE MBE R 2, 2011

— D ECI DE D D ECE MBE R 27, 2011

Befo re E A S T E RB R OO K, Chie f Judg e, a nd P O SN ERa nd W OO D , C ircu it Judges . P OSNER, C ircu i tJudg e . A TA fi l ed thi s di ver si ty sui t for br ea cho fc o nt r ac t ag ains t F edera lExpr es s ( whi chthe p ar tie s c all “F ed E x ,” as s h all w e, ev en t h ou gh it ’s a c tu ally a su b s id iary of FedE x C orp oration), and obtained a j ury ver dicti n the exact am ou n t ithad ask ed f or : $6 5, 998, 411. FedEx has appeal ed. A TA has fi l ed a c ro ss- appeal that i s c o nd i t i o na lo n o urr e v e r s i ngthe j ud g men t ; the c r oss appe al c hal l en g es the di st r i ctc o ur t’ s r efus alt o l etATA2 N os. 11

- 1382, 11

- 1492 prese nt ev i dence thati t incurr ed $27, 842, 74 8 i n unreco ver ab l e co st s i n r el i an ce o n a pr o m i se b y F edEx in the al l ege d contr act, and that i t i s e nti tl ed to r eco verthes e co st s as r el i an ce da m ag es , e i th era s ana l te r na ti ve t o the ex p ecta ti on dam age s a w ar ded bythe j ury orpursuant to the doct rine o fpro m i ssoryes toppel

. The part i es agr ee that the s ubstanti ve i ssues ar e g ove rned by the l aw o f Te nn e s s e e , Fe dEx ’ s p r i nc i pa lp l a c e o fb us i ne s s , e xc e pt th at Fed E x d efend s the district cou rt’s ruli ng th at A T A ’s prom i sso ryes toppe l cla i m i s pre em pted by the federa l A i rl i ne Dere gul ati on Act. S ee Am e r i ca n A irline s , Inc . v. Wol e ns , 51 3 U .S. 21 9 (19 95 ); M orale s v. Trans World A ir li nes, Inc. , 504 U
. S. 374 (1992). W e b e gin the re, and can be brief : the ru ling w as incorre ct. A l though the A ct forbi ds a s tat e t o “enacto r enf or ce a l aw, r egul ati on, or o th erpr o vi si o n h av i ngthe f o r ce a nd effe c t o f law rela te d to a p ric e, rou te , or se rv ice of an air carrier, ” 49 U
. S. C
. § 41713(b)(1), i t d oes not “affor d [] r el i eft o a pa r tywho c l ai m s an d pr o ve s that an a i r l i ne disho nored a ter m the ai rl i ne i tse l fst i pu l ate d. This distinc ti o n be tw ee n wha t th e S ta te di ct at es a nd wha t th e a irl ine itselfun d ertakes confines co urt s, in breach -of

contr act acti ons, to the parti es’ bar gain, with no enl ar gem ent o r enhancem ent b ase d on st ate l aw s or pol i ci es externalto the agr eem ent. ” Am e r i ca n Ai r l i ne s , Inc . v. Wol e ns , sup ra , 51 3 U.S
. at23 2- 33. Pro m i sso ryes toppel, as the w or d “prom i sso ry ” i m pli es, furni shes a g ro und f or e n f or ci ng a prom i se m ade by a p rivate p a r t y, rath er than f or i m p lem en ting a state ’s regu latory p oli cies. A ga rd en -variety claim of prom issory est oppel

— one that differ s fro m a conve nti onalbr ea ch ofN os. 11

- 1382, 11

- 1492 3

co nt r ac t cl ai m o nl y i n b as i ng the e nf o r ce ab i l i tyo fthe d efend an t’s prom ise on reli an ce rath er than on con side rat ion, In reFo r tWayneTel s at, Inc . , N o . 1 1

- 2 1 1 2 , 2 0 1 1 WL 59 24 44 6, at *2 (7t h C ir. N ov . 23, 20 11 ); Ga rw o od Pac kagi ng, Inc . v. Al l e n & Co. , 378 F.3d 698 , 70 1 -0 2 ( 7 th Cir. 2004 )

— is th er efo r e no t pr ee m pte d. “ W e d o n ot r ea d the [ A ct’ s] pre em pti on cl ause . . . to shel terai rl i nes fro m sui ts al l eging no vi ol ati on o fst ate
- i m posed ob l i gat i ons, but se eking r eco ver y s ol el y forthe ai rl i ne’ s a l l ege d b re a c h o f its ow n, self-im p os ed u n d er ta kin gs . . . . A r e med y c o nfi ne d t o a c o nt r a c t ’ s t e r ms” i s not pre e mpt e d. A m eri ca n Ai r l i ne s , Inc . v. Wol e ns , sup ra , 5 1 3 U. S
. a t2 2 8

- 29. N ot so tor t cl ai m s that o ver ri de contr act cl ai m s, se e U nite d Airli nes, Inc. v. M es a A ir li nes, Inc. , 219 F. 3d 60 5 (7th Cir
. 20 00) , r atherthan j ust seeki ng a re m edy “c onfi ned to a c on tr ac t’s te rm s.” B u t A T A is n otalleg in g a to rt ; i t i s t r y i ngt o h o l d F e dEx t o a pro m i s e tha ti tc o nt e nd s Fed E x m ad e to i t. W e’l l see late r t h a t A T A ’s prom issory cl ai m f ai l s, b utno t be ca us e o fpr ee m pti o n. W e turn to the conve nti onal contr act i ssues, on wh i ch A TA pre vai l ed i n the dist ri ct c ourt
. I n the e ve nto fa na ti o na le m er g ency, th e Depa r tment of Defe nse can use com m er ci al ai rcr aft draw n from what ’ s ca l l ed th e “Ci vi l R eserve Ai r F l ee t” t o a ug m en t the Depart m ent’ s ow n ai rl i ft capabi l i ti es. See A i r M obi l i ty C o mma n d , “ F a c t s h e e t s : C i v i lR e s e r v e Ai r F l e e t, ” ww w. am c. af

. m i l/l ibra ry . f acts heets

. f acts heet. asp?i d=234 ( vi si ted Dec. 21 , 2011)
. C om posed ofai rcr aft o w ned by c om m er ci al ai r carri er s butc o m m i tt ed vo l unt ar i l y t o the De par tment f oru se d u ringem er genci es, the Fl eeti s di vi ded i nto se p ar at e “ te am s” of airlin es , eac h w ith a “t ea m lea d er .”4 N os. 11

- 1382, 11

- 1492 The tea m s pl edge por ti on s of thei r fl eet s foruse by the Depart m ent duri ng an em er gency ; the l eader assem bles the te a m a nd sub m its the team ’s bi d to parti ci pate in the Civi lRese rv e AirFl eet
. The tea m m em b ers a re notco m pensated di re ctl y for th eir co m m itm en t, b u t a re co m p en sa te d ind ire c tly be cau se i n e xc ha ng e f o r a t ea m mem be r ’ s co m m i tment th e Depa r tmenta war ds th e m embe r “ m o bi l i za ti o n v alue po i nt s” i n pro po r ti o n to the sca l e o fthe co m m i tment
. The m or e p oin ts a m em b er h as , th e m or e n on - e m e r g en c y a ir tr an sp or ta t ion for th e D ep ar tm en t t h e m em b er ca n bid on. The poi nts a re tr ansfer rabl e with in team s. S m al l er ca r r i er s va l ue pr o vi di ngno n- em ergencys er vi ce t o the Dep a r t men t( f o r wh i c h o fc o ur s e the y a r e c o mpe ns a t e d) m or e than the bi gge r ones (s u c h as Fe dE x) do. S o they w ant the l ar gercar ri er s’ poi nts a nd ar e wil l i ng to pay f o r the m , a nd a s a r es ul t en d up do i ngmos t o fthe no nem er gencyfl yi ng. The te am l eader

— i nvar i abl y a l ar ge car ri erthatther ef ore has a l ar ge num bero fm obi l i zati on v a l ue p o i nt s b e c a us e o fi t s c o mm i t mentt o p r o v i de c op i ous e m er gencyse rv i ce i fneeded

— tr ansfer s points t o th e me mb e r s o fi t s t e a m in e x c h a n g e f o r a c o mm i ss i o n o n the i r no n- emer g en cymil i ta r y fl i g ht s. The com m i ssi on r ate i s the pri ce t er m i n the contr actual ar r an g ement s be twe en th e te am l ea der an d ea ch o fthe te am’ s smal l erc ar r i er s. ( Thi s ca se c o nc erns the c o ntr actualr el ati ons am ong the m em ber s o fo ne te am r ather th an th e c on tr ac ts be tw ee n th e te am s an d t h e D ep ar tm en t.) Fed E x is the lead er of on e of th e team s, w hich before th e a lleg ed br ea c h of co n tr ac t inc lu d ed A T A an d O m n i A ir I nter nati onal

— sm al lpasse ngerand char ter a i rl i nes thatN os. 11

- 1382, 11

- 1492 5 spl i t be tw een them the tea m ’ s al l otm ent ofnon- em er gency m il itary p assen ger service (as d isti nc t from car g o servic e). T h e F ed E x te am ’s a n n u al re ve n u es from th e p ro visi o n o fn o n - e me r g e n c y s e r v i c e s t o th e D e p a r t men t amoun t to abo ut$ 60 0 m i l l i o n. Rel atio ns am ong m em ber s o fFe dE x’s te am ar e defi ned i n th r e e s e p a r a t e c o n t r a c t s , ea c h w i th a o n e - y e a r t e r m. O ne cont ract fixes both the alloc ation of m il itary busi ness am on g the te am m em ber s a nd the com m i ssi on ra te f orthe tea m l eader

. Thi s co ntra ct i s neg oti ate d separa tely b etween the lea d er and eac h tea m m em ber( so actu all y i t’s m ore tha n on e con tract, but w e can i gn ore that detai l )
. A se cond contr act i denti fi es th e team m embe r s an d th e ai r cr aft th ey wi l l co m m i t to the m i l i ta r y i fthe t ea m ’ s bi d i s ac cep ted

. A th i r d de fi ne s th e l i ab i l i t y a n d i n s u r a n c e o b l i g a t i o n s o fth e t e a m m e mber s. There ar e a dd i ti onalpro vi si ons i n thes e contr acts, butwe ca n di sr eg ar d the m . W e’ l lc al lthe thr ee c o ntr ac ts as a gr ou p th e “ tr ip ar tit e c on tr ac t.” The tr i parti te contr act has a s we sai d o n ly a o ne- yea r te r m . (T he y ea r i s th e fede r alfi sc aly ea r, whi chr uns fr o m O c t o b e r 1 o fth e p r e v i o u s c a l e n d a r y e a r t o S e p t e mber30 , so that the 2 002 fi scalye ar, f orexam ple , beg an i n Octobe r 2001 . Allo ur y earr efer ences ar e t o fi scal yea rs . ) But i t was the te am ’ s pra ctic e to e nteri nto a s epara te three-y earag re em ent c oncerni ng the di str ibuti on ofbusi ness am ong the t eam ’ s m em ber s. I m ple m en tat i on ofthe agr eem ent depended on t h e Defense Dep ar tm en t’s ac c e p t i n g t h e t ea m ’s b id ; oth er w ise th er e w ou ld be no b us i ne ss t o di vi de amongthe t ea m ’ s m embe r s. And6 N os. 11

- 1382, 11

- 1492 i fthe Dep ar tm ent deci ded i t wanted m ore o r l ess se rv i ce fr o m the t ea m tha n h ad be enb i d, thi s m i g hta ff ec t th e divi si on o fbusi ness, s i nce a parti cul arte am m em ber m i ght ha ve i nsuffi ci ent c apacity to pro vi de i ts al l ott ed shar e o fse rv i ce i fthe ser vi ce r equi re m ent in c re as ed, o r al ternative l y m i ght b e ba dlyhurt by a r educti on in that r e qu i r e men ti fi t s s ha r e we r e u nc hanged

— th er e m i g ht for ex am p le be l im ited d e m an d f or or p rofi t in a parti ci pant’s nonm i l i tar y b usi ness. The ag re em ent a l so a s s u me d th a tth e p a r t i e s w o u l d a l le n d u p o n th e F e dEx tea m , tho ugh t h er e w as no co ntra ctualst i pu l ati on t o that effect. W i ths o many co nt i ng en ci es, es pec i al l y o ne s depe nde nt on deci si ons enti re l y withi n the pow erand ri ghts of ea chpa r ty, the a g r ee m en t was a pl anni ngdo cument r athe r tha n a n e nf o r ce ab l e co nt r ac t. W e ha ve po i nt ed o ut th at“ i fa ny s i g n o fa g r ee m en t o n a ny i ss ue e xpo se d the parti es to a ri sk that a j ud ge w oul d deem the fi rs t- re sol ved i tem s t o be s tand-a l one contr acts , the proce ss ofnego ti ati on would be m or e cum ber som e ( th e par ti es w oul d have to he dge ev ery s en te nc e wi thc au ti o na r y l eg al es e) , a nd these extra nego ti ating exp enses would r ai se the e ffecti ve pri ce. ” P FTRo be rs on, Inc. v. Volvo Trucks North A m er ica, Inc. , 420 F. 3d 728, 73 1 ( 7th Ci r. 2005)
. Contr act l aw “per m i ts par ti es to co ns er ve th es e co st s by r ea ch i ngag r ee m en t i n sta ges witho ut ta ki ng t he r i sk that cour ts w i l lenf or ce a par ti albar gain that one s i de orthe othe r w oul d have rej ecte d as incom ple te. ” Id .; see E nG eni us E ntert ainm ent, Inc . v. H ere nt on , 971 S. W
. 2d 12, 17-18 (Ten n. A p p . 1997); R es tate m ent( Second) of Co ntracts § 27, com m en ts b, c (1981).N os. 11

- 1382, 11

- 1492 7 ATA ’ s su i t i s ba se d o n on e o fthe se thr ee - y ea r “ co ntr ac ts , ” si g ne d i n 20 06 , i n whi ch ATA an d ( m aybe) O m ni agreed w ith Fed E x th at d uring the foll ow ing three years (20 07 th ro u gh 20 09 ) th e t ea m ’s p as se n ge r b u sin es s w ou ld be di vi ded equa l l y be twe en th o se two ca r r i er s. The “co ntra c t” i s in the f or m o fa l ett erfro m Fe dE x to them that re ads as f ol l ows: The l et te r w i l lse r ve as the a g r ee m en t f o r the di st r ibuti o n b etwee n ATA a nd Omni ofb o thfi xe d a nd e xpa nsio n for b ot h w id e a n d n ar ro w bo d y p as se n ge r b u siness i n the A M C L ong Ran ge Inte rnat i onalContr act f orFY07- FY09. I t i s ag r ee d th at th e di st r ibut i o n f o r th e ab o ve pa ss en ge r se gm en ts w ill b e fift y-fift y (5 0% -50 % ) res p ec tiv ely f orbo th w ide and narr ow body and f orbo th fi xed an d e xpa ns i o n. P l e a s e in d ica te you r c on c u rre n c e b y s ign in g a s in d ic a t e d b e l o w a nd r e t urningt o the u nd e r s i g ne d. W e l o o kf o r wa r d t o a c o n t i n u e d s u c c e s s fu lr e l a t i o ns hi p o v e r thi s p e r i o d. There i s a s p ace bel ow the wri ter ’ s s i gnatur e forsi gnature s by re prese ntati ves of A TA and Om n i. A l though onl y AT A ’ s r epres entat i ve si gned, the evi de n c e ind i cate s th at O m n i co ncurr ed, and i fso the om i ssi on o fa si gnatu re by a re p re se n ta tiv e o f O m n i is im m at er ial. The tr i parti te contr acts f or20 07 a nd 20 08 i ncor pora ted the 5 0/50 divi si on

—but with a chang e in the 2 008 contr act: A TA ’ s a l l otm ent was r educed by 10 flights perm onth to ena ble them to be all otted i ns tea d t o N orthw est A ir-8 N os. 11

- 1382, 11

- 1492 line s, a m uc h bigger carr ie r, w hich w an ted to start fl yi ng f orthe Civi lRese rv e AirFl eet
. N or thw estwas a l r e a dya p ar ti c i pa nti n the F e dEx t e a m, b utl i k e F e dEx (thou gh w ithou t Fed E x’s resp on sibil iti es as team l ead er) had here tofor e be en a guar antoro fem er gencyse rv i ce to th e m ili tar y a nd thus a se l l ero fpoi nts t o the s m al l er ai rl i nes; 20 08 w ou ld b e th e fi rs t t i m e i t would be a fl y i n gme mb e r o fth e t e a m. The change turned o ut t o be pre gnant w i th m enace f o r ATA
. F o r l at ertha t y ea r F edEx de ci ded to drop ATA fro m the tea m and, beg i nning i n 2 009, gi ve the m obi l i zati on va l ue poin ts t hat would have go ne to A TA to Del ta, w hi ch had a cquir ed N or thw est shor tly after the si gni ng o f the 20 08 tr i parti te contr act. Fe dE x’s deci si on t o re pla ce A TA i n 200 9 ca used A TA to w ith d raw fro m the tea m p rem a t u r e ly, in th e m idd le of2008 (w e’re not su re w hy ). The w i thdrawal preci pit ate d i t in to bank ruptcy because i t ha d v ery l i tt l e no nm i l i ta r y b us i ne ss t o f al lb ac ko n. A TA ’ s br each o fco n tr act cl ai m sho uld nev erhave been perm i tte d t o go to tr i al

. Courts i nter pret and enf or ce c o n t r ac ts ; th ey d on ’t m ak e c on tr ac ts . A co n tr ac t is une nfo r ce ab l e i fi t i s “inde fi ni te ” i n the se nse o fmis sing vi talte rm s, such a s pri ce, thatc an ’ t be r eadi l y s up pli ed b y a co u rt, for e x a m p le b y re fer en c e t o a p ric e fo rm u la ag re ed on by th e p ar tie s. D oev. H CA H eal th S e r vi ces of Tenne ss ee, Inc. , 46 S .W .3d 19 1, 19 6-9 7 (T en n . 200 1); Fou r E igh ts, LLC v. Sa lem , 19 4 S
. W
. 3 d 4 8 4 , 4 8 6

- 8 7( Te nn . App
. 20 05 ); R es tate m ent( Second) of Co ntracts § 3 3 ( 1 9 8 1 ) ; 1 E. A llan Fa rn sw or th , Far nswo rth on C ontracts § 3. 27, pp. 417- 20 (3d ed

. 2004). I f th e price or othe r vi tal m issi ng term can ’tN os. 11

- 1382, 11

- 1492 9 be r eco nstr ucted i n that w ay, the “co ntra ct” shoul dn ’ t be cal l ed a contr act at al l, but an att em pted contr act; i ts i nd efi ni tenes s r enders i t unenf or ceabl e. W e’ ve al re ady se en thata gr eatdeal w as m i ssing fro m th e so - ca l l ed co nt r ac t to al l o ca te th e F edEx t ea m ’ s pas se ngerbusi ness f or 2007

- 2009 between A TA and Om ni
. True, “the f act that a co ntra ct i s incom ple te, pre sents i nter preti ve questi ons, br i stl es w i th unre sol ved co nti n ge n ci es, and in shor t has as m any hol es as a Swiss chee se d oes not m ake i t unenf or ceabl e forind efi ni tenes s. Other w i se th er e woul d be few en f o r ce ab l e co nt r ac ts
. Compl ete conti ngent contr acts ar e i m possibl e. The future, o ve r w hi ch contr actualp e r fo r man c e e v o l v e s, i s t o o uncer tain. ” Has l und v. Sim on P roper ty Group, Inc. , 378 F.3d 653 , 6 55 (7th C ir. 20 04 ). B u t “ a c on tr ac t is righ tly d ee m ed u n en for c e a b le for ind e fi n itenes s w he n it l eave s out ( 1) a crucial term th at (2) a c ou rtca n n otr e a s o n a b l y b e a sk ed to su p p ly in the nam e o fi nter preta ti on. ” Id

. The pr o perdi visio n o fr es po ns ibi l i tyb etwee n the contr acting par ti es, o n the one hand , and a c ourtas ked to en f o r ce a pur po r te d c o nt r ac t, o n th e o th er, r equi r es the parti es to d ec id e o n the keyte rm s o fthe contr act ( orat l e a s to n a me th o d o l o g y th a tg e n e r a t e s th e k e y t e r ms m or e o r l ess m echani cal l y) , such a s pri ce, and l eave s the cour t to re sol ve onl y i ssues that, being unl i kel y t o ar i se, the parti es shoul d no t be re quir ed to have f or ese en an d prov ided f or. To req u ire p arties to negotiate eve ry c on tin ge n c y t h at m igh t a ris e d u rin g p er for m an c e w ou ld be i m possib l e, bec ause as w e s ai d not every co nti ngency can feas ibl y b e for ese en and p ro vi ded f or

— th e fu tu re is10 N os. 11

- 1382, 11

- 1492 too un certain
. Con tract la w sup p li es a set of stand ard te rm s t h at th e p ar tie s c an ch an ge if th ey w ish bu t t h at if th eydon’ t ch an g e s uppl y a s ubs ti tu te f o r ne g o ti at i o n. But there is no s tandard pri ce t er m , and no a gr eed- up on f or m ula f orcal cul ating the pri ce, f orthe ser vi ce pr ovi ded by the l eadero fa tea m o fthe Civi lRese rv e AirFl eet
. The doctr i ne o f in defini tenes s that m ake s a co ntra ct unenforceabl e when i t o m i ts a cruci alte rm thatcannot be s up pli ed b y i nter preta ti on has part i cul arf or ce when the c ontr act i s o ne be tw een s ophis ti cate d com m er ci al en tit ies an d inv olv es a gr ea t d ea l of m on ey . PFT R ob e rs on, Inc. v. Volvo Trucks North Am er ica, Inc. , sup ra , 42 0 F.3 d at 73 0; S ky c o m Co rp . v . Te l s t a rC o rp. , 81 3 F
. 2d 810, 81 5 ( 7th C ir. 19 87 ); Far n sw or th , sup ra , § 3.8 , pp. 224- 26. That des cr ibe s th e l et te r a g r ee m en t; ATA ’ s sh ar e o fthe re venues that the t ri parti te contr act gene ra ted ea ch ye ar w as, at it s p eak, $4 06 m i l l i on, and i n 200 7 i ts profi ts fro m the c on tr act exceeded $9 0 m i l l i on. Even i fwe assum ed

— u n re alis tic ally

— that al lthe othe r hol es that w e m enti oned i n the tea m st ructur e for20 07- 2009 co u ld be fi l l ed b y a co urt fro m i nd ustr y s tandards, co urse ofdeal i ng, tr ade usag e, o r som e o thero bj ecti ve sour ce o f g u i d a n c e th a te n ab l e s j u d i c i a lc o mp l e t i o n o fa n i n c o mp lete cont ract, the p rice term

— FedEx’s com pensati on f orpro vi ding tea m l eader shi p and tra nsfer ring m obi l i zation value point s to team m em bers

— cou ld n ot be sup p lied fro m any such so urce. That co m pensati on was th e resu lt of a d h oc ne gotiations an d thu s w as d etermi n e d b y th e p a r t i e s ’ c i r c u ms t a n c e s e a c h y e a r a tth e t i me ofco ntra cti ng. I t had u su ally been 7 perce nt but one yea r had plunged to 4. 5 per cent.N os. 11

- 1382, 11

- 1492 11 A n d so th e le tt er ag re em en t w a s n otan en for c ea b le co n t r a c t
. B u t i t d i d c o n t a i n a p r o mi s e t o d i v i d e th e m il itary pas sen ger se r v ic e to be prov ided by Fed E x’s tea m equal l y b etw een AT A and Om ni
. The doctr i ne o f prom i sso ryes toppel m akes a pro m i se enf or ceabl e e ven th ou gh i t is not sup p orted by co n side ration or otherwi se e nf o r ce ab l e unde r c o nv en ti o na lpr i nc i p le s o fc o ntr act l aw , pro vi ded thatthe prom i see r eas onabl y incurr ed a co st i n re l i ance o n the prom i sor ’s fu lfi l l i ng the pro m i se and that the p ro m i sorshould reas onabl y hav e a nti ci pated th atthe pr o m i se e w ou ld rel y i n tha t way a nd mi g ht th er efo re be h u r t i f th e p ro m iso r re n eg ed

. Calab r o v. C a la bro , 15 S .W .3d 87 3, 87 8-7 9 (T en n . A p p . 199 9); Am ac her v. Br own- For m an Corp
. , 8 2 6 S
. W
. 2 d 4 8 0 , 4 8 2 ( Te nn . App
. 19 91 ); R es tate m ent( Second) of Co ntracts § 90 ( 1981 ); Fa rn sw or th , sup ra , § 2. 19, pp. 176- 78. One func tio n o fthe doctr i ne o fpro m i sso ryes toppel, as we no te d a t th e ou tset ofthi s o pi ni o n, i s to a l l o w re as o nab l e r el i an ce t o b e su bs ti tu te d f o r c o ns i der at i o n. The un d erlyi ng i d ea is that a reason able prom isee w ou ldn ’t incu r an u nrec overab le cost i n reli an ce on the p rom ise’s bei ng fulfi l l ed unle ss ther e r eal l y had be en a p ro m i se, an d s o r ea so na bl e r el i an ce i s as g o o d a b as i s f o r i nfer r i ng th e e x ist en c e o f a p ro m ise as co n s i d e r at ion is. Garwood Packagi ng, Inc
. v. Al l e n & Co. , sup ra , 37 8 F.3d at 70 2. Inth is case , however, ther e i s no questi on t h at ther e was a prom i se

— the pr om i se to shar e business 50/50 between ATA an d O mn ii s i n wr i t i n g, i n th e l e t t e r a g r e e me n t
. The q u es tio n is w h et h er t h e p ro m ise w as (o r c ou ld rea so n ab ly h av e b ee n u n d er st oo d to be ) in te n d ed to ind u c e, an d co u ld r ea so nabl y i nduc e, r el i an ce t o the tune o f$ 28 mil l i o n.12 N os. 11

- 1382, 11

- 1492 If som eo n e t ells you “I p r o m ise you X , bu t d on ’t h old m e t o i t, ” the pro m i sori s m aking cl earthathe i s no t i nv i tingr el ia nc e an d the pr o m i se e ca nno t, b y i gno r i ng the warni ng and r el yi ng o n the p ro m i se to hi s detr i m ent, m a k e the pr o mi s e e nfo r c e ab l e . S uc h a “ pr o mi s e” m ay cre ate an e xpe c tati on but does not cre ate a com m i tm ent, an d so th e p ro m ise e re lies ath is ris k. R isk ta kin g is u b iqu itous i n busi ness and i s per fectly r eas onable bec ause the e xpected bene fi ts ofa ri skyundertak i ng wil lo ften ex c eed the expected co sts
. I t m ay have been re aso nab le f orA TA to r ecko n that i t had a goo d enou gh chance of ge tt in g ha lf th e pa ss en ge r b u sin es s of th e Fed E x te am in the 2 007- 2009 per i od to j usti fy i ts go in g ahead and acquir i ng the ai rcr aft i t would nee d to provi de the ser vi ce because i ts exi sting fl eet w as i nadequ ate ; i t i s th e $ 28 m i l l i on in al l ege dlyunrec ove rabl e e xp enses r el ating to that acqui si ti on that A TA se eks to r eco up byi nvoking pro m i ssory e sto pp el

. But A TA co uld n ot r eas onabl y hav e b elie ved thatFe dE x i ntended to com m iti t s e l ft o s p l i tthe pas se ng erb us i ne ss e qua l l yb etwee n ATA a nd Omni du ring th at p er iod wh en so m uch w as l eft t o be a gr eed u p on , an d so Fe d E x c an n ot h av e be en ex p ec te d t o an tic ip at e that AT A would r el y o n the prom i se. A TA ’ s l aw yer ackno w l edged at the o ra lar gum ent that hi s cl i ent m ay h av e b ee n “im p ru d en t” in fa ilin g t o re c og n ize th e p os s ibil ity that N orthw est w ou ld w an t m ore ofth e team ’s busi ness; and N or thw estwas ( and D el ta, wh i ch swall owed N or thw est, e ven m or e s o, i s) to A TA as the Dream l i ner i s t o the DC

- 3. A cti ng on a ho pe i s no t r eas onabl e r el i ance. Cl as s i cCh e e s e c akeCo
. v . JP M org an Ch as eBa n k, N. A. , 54 6 F.3 d 83 9, 84 5-4 6 (7 th C ir. 20 08 ); Ga rwo o d Pa c k ag i n g, Inc . v.N os. 11

- 1382, 11

- 1492 13 A llen & Co. , sup ra , 378 F.3d at70 3-0 4; Wood v. M i d- Valley Inc. , 942 F.2d 425 , 428 (7th C ir. 1991). So A T A l oses. Bu t w e d o not w an t to i gn ore the j ury’s awar d o fda m ag es , whi chpr es en ts i m po r ta ntque sti ons t h a t h av e b ee n fu lly b rie fed an d are bo u n d to aris e in future case s. T h e aw ar d w as ba se d en tir ely on a re gr es sio n an aly sis pr es en te d b y a n e xpe r t w itnes s, af o r en si c ac co unt an t na med La wr e nc e D
. Mo r r i s s . F e dEx o bj e c t e d t o the a dm i ss ibi l i tyo fthe a na l y si s, c i ti ngRul e 70 2( 2) , ( 3) o fthe Feder alRule s o fEvi dence, wh i ch w hen thi s case was tr i ed condi ti oned the adm i ssibi l i ty of expertev i dence o n the e xpe r t’ s ha vinga ppl i ed “rel i ab l e pr i nc i pl es a nd m et h od s . . . reliab ly to th e fa c ts o ft h e c as e.” T h e ru le h as be en rew or d ed sligh tly , effec tiv e D ec e m b e r 1 of th is y ea r, b utthe C om m i tt ee Not es s ta te c o r r ec tly tha t th e changes ar e pure l y s tyl i sti c. The r e wer e, a s we’ r e ab o ut to s ee , g r av e que st i o ns concerni ng the r elia b i l i ty ofM or ri ss’ s a pp l i cati on o f re gr ess i on a nal ysi s t o the f acts
. Yet i n deci ding that th e a n aly sis w as ad m iss ible , all th e d ist ric t jud ge sa id w as that FedEx’s obj ecti ons “that t h er e i s no o bj ecti ve tes tp e r f o r med , a nd tha t[ M o r r i s s ] u s e d a s ubj e c t i ve tes t, and [ gave ] no expla nati on wh y he didn’tco nsi der obj ecti ve cri ter i a, ” pre sente d i ssu es to be explo re d on c r o ss -ex am in at ion attria l, an d th at “re gr es sio n an aly sis i s a c c e pt e d, s o thi s is n o t‘ j un ks c i e nc e . ’ [ M o r r i s s ] a ppears to have appli ed i t. A l though defendants di sag re e, he h a s a pp l i ed i t a nd c o me up wi th a r e s ul t, wh i c h a ppa r e nt l yi s a c c e pta bl e in s o me a r e a s u nd e r s o me mod

els . Sim p le re gr es sio n an aly sis is an ac c ep te d m od el.”14 N os. 11

- 1382, 11

- 1492 T his cu rsory, an d non e t o o c lear, respon se to Fed E x’s obj e c t i o ns t o M o r r i s s ’ s r e g r e s s i o n a na l y s i s di d no tdi scharg e the duty o fa d ist ri ct j ud ge to evaluate i n advance of tri al a ch all en ge to the ad m issibil ity ofan ex p ert’s p ro p os ed tes ti m ony. The ev al uati on o fsuch a chal l enge m ay not be e asy ; the “princi ple s a nd m etho ds” used by expertwitnes se s w il lo ften b e di ffi cul t fora j ud ge to und er sta nd

. But diffi cul t i s not i m possibl e. The j ud ge can re q u ire th e law ye r w h o w an ts to offe r th e ex p er t’ s t es tim o ny to e x p l a i n t o th e j u d g e i n p l a i n E n g l i s h wh a tt he ba si s an d l o g i c o fth e pr o po se d t es ti m o ny a r e, a nd the j ud ge can l i kewis e re quir e the opposi ng counselto ex pl ain h i s o bj ec ti o ns i n pl ain Eng l i sh

. Th i s mi g ht no t ha v e wo r k e d i n the pr e s e ntcas e; ne i th e r p a r t y ’ s l a wy e r s , j u d g i n gfr o m th e t r i a lt r a n s c r i pt an d the tran script of th e Ru le 702 hearing an d the briefs and or alar gum ent in thi s co urt, u n d er sta nd r egr ess i on an aly sis ; or if th ey d o u n d er st an d it th e y a r e u n ab le to co m m uni ca te the i r unde r st an di ngi n pl ain Eng l i sh

. Bu t a j ud ge can al w ays appoi nt hi s o w n expertto as si st h im in u n d er st an d in g a n d ev alu at in g t h e p ro p os ed te st im on y of a p ar ty ’s ex p er t. Fe d . R. E vid . 706 ; G ene ral E le ctr ic C o . v. Join er, 5 22 U. S
. 1 36 , 1 49- 50 ( 19 97 ) ( co nc ur r i ngo pi nion ). If h e worr i es that the e xpert he appoi nts m ay not be trul y ne ut r al, he c ana skthe pa r ti es ’ e xpe r ts t o a gree o n a n eu tr al e x p er t f o r h im to ap p oin t, as w e s u gg es te d in D eKo ven v. P la z a A ssoc ia tes , 599 F.3d 578 , 583 (7th C ir. 2010), a nd In reH igh Fr uc to se C o rn Syr up Ant i t r us tLi t igat i on , 29 5 F
. 3 d 6 5 1 , 6 6 5 ( 7 th Ci r . 2 0 0 2 ) ; se e a l s o Da ni e lL. R ub i nfe l d, “Econom etr i cs in the Courtr oo m ,” 85 Colu m . L. Re v. 10 48, 1096 ( 1985 )
. A l so, the Feder al J ud i ci al Center has publ i shedN os. 11

- 1382, 11

- 1492 15

a no nt ec hni ca l “R efer en ce Gui de o n Mul ti pl e Re g r es si o n” wri tt enb y Pr o fes so r Rub i nfel d, pub l i sh ed i n R efere n ce M anua l on Sci ent if

ic E vidence3 03 ( 3d ed. 2 01 1)
. Had the d istri ct j ud ge read the relevan t p ortions of Ru binfeld’s gui de, he woul d have r eal i zed thatM or ri ss’ s r egr ess i on anal ysi s was f atal l y fl aw ed . A nothergo od i ntro du cti on to th e u se of st at ist ic a l a n aly sis in litig at ion is D av id C op e, Funda m ent als of Stat is ti cal Analysis ( 2005 ). The j ud g e wo ul d h a v e di s c o v e r e d in the s e o r o ther s o ur c e s tha th e mi g hth a v e c o ns ul t e d tha ta l i ne a r r egr essio n is an e quati on f orthe str ai ght l i ne thatpro vi des th e b e s t f i t fo r th e d at a b ein g a n aly ze d . Th e “ b es t fit ” is th e l i ne tha t m i ni m i ze s th e su m o fthe sq ua re s o fthe vert ica l di sta nce be tw een e ach data poi nt and the l i ne. (W h y t h e s q u a r e s r at h er th an th e s im p le d ist an c es is diffi cul t t o expla i n, and the j ury can be a sked to tak e i t o n f ai th

. ) A si m pl e l i nearr eg r es si o n ( th ati s, o ne i nvol vi ng o nl y tw o var i abl es

— on e t h e d ep en d en t v ar iabl e, the var i abl e t o be ex p lain ed, and the othe r the ind epen den t va r i ab l e, the v ar i ab l e be l i ev ed to e xpl ain the depe nde ntv ar i ab l e) i s ea si l y v i su al i zed by pl o tt i ngthe dat a po i nt s o n a grap h. Th e r eg r es si o n l i ne i s a st r ai g ht l i ne thatm i ni m i zes the agg re ga te o fthe square d ver ti cal dist ances fro m the poi nts t o the l ine. The equati on that gen erates th at line can be w ritten as Y = a + bX + u, w he re Y i s the d ependent var i abl e, a the inter cept ( expla i ned bel ow), X the i nd ependent variab le, b the c oeffi ci ent o f the ind ependent varia b le ( that i s, the num berthat i nd i cate s ho w change s i n the i nd ependent var i abl e pr odu ce c hanges i n the dep endent vari abl e) , and u the re gr essi on r esi du al

— the par t o fth e d ependent var i abl e that16 N os. 11

- 1382, 11

- 1492 is n otex p lain ed o r p re d ict ed b y t h e in d ep en d en t v ar iab le an d t h e inter cept, o r i n other w or ds i s “ l eft o ver, ” l i ke the c hange you r ec ei ve afterpayi ng f ora 99- cent i tem w ith a $1 bill. T o i ll us trate below w e grap h a r e g r ession of salary ( the dependent var i abl e, o n th e ver ti calaxi s) o n j ob experi ence ( the ind ependent var i abl e, o n the hor i zonta l ax i s) f o r a hy po th et i ca lc om pan y . Ea chdo t r epr es en ts the sa l ary a nd j o b ex per i en ce o fa pa r ti cul are m pl o y ee . The i nt er ce pt i s t he po i nta t whi chthe r eg r es si o n l i ne c ro ss es th e v er tic al a x is on th e le ft s id e o f th e g ra p h ; i t is thus the sa l ar y r ecei ved by an em ploye e who has no j ob experi ence at al l

. ( Because a i s 2 6. 9, the m od elpre dict s that the s tar ti ng wage o fa new hi re with no exper ience woul d b e $2 6, 90 0. ) The s l o pe o fthe r eg r es si o n l i ne i s th e coe ffi ci ent o fthe i nd ependent varia b le: i t i s a posi ti ve numberb ec au se the mor e j o b ex per i en ce a wor k erha s, the h igh er h is s ala ry is like ly to b e. Fo r ex am p le, b e q u als 2.2 in the g ra ph, so the r egre ss i on m odelpre dict s that a 1- yea r in c re as e in j ob e x p e r ien c e g en er at es a $2 20 0 in c re as e in sa lar y. The re l ati on be tw een s al ar y a nd j ob experien c e, al though pos i ti ve, var i es fro m em plo yee to em plo yee . That i s why not al lthe data point s lie on the r egr ess i on lin e, th e str ai ght l i ne that fi ts the data best; the bestfit i s r arel y a pe r fec t fi t. The v ar i at i o n in s al ary tha t th e re gr ess i on l i ne does notexpl ai n is the r egr ess i on r es i dual, u i n o ure qua ti o n.N os. 11

- 1382, 11

- 1492 17

Re g r es si o n a nal y si s i s us ed to t es t hy po th es es , i n o ur e x a m p le the hyp oth esis that m ore exp erience d w orkers g etpa i d m ore (and ho w m uchmor e) de pen di ngo n the am ount o fthei r experi ence. But i t i s a lso u sed to pre dict

— f orexam ple thatw h en a new em plo yee acc rues 10 yea rs o fexper i ence he wil lbe pai d $ 22 ,00 0 m or e than hi s s tar ti ng wage. T h er e is m u c h m or e t o re gr es sio n an aly sis , eve n in th e si m pl e ca se i n whi chthe r e i s o nl y o ne i nde pen den t va ria b le; bu t w e’v e n ow ex p lain ed (a n d th e jud ge co u ld re adily h av e und er sto od fro m the FJ C gui de) enough t o en a b l e u s t o s h ow w h y M or ris s’s reg re ss ion an aly sis shoul d neverhave bee n al l owed to be pu t be f or e a j ury. H e use d reg r e s s ion ana lysi s to pred ict w ha t A T A ’s m i l i tar y pr ofi ts w oul d hav e been had i t no t be en dro pp ed fro m Fe dE x’s te am . In a g ra ph that h e pr epare d w hi ch18 N os. 11

- 1382, 11

- 1492

w e rep rod uc e below , the d e p en d en t variable i s A T A ’s annual cos ts of parti ci pati ng i n the Civi lRese rv e AirFl eet as a m emb e r o fth e F e d E x t e a m a n d th e i n d e p e n d e nt va ria b le is A T A ’s t ot al a n n u al re v e n u es from th at p ar tic ip ation. T he re a re 1 0 d ata p oints, eac h rep resen ting A T A ’s cos ts and rev en ues foro ne ye arfro m 19 98 thro ugh 200 7. A s in ou r illu st r a t i v e g ra p h, th e re gr es sio n line in M orri ss ’s gra p h slop es up w ard

— w hen r eve nues r i se, c o s t s r i s e . No t i c e th a t th e d a t a p o i n t s a r e c l o s er t o t he re gr ess i on l i ne than the data poi nts in ouri l l ustr ati ve g r a p h

. T h i s me a n s th a tth e r e g r e s s i o n l i n e i n h i s g r a ph fi ts hi s data bet terthan the r egr ess i on l i n e in ouri l l ustr ati ve g r aphfi ts the da ta i n tha t g r aph

.

To cal cul ate A TA ’ s dam age s, M orri ss needed to es tim at e it s m ilita ry rev en u es a n d co st s fo r th e s ec on d h alfN os. 11

- 1382, 11

- 1492 19 of20 08 ( afterA TA withdrew fro m the tea m ) , and al lo f 20 09 , o n th e co unt er f ac tu al as su m pti o n th at th e ai r l i ne woul d ha ve c ont i nue d t o b el o ngt o F edEx ’ s te am f o r the enti re ty oftho se tw o yea rs r ather t h an f orj ust the fi rs t s ix m o n th s of th e pe riod. M orri ss estim ated that A T A ’s re ve n u e s f o r 2 00 8 w ou ld h av e b ee n $2 86 .5 m illion, a fi gu re he arrived a t by m ultiplying th e Fed E x tea m ’s 2008 m i l i tar y pass engerr eve nue ofr oughl y $ 600 m i l lion by A TA ’ s hi sto ri cal shar e of the tea m ’ s annu al passenge r re venue. Pl uggi ng hi s r eve nue est i m ate i nto hi s l i ne a r r e g r e s s i o n ( whi c h, r e memb e r, t r e a t s c o s t s as a functi on o fr eve nues) , M or ri ss cam e u p with aco st fi g ur e o f$ 25 3. 8 m i l l i o n; a nd s ubt r actin gtha t fr o m the est i m ate d rev enues y i el ded an esti m ate d net pro fi t for ATA i n 2 00 8 o f$ 32
. 7 m i l l i o n. Since F edE x w as w illing to kee p A TA o n the tea m thro ughout 2 008, i t i s doubtful that the l oss o f profi ts that A TA exper i enced i n the l as t hal fo f20 08 by re aso n ofi ts prem atur e withd ra w alcan be b l am ed on FedEx. Yet M or ri ss bel i eve d that hi s in fl ate d esti m ate o f A TA ’ s l ostpro fi ts un derestim a tedthe l oss i n 200 8 bec au se th e fi gu re forcosts t ha t he u sed ( an d profits are r ev enue min us c o st s, so th e hi g he r th e co st s th e l o werthe p ro fits ) inc lu d ed int er es t, ta x es , d ep re c iat ion, an d am or tiza tio n co st s t h at h e e st im at ed am ou n te d to $1 1.4 m illion in 2008
. H e thought these cos ts w oul d not have b een a ffecte d b y t h e c om p an y’s flyin g a s p ar t o f th e C ivil R es er ve A ir Fl eetthatye ar, and so sho uld notbe ded u c te d fro m re venu es . T here i s s om e t ruth t o thi s. S om e o ftho se cos ts m ay have been fi xed, and i f s o w er e pr oper l y s ubtra cted fro m the cos t fi gure used to co m pu te A TA ’ s l ostpro fi ts.20 N os. 11

- 1382, 11

- 1492 I m agine thata fi rm has a fi xed r ental expense of $1 m i l l i on a y ea r, a nd un ex pec te dl y l an ds a ve r y pr o fi table c o ntr ac t. B ec au s e t h e re n ta l w ou ld h av e t o b e p aid ev en if the fi rm had f ai l ed to o btain the c on tr act, the re ntal ex pen se woul d no t be a c o sta l l o cabl e to the cont ra cta nd so s h o u ld n ot be su btrac ted i n ca lculating th e con tract’s p ro fita b ility . Ye t w e’ll se e t h at els ew h er e in h is a n aly sis h e t re at ed c a p ita l ex p en d itu re s a s c u rre n t e x p en se s, a tr eat m ent that f ai l s t o m atch cos ts and rev enues, j ust a s s ub t r a c t i ng a fi xe d c o s t fr o m the r e v e nu e g e ne r a t e d b y the c ontr act i n ourexam ple would f ai lto m at c h cos ts and rev enues. Ex p u ngi ng the $1 1. 4 m i l l i on fi gure fro m M or ri ss’ s co st est i m ate i ncre ase d his annuales tim at e ofA TA ’ s l ost profi ts to $44 m i l l i on f oral lo f20 08. Last he as sum ed th atATA ’ s pr o fi ts woul d b e i denti ca li n 2 00 9, s o he m ult i pli ed $4 4 mi l l i o n b y 1
. 5 ( t o c a l c ul a t e l ost p rofi ts f orthe peri od enco m passi ng the l att erhal fo f 2 0 0 8 a nd a l l o f 2 0 0 9 ) t o y i e l d a t o t a l l o s t pr o fi t s e sti m ate of$6 6 m i l l i on. A s we sai d, the e sti m ate was exces si ve b ec au se it in c lu d ed A T A ’s p ro fits i n s ec on d h alf of20 08

— the c onse quence ofwh at appears to have b e e n a s e l f

- i nfl i c t e d wo un d. Bu t these w er e th e least o fM or ri ss’ s e rr or s. H i s m ost gla rin g e rro r w as to u se co st s a s h is d e p e n d en t v ar iab le an d r ev enue s as hi s i nde pen den t v ar i ab l e. The depe nde nt var i abl e a s we know i s a n u m berso ught t o be e xplained bythe i nde pen den t va r i ab l e, a s i n a ny e qua ti o n. In the equati on Y = b X , t h e effect ofX on Y i s quanti fi ed by i ts c oe fficie n t, b; so , f orexam ple , i fb i s 3 , then Y i s three ti m es l ar g ertha n X.N os. 11

- 1382, 11

- 1492 21 B u t re ve n u e d oe s n otin f lu en c e c os t d ire c tly ; no r is i t cl earthati t i s cl ose l y c or re l ate d w i th un m ea su re d va r i ab l es tha t d o infl ue nc e co st s. An i nc r ea se i n r ev enue mayb e c o r r e l a t e d wi th a n i nc r e a s e i n cos t

— and i nd eed i s l i kel y t o be i fthe i ncre ase d rev enue i s th e re sul t o f i n c r e a s e d s a l e s , b u tn o t i f i t i s th e r e s u l t o f s e l l i n g th e s a me ou tp ut at a higher p rice. Inc reases i n tota l c o s t s are dri ven by incr eas es i n com ponent co sts

— l abor, m ate ri al s, and so f or th

— n ot b y rev en u es . W h at is tru e is th a t if re ve n u es p lu m m et, th e firm w ill try t o c u t it s c os ts in or der t o m i ni m i ze the l oss es caused by t he dro p i n re venues. But to the extent that thos e co sts ar e fi xed, i t m ay not be abl e to c ut them i n ti m e t o avo i d bankr up tcy

— w hi ch i s what happened to A TA i n 200 8. M or ri ss tr i ed to j usti fy hi s e xplaini ng co st by re venue, ra th er th an b y m or e pla u sib le var iab les su c h as fu el, m ai ntenance, and l aborco sts , o n the gr ound that s uch i nfo rm ati on was unavai l abl e. I t i s hard to bel i eve thi s, b ec au se the info rm ati on m ust hav e be en r eco rded by A TA ’ s a ccountants

— how el se coul d they have prepar ed a ba lance sheetand i ncom e s tat em ent forthe com pany? I n any eve nt a pla i nti ff’ s f ai l ure to m ai ntai n adequate re cor ds i s n ot a j usti fi cati on foran i rr ati onaldam age s theo ry . E ve n if w e a ss u m ed th at M o r ris s’s m od el w er e b u ilt on a r ati onalf oundati on, we w oul d have t o rej ect i ts r e s ul t s b e c a us e the mo de lwa s i mpr o pe r l y i mpl e men t e d. In20 07, th e la st fu ll yea r inw h i c h A T A p ar tic ip at ed in th e C ivil R es er ve A ir Fle et, i ts p ro fits w er e a m i n u s c u le $2 .1 m illion . I f it w ou ld h av e h a d t h e s am e p ro fits in22 N os. 11

- 1382, 11

- 1492 2 0 0 8 a n d 2 0 0 9 h a d i tn o tb e e n dr o p p e d f r o m F e d E x ’ s t e a m, i ts tot aldam age s would have bee n onl y $ 3. 15 m i llio n du ring the 18 m onths re m ai ni ng i n 200 8 a nd 20 09, r ather th an th e $66 m il li on that A T A asked for an d th e ju ry awar ded ( to th e do l l ar )
. $2

. 1 m i l l i o n i s o nl y 6. 4 p erce nt ofthe $32. 7 m i l l i on pro fi t that M or ri ss’ s r egr ess i on an aly si s pr edi ct ed th atA T A w o ul d ha ve e arne d the f ol l owing yea r ( as w el las the yea r afterthat ) had A TA not be endr o pped fr o m the t ea m . ( The $ 32
. 7 m i l l i o n i s th e profi t be f or e the adj ustm ent fo r the so- cal l ed fi xed cost s o f $1 1. 4 m i l l i o n. The a dj us tmentwas no t ca r r i ed i nt o the calcu lation ofA T A ’s 2007 p rofi ts, w hich i s w h y w e are express i ng tho se profi ts as a per centag e o fthe pred ict ed p ro fit for 20 08 an d 20 09 .) The f ol l owing gr aph, bas ed on o ne pre pared byM or ri ss an d ad m itt ed int o e vid en c e, ex h ibi t s t h e fa llac y of h is predi cti on. ( W e a re notcl earwh y hi s gr aph w as tr uncated at 2002 , since AT A had j oi ned the F edE x tea m ea rl i er an d the r ecord pr o vi des s uffi ci en t dat a to e xt en d the grap h to 1998 , as w e ha ve d one . ) T he top lin e is A T A ’s annual m ilita ry r eve nues; the l ower l i ne i s i ts annual cos ts; the ver ti cal dist ance between the tw o l i nes m eas ures the c om pany ’s p ro fi ts fro m i ts m i l i tar y b usi ness. W e s ee th a tr e v e n u e s r o s e s h a r p l y f r o m 2 0 0 2 t o 2 0 0 5 , th e n p l u mm et ed in 2 00 6 a n d 20 07 . C os ts ros e m or e g en tl y , a n d fell m o r e gen tly, o ve r the 2 00 2- 20 07pe r i o d, a nd in 2 00 7, the l astye arf orwh i ch there a re data, the tw o l i nes a l m ost i nter sect

— i t was be cause re venues w er e so cl ose to co sts th at p ro fits w er e s o m ea ge r th at ye ar .N os. 11

- 1382, 11

- 1492 23

M or ris s p re d ict ed th at A T A ’s m ilita ry rev en u es w ou ld have ri se n i n 2 0 0 8 a nd 2 0 0 9 wh i l e i t s c o s t s wo ul d h a ve continued to f al l

. The differ ence between h is esti m ate d re ve n u es an d h is e st im at ed co st s is th e $ 6 6 m illion in ( i m agined) l ostpro fi ts. Rem em berthatM or ris s’ s r egr essi on m odel, w hi ch i s ba sed o n hi sto ri caldata ( 2002

- 20 07 ) , f o und a po si ti ve r el at i o n b etwee n re ve nue s an d cos ts: wh en r eve nues r i se, co sts r i se, a n d w hen r eve nues f al l, co sts f al l

. Rem em berto o that he used the m odelto p re d ict th at A T A ’ s c o s ts w ou ld h av e c on tin u ed to fall in 2008 and 200 9 ( the l ower dash ed line) , ev en as r eve nues ro se. I t’ s thi s di ver gence i n dir ecti ons that turns a m odest predi cted g row th i n re venues i nto a l ar ge gr owth i n profi ts. W h atp ro d u c ed th is od d res u lt

— c os ts f al l i ng as re ve nues r i se

— i s that AT A ’ s co sts had i ncre ase d m uch m or e s l owly than i ts re venu es betw een 2 002 and 2005,24 N os. 11

- 1382, 11

- 1492

re su ltin g in big p ro fit m ar gin s. T o p re d ict a c om p ar ab le (though so m ewha t smal l er ) pr o fi t m ar g i n in 2 00 8 an d 2009 ( and thus p ro du ce a bi g l ost
- profi ts est i m ate ) , wh en the upti ck i n re venues w as expected to be m uch sm al l er than i t had be en be tw een 2 002 an d 2005, M or ri ss had to m ake co sts i n thos e y ear s f al l

. But f orA TA ’ s co sts to f al las i ts re venues ro se w oul d m ak e n o econo m i c se nse, as wel la s be i ngi nc o ns i st en t wi thM o r r i ss ’ s unde r l y i ng ass um pti on that co sts ar e a posit ive functi on o fr eve nues

— that i f re venues ri se cos ts ri se and i f re venues fall cos ts f al l

. That co sts r i se m or e s l owly than r eve nues does not i m plythat cos ts drop w hen r eve nues i ncre ase sl owly. N o mech an i sm f o r s ucha r ever sa li s su g g es te d, a nd re ven ues a nd co sts had neverm ove d i n opposi te dir ecti ons du ring the pre cedi ng decade i n w hi ch A TA had actual l y b een o perat i ng. M or ris s t rie d to ex p lain aw ay th e e m b ar ra ss in gly m inuscule pro fi ts that A TA ea rned o n i ts m ilita rybusi ness i n 200 7 a s a fl uke: th e c ar ri er, he s ai d, had experi enced “n onrec urring” costs th at year. Th e c osts in q ue stion w ere the c ost s o facqui ring new ai rcr aft. They were i nd eed nonre curr i ng co sts , but they w er e no t 2 007 cos ts; they w er e capit alexpenditures , wh i ch i s t o sayexpenditures ex p ecte d to inc rease rev e n u e s or red uc e costs ove r a peri od ofm or e than a y ear, and thus be yond the year i n w h ich the expenditur es w er e m ade. I fa busi ness buys a p iec e o f eq u ip m en t in y ea r 1 fo r $1 m illion th at w ill be usabl e for10 ye ar s a nd wil lthen be s cra pp ed , t o tr eat thi s a s a $ 1 m illion co st i n yea r 1 a nd a zer o cos t in each o fthe nine s ubs eque nty ea r s woul d create a mis l ea di ng p ict u re of th e firm ’s p ro fits th ro u g h tim e. C os ts sh ou ldN os. 11

- 1382, 11

- 1492 25 be m atched with re venues to provi de an accura te yea r- toyear pi ctur e o fpr o fi tabi l i ty
. Thi s i s do ne b y a m o r ti zing (sp re ad in g) a ca p ita l ex p en d itu re ov er its u se fu l life. In th e c as e o f ou r h yp ot h et ica l $1 m i l l i o n as se t, th is w ou ld re quir e a ssi gni ng co sts o f$1 00, 000 per yea r to e ac h yea r of the a s s e t ’s u seful l ife. I f th at w ere d one here, M orri ss’s est i m ate o fl ostp ro fits i n 200 8 a nd 20 09 w oul d have be enl o wertha n i t was , b ec au se s o m e o fthe no nr ec ur r i ng co s t s i nc ur r e d i n 2 0 0 7 wo ul d ha v e b e e n r e a l l o c a ted to thos e y ear s. A notherm i sta ke M or ri ss m ade w as to m odelthe re l ati on between co st an d reve nue as a s tr ai ght l i ne, as i f, f or exam ple , A TA ’ s co sts were al w ays exact l y 75 per cent of i ts reven ue ( pr o ducingthe l i ne arr eg r es si o n e qua ti o n c=

. 75 r ) , i n w hi ch eve nt the co m pany w ou ld turn a 25 perce nt pro fi t e ver y y ear . Yet i ts actual profi t m ar gi ns, as s ho wn in t he ne xtg r aph, fl uctua te d b etwee n 0 a nd 25 perce nt o fto talr eve nue.26 N os. 11

- 1382, 11

- 1492 St i l lano therm i sta ke w as M orri ss’ s ba si ng a predi cti on of wha t ATA’ s c o s t s wo ul d ha v e b e e n i n 2 0 0 8 a nd 20 09 ( ha d i t r emai ne d a me m ber o fF edEx ’ s te am) o n a t i ny sa m p le

— 10 obs er vati ons, ea ch co nsi sting o fA TA ’ s co sts in one ofthe 10 yea rs o n w hi ch the re gr ess i on a na lys is was b as ed. S m all sa m pl es a r e l es s r epr es en ta ti ve o fthe po pu l ati on be i ng sa m ple d than l ar ge ones . The popula

ti o n h er e woul d b e th e en ti r e co ste xpe r i en ce o fATA an d sim ilar air c ar rie rs . Confi dence i nter val s (fam i l i aras the “m ar gi ns o f error” reporte d i n p red ictions o f e lec tion out com es) are sta ti sti cales ti m ate s o fthe ra nge withi n w hi ch ther e ca n be re aso nabl e confi dence that a cor re l ati on or p re dict i on i s no t the r esul t o fchance v ar iabil i ty i n the sam ple o n whi chthe c o r r el ati on orpr edi ct i o n was b as ed; 9 5 per ce nt c on fid en c e is th e s ta n d ar d cr ite r i o n o f rea so n ab le c on fidence used byst ati sti ci ans. Consid er ourhypothe ti cal re gr ess i on o fwages o n experi ence. A r egr ess i on ba sed o n a s am ple o f10 worke rs w ou ld yi el d a l ess pre ci se predi cti on o fwh at the av erage r el ati on o fwages t o experi ence w as f orthe w or ker s in a p l ant that had 10 00 w or ker s than a r egr ess i on ba sed o n a s am ple of 50 or10 0 o fthe w or ker s. The 95 perce nt confi dence i nter valf orM or ri ss’ s pre dicti o n o fATA ’ s 20 08 c o sts wa s co r r ec tly c al cul at ed i n the r epo r t o fF edEx ’ s ex per t to b e $9 0 m il l i o n. Thi s m ea ns that M or ri ss’ s e sti m ate thatA TA would have cos ts of $254 m i l l i on was the m i dp oi nt of a ra nge fro m $299 m i l l i on at the t op ( $254 m i l l i on +$9 0/2 m illion) to $209 m i l l i on at th e bo tt o m ( $2 54 m i l l i o n - $ 90 /2 m i l l i o n)

— and i fi ts cos ts w er e a t the to p ofth e range the r esul t would have bee nN os. 11

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- 1492 27 a $ 12. 5 m i l l i on a nnual ne t l oss f orA TA r atherthan M o r r i s s ’ s p r e di c t e d $ 3 2
. 7mi l l i o n pr o fi t(b e f o r e the a dj ustm ent forfi x ed costs )
. A l lel se asi de, the confi dence in te rv al is s o w id e t h at th er e c an b e n o re as on ab le c on fide nc e i n the j ur y ’ s da mag e s a wa r d. All t hi s i s n o t t o s a y th a t i t wo u l d b e a s u r p r i s e i fATA ha d l o stpr o fi ts a s a r es ul t o fi ts e xpu l si o n fr o m the Fe d E x t e a m , alth ou gh its n on m ilita ry bu sin es s w as co ll apsi ng and i t i s doubtful that i t co uld have sur vi ved pu re l y o n i ts m i l i tar y b usi ness. But the o nl y quanti fi cati on of dam ages p resen ted at the tria l w as bas ed on M orri ss’s re gr ess i on, and a s a re sul t ther e w as a f ai l ure of p ro of o fda m ag es . I t is n ot e no ug h t o pr o ve i nj ur y i n a d a ma g e s s u i t ; th e p l a i n t i ff mu s t p r o v e a n a m o unt ofdam age s a nd A TA f ai l ed to do that. This i s no t ni tpi cking. M or ri ss’ s r egr ess i on had as m any b l oo dy w ounds as J ulius Caesa r w hen he was stabbed 23 ti m es by the Ro m an S enato rs l ed by Brutus. W e hav e g one on a t s uch l ength about the defi ci enci es ofthe re gr ess i on a nal ysi s in or der t o re m i nd di str i ct j ud ges that, pai nfulas i t m ay b e, it i s thei r re sponsibi l i ty to scr een e xpert tes ti m ony, h owever techni cal ; we have su g g es te d a i ds to the di sc ha r g e o ftha t r es po ns ibi l i ty
. The re sponsibi l i ty i s e speci al l y g reat in a j ury tr i al, since j uror s o n ave ra ge have an ev en l owe r c om f or t l eve lwith techni calev i de nc e than j ud ges . The exam i nati on a nd cr oss exam i nati on o fM or ri ss w er e per functor y an d m ust ha ve s truckmos t, mayb e al l, o fthe juro r s as g ibb er i sh

. I t be cam e a pp ar ent a t the o ra lar gum ent o fthe appeal th at even A T A ’s l aw yer d id n ot un d erstan d M orri ss’s28 N os. 11

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an aly sis ; he co u ld n ota n sw er ou r q u es tio n s a b ou t it but c o ul d o nly r e fe r us t o M o r r i s s ’ s t e s t i mon y . And l i ke A T A ’s la w ye r, F e d E x ’ s la w ye r, bo th atth e t ria l an d in hi s a pp el l ate br i ef s a nd atar gu m en t, co uld o nl y par ro t hi s expert
. FedEx’s expert did not tes ti fy; as is c om m on i n dam age s ca ses , the d efend ant o ffer ed no a l ternati ve m easu re of d am ages, dou btless fear in g th at th e j ury w oul d t ake that as a si gnal to spl i t the di ffer ence

— fi ndi ng l i ab i l i tyb uta war di ngthe pl aint i ffl es s th anthe pl ainti ffas ked f or

— ra therthan str uggl e t o u n d ersta nd an i nc o m pr eh en sibl e ca se . Bo thb ec au se F edEx t ender ed no es ti m at e o fda m ag es an d b ec au se ne i th erM o r r i ss no r the l aw yer s no r the j ud ge prese nted an in te lli gibl e dam age s anal ysi s t o the jur y, it i s no sur pri se that, having deci ded that A TA shoul d win, the j ury si m ply aw ar ded the exact fi gure thatA TA had ask ed f ori n dam age s. I fa p a r t y ’ s l a wy e r c a n n o tu n d e r s t a n d th e t e s t i m o ny o fthe pa r ty ’ s o wn ex per t, the t es ti m ony s ho ul d b e wi th

hel d fr o m t he j ur y . Ev i de nc e u nint e l l i g ib l e t o the t r i er o r t r i e r s o ff a c th a s n o p l a c e i n a t r i a l

. S e e F e d. R
. Ev i d. 403, 70 2. The j ud gm ent i s r eve rs ed w i th i nstr ucti ons to dism i ss the s uitwith pr ej ud i ce. R EVER S ED .

12- 27- 11