THOMAS L. GOWEN, Special Master.
A damages hearing was held on February 10, 2016. At the conclusion of the hearing, the undersigned issued a bench ruling awarding petitioner damages for past and future lost wages, past pain and suffering, past expenses, and various life care items. On February 22, 2016, a Ruling on Damages, which memorialized my bench ruling, was issued. The parties were then ordered to file a joint status report providing the present value of the amounts awarded to petitioner for future wage loss and items of future medical and life care, at a 1% discount rate. Thereafter, the parties raised issues of a tax offset to the amount for petitioner's future lost wages, an adjustment for fringe benefits, a wage growth rate, and the appropriate rate to reduce the future awards to present value. Respondent filed a report from economist Dr. Patrick Kennedy on April 20, 2016, and petitioner filed a responsive expert report from George McLaughlin, MBA, CEA, CVA on May 4, 2016. Respondent filed a responsive expert report from Dr. Kennedy on May 10, 2016.
This case is now ripe for a decision on damages.
A comprehensive discussion of petitioner's award for past and future lost wages can be found in the Ruling on Damages issued on February 22, 2016. In summary, the undersigned considered the parties' filings in support of their respective positions on all issues relating to petitioner's damages. Specifically on the issue of petitioner's lost wages, petitioner's vocational expert reports and supportive literature, her testimony at the hearing, and the striking impression of her current condition persuasively established that she remains completely disabled from professional employment as an attorney or any other employment. This finding was also well supported by the medical records. The undersigned found that the reports from respondent's vocational expert, Mr. Edward Bennett, were not reliable or credible, as he mischaracterized the record before him. Consequently, based on the methodology and figures provided by petitioner's vocational expert, Dr. Staci Schonbrun, petitioner was awarded a raw figure for past and future lost wages in the amount of $2,225,000.00 based on the following rationale:
Based on a review of the record and the testimony provided by petitioner at the hearing, petitioner was awarded
Petitioner submitted a statement claiming $9,309.14 for past unreimbursable expenses. Based on a review of petitioner's itemized list of out-of-pocket expenses and mileage, exhibit 35, and respondent's recommendations, petitioner was awarded
Concerning petitioner's life care items, the undersigned awarded expenses for items which would ordinarily be covered by an employer, such as a health insurance premium; and awarded expenses for items which are reasonable and necessary as a result of petitioner's disability. In light of the significant amount for wage loss petitioner was awarded, more routine items of personal care and other typical expenses were not awarded because such items would ordinarily be purchased by petitioner from her income had she been employed. Petitioner was not awarded amounts for a wheelchair accessible van, an all-terrain wheelchair and associated expenses, as it appeared that petitioner was capable of walking short distances and driving short distances in a standard automobile.
Petitioner was awarded the following life care items as proposed by her life care planner, Ms. Roberta Hurley, and as supported by the medical records and/or petitioner's testimony. See Pet. Ex. 29.
At the conclusion of the damages hearing in this case, and after review and consultation with counsel, I announced a decision awarding damages to Ms. Petronelli. I was persuaded that she had suffered substantial and permanent disability secondary to the flu vaccine and Guillain-Barré Syndrome.
The only matter outstanding at the conclusion of the hearing, in my view, was to have an economist calculate the tax offset and a reduction to present value that I determined should be done at 1% rate. The respondent argued, in a post-hearing status report, that the decisions in the Program required that future wage loss be reduced by a figure equaling "net present value" and that a tax offset should be applied. Upon review of the cases submitted by respondent, it appeared that the concept of reduction to "net present value" was used in prior cases. See Brown v. Sec'y of HHS, No. 00-182V, 2005 WL 2659073 (Fed. Cl. Spec. Mstr. Apr. 17, 2012); Watkins v. Sec'y of HHS, No. 95-154V, 1999 WL 199057 (Fed. Cl. Spec. Mstr. Mar. 12, 1999).
Both of the cases cited above quoted the United States Supreme Court decision in Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523, 524 (1983) in which the Court said:
Id.
The Supreme Court noted that in almost any case, calculating the loss of future wages could become the subject of reasonable debate. See Monessen Southwestern Railway Co. v. Morgan, 486 U.S. 330, 351 (1988). The Court counseled against allowing the average personal injury trial to become a graduate seminar on economic forecasting. Id. at 341. After reviewing the advantages and disadvantages of the various calculation methods, the Court in Jones & Laughlin Steel Corp. found the "economic evidence distinctly inconclusive" and concluded that: "we do not believe a trial court adopting such an approach in a suit . . . should be reversed if it adopts a rate between one and three percent and explains its choice." Jones & Laughlin Steel, 462 U.S. at 548-49.
The Supreme Court reviewed various methods for calculating future losses, including a reduction by a nominal rate of return and the net present value method. A nominal reduction to present value requires a straight forward reduction for the time value of money received at the present time to compensate for future losses. This reduction is usually based upon the projected return on the investment of an awarded lump sum of money in a conservative investment, such as U.S. Treasury bonds. On the other hand, the use of "net present value" requires the estimate of future interest rates less the rate of future wage growth for the petitioner, with the difference representing the reduction factor.
The net present value methodology, to some extent, assumes that future interest rates will exceed future wage growth, and thus result in a net reduction of the raw sum awarded for future wage loss. It usually does not, but certainly could, contemplate that wage growth could be higher than interest rates at various times. In an attorneys' fee case in this Program, based upon a study
I had initially determined that this study, the Real Rate Report, appeared to provide a good guidepost for calculating the rate of future wage growth for Ms. Petronelli, who was an experienced corporate attorney prior to her disability. I observed to counsel in a status conference that given the low interest rates available on U.S. Treasury bonds, even as far out as 10 year maturities, the result of a net present value calculation would likely produce a negative net value, and at a minimum require no reduction, if not actually an increase, in the award.
At the same time, petitioner argued that I should add the value of fringe benefits and future wage growth to the initial sum awarded. The parties, at my direction, filed status reports in which they calculated tax offsets and reduction to present value at 1%. Petitioner added fringe benefits at 14.5% of wages, and performed the calculations to increase future wages by 3.7% as directed by my order. See Status Report, docket no. 108, filed Mar. 25, 2016. Respondent also calculated tax offsets, but did not increase future wages or add fringe benefits. See Respondent's Exhibit ("Res. Ex.") M, filed Mar. 25, 2016. Respondent's counsel further argued that he needed to submit an expert report from Dr. Patrick Kennedy Ph.D. to support an argument for a higher reduction to present value greater than the 1% I had allowed, even though this rate appeared generous to the respondent's side given the current interest rates.
The respondent filed a report from Dr. Kennedy to which the petitioner responded with a report from an economist, George McLauglin, MBA, CEA, CVA. I held a status conference with counsel at which time respondent indicated that he would like to file a responsive report from Dr. Kennedy, which he had in hand. I advised respondent's counsel to file it promptly, which he did. Respondent also requested a hearing to permit live testimony from Dr. Kennedy and Mr. McLaughlin. Petitioner did not believe a hearing was necessary. As I had extensively reviewed the expert reports, the cases, and supporting economic data, I advised the parties that I did not believe an additional hearing would be necessary or helpful to the decision, and would only have the effect of further delaying the resolution of the case. Particularly, given that the difference between my conclusions as to a discount rate and a wage growth rate appeared to be well within the range of a reasonable rough approximation, and that I was planning to accept the respondent's estimate for fringe benefits, I denied the request for a hearing. See Order, docket no. 120, filed May 11, 2016.
Dr. Kennedy argued for a discount rate of 1.75%, while petitioner's expert, Mr. McLaughlin, found the 1% rate that I used initially to be reasonable. Dr. Kennedy's research suggested that over a period of 18 years, the Consumer Price Index averaged 2.2%, and interest rates averaged 3.4%. Res. Ex. N at 7. He opined that the Bureau of Labor Statistics ("BLS") estimate for wages in the legal industry would be more reliable than the RRR report, which was based on attorneys' fees rather than net income. Id. Based on the BLS numbers, Dr. Kennedy found that the legal industry growth rate was 0.25% above the rate of inflation, resulting in a net discount rate of approximately 1%, based on this 18-year time period. Id. at 7.
Nevertheless, Dr. Kennedy argued for a methodology he called the "real rate of return" or "net discount rate," which assumed that the relationship between earnings growth and interest rates remains relatively stable over time. Res. Ex. N at 8. Dr. Kennedy looked at three projections for future inflation, which ranged from 1.04% to 2.3% by 2020; and in one projection, a range up to 2.6% in later years. Id. at 5. Not surprisingly, the projections differed significantly, with the Congressional Budget Office projecting a range from 1.04% in 2018 to 1.1% in 2026, and the Federal Reserve projecting 2.3% by 2018, with a "longer run" projection of 2.6%, according to Dr. Kennedy. Id. Dr. Kennedy argued that I should consider average interest rates over the last 30 years, rather than the 18 years he discussed before, because the great recession occurred during the last 18 years, thus depressing growth rates during that time. Id. at 7. Dr. Kennedy neglected to mention that by going back 30 years, he included the latter part of the highest interest rate period subsequent to the OPEC oil crisis and the high inflation which Federal Reserve Chairman Paul Volcker attempted to curb by restricting the money supply. See Petitioner's Exhibit ("Pet. Ex.") 40 at 2-3.
Mr. McLaughlin argued that past averages are particularly poor predictors of future interest rates. Pet. Ex. 40 at 2. He argued that investors do not make judgments about bond purchases based on past averages. Id. Mr. McLaughlin noted the important roles played by Federal Reserve Chairmen in addressing the challenges faced by the economy during their terms in office. He explained that Paul Volcker was challenged with curbing very high inflation after the formation of the oil cartel ignited inflation in the United States. To remedy that situation, Mr. Volcker severely tightened the money supply, which resulted in high interest rates. Id. Alan Greenspan, the subsequent Federal Reserve Chairman, believed in as little regulation as possible on the free market and he generally maintained modest interest rates, which led to the dot.com bubble and the housing bubble with severe recessionary consequences for the economy. Id. at 3. Subsequent Federal Reserve Chairmen, Ben Bernanke and Janet Yellen, have had the challenge of trying to stimulate the economy without the benefit of additional fiscal stimulus employed in the prior recession. Id. They have maintained interest rates close to zero. Id. at 2-3. Neither party mentioned the Federal Reserve Open Market Committee goal of maintaining inflation at 2% in order to achieve price stability and maximum employment.
While Dr. Kennedy is correct that the Federal Reserve raised its federal funds rate by 0.25% in December 2015, and expects additional increases in the future, he neglected to mention that the Federal Reserve declined to raise interest rates at its March or April 2015 meetings by even another 0.25% because of the sluggish economic conditions. See Res. Ex. N at 5. Both economists agreed that if current interest rates were compared to current wage growth in the legal industry, whether using the 3.7% rate, which Mr. McLaughlin found reasonable, or the 2.65% rate found reasonable by Dr. Kennedy, the result would be a negative present value requiring no reduction. However, Dr. Kennedy argued that a 30-year average should be used to identify expected interest rates for U.S. Treasury bonds. He stated that "[o]ver the last 20 or 30 years, the five year Treasury note has averaged 3.5 to 4.8 percent." Id. Mr. McLaughlin, though recognizing that the net discount rate could be negative, stated that he thought that the time value of money had to be accounted for, and so concluded that a 1% rate was reasonable, which is a straight nominal rate and not a net rate. See Pet. Ex. 40 at 7.
I considered that the challenge for Ms. Petronelli is to be able to take a lump sum of money awarded to her at this time and purchase a portfolio of U.S. Treasury bonds that would provide her with a return sufficient to offset the reduction to present value. Consulting the official site of the U.S. Department of the Treasury on May 5, 2016, I found that the rate for 6 month bonds is 0.41%, for 1 year bonds 0.55%, for 2 year bonds 0.80%, for 3 year bonds 0.96%, and for 5 year bonds 1.32%.
Dr. Kennedy's argument for the use of a 30-year average might carry more weight in the case of a younger person for whom the court would be projecting wage loss for 30 or 40 years into the future. But, in this case, I projected a work life expectancy of 13 years for Ms. Petronelli, given her current age of 51. So, while she may be able to earn higher returns in the outer years of this time period, she will not be able to earn those returns in the more clearly foreseeable near term. In fact, it can be argued that given that the 10-year maturity for U.S. Treasury bonds is currently at 1.88%, the market is projecting a much lower rate of growth of the interest rate than projected by Dr. Kennedy for a very substantial portion of the petitioner's work life expectancy.
Mr. McLauglin argued that the rate of return on conservative investments like U.S. Treasury bonds is affected by many considerations, and most prominently at this time, by the need to maintain growth in a sluggish economy. He cited an article by Lawrence Summers, the former Treasury Secretary and Harvard President, which suggests the likelihood of "secular stagnation" in the economy over the foreseeable future, as well as research by two economists at the San Francisco Federal Reserve Bank which shows that market expectations for inflation have shifted downward, implying that interest rates will be kept low by the Federal Reserve for a long period of time. See Pet. Ex. 40 at 5.
As can be seen from the above discussion, the projections of economists vary greatly and rely upon crystal balls that are rarely very clear, particularly when the intention is to look 5 or 10 years, or more, into the future. What is clear is that Ms. Petronelli's wage loss is projected over a 13-year work life expectancy, and that for at least the first third to half of that time period, it is unlikely that she will be able to obtain average investment returns in short and intermediate term U.S. Treasury bonds that would exceed Dr. Kennedy's projected wage growth rate of 2.65%, which is lower than the growth rate found reasonable by Mr. McLaughlin (3.7%).
While it seems likely that the petitioner would be able to obtain higher returns in the outer years if the economy returns to past growth rates, it should be noted that even the 20-year U.S. Treasury bond is paying only 2.22% as of May 4, 2016.
Petitioner argued that I should retain my original growth rate projection for attorney income in the corporate world at 3.7%, and I will. I find that this number comes closer to approximating future losses for a corporate attorney because most growth in attorney wages occurs as a result of progression up the ladder based on experience and expertise. The 3.7% and 2.65% figures approximate an overall number for the profession that does not account for individual progression over the course of a career, which I find reasonable to consider. Accordingly, either figure would provide a conservative estimate of the petitioner's likely future wage loss.
In his supplemental report, Dr. Kennedy argued that Mr. McLaughlin's use of a figure for future wage growth compared to foreseeably available interest rates "implies" a negative net discount rate of 2.7%, which he argued contradicted Mr. McLaughlin's initial report in this case, filed in 2014. See Res. Ex. O at 2. However, both experts were directed by my post-hearing order to consider the definition of "net discount rate" as showing the difference between future wage growth and potential investment return, a methodology recognized by the Second Circuit in Hawaiian Independent Refinery, Inc. v. Caleb Brett U.S.A. Inc., 928 F.2d 39, 44 (2d Cir. 1991) (as cited in Watkins, 1999 WL 199057, at *6). See Scheduling Order, docket no. 109, filed Apr. 4, 2016. When following this directive, and looking at 18-year data for wage loss compared to investment return, Dr. Kennedy concluded that a 1% net discount rate was appropriate. He then argued for a different methodology based on the assumption that interest rates and inflation maintained a relatively constant relationship over time, and that a 30-year look back was necessary. The Supreme Court in Jones & Laughlin Steel Corp. reviewed the various methodologies and concluded that the economic evidence in favor of one method or the other was "distinctly inconclusive." 462 U.S. at 548-49. As explained above, I have concluded that because of the relatively short term of future wage loss in this case, and the interest rates for short and intermediate term bonds that would be available for investment, the methodology proposed by Dr. Kennedy, (based on a 30-year look back period) was less likely to be predictive.
The petitioner argued that fringe benefits of 14.5% of salary should be added, while respondent argued for a 10% rate. On this issue, I find respondent's argument more reasonable and award a 10% rate, as I found 4% of the 14.5% figure petitioner suggested was attributable to medical benefits (which are awarded separately) and benefits like vacation pay (which are already calculated into total wage loss). Other benefits, such as retirement plans, life or disability insurance, unemployment insurance, and the employer's FICA payment, may reasonably constitute 10% of earnings. In his responsive report, Dr. Kennedy argues that 10% is reasonable but that I should consider a 7% rate because Mr. McLauglin included items like life and disability insurance in his calculation, and these items should be excluded as the person would have to be dead or disabled to benefit. See Res. Ex. O at 1-2. While I used the above list only by way of examples of employee benefits, Dr. Kennedy's argument misconstrues the nature of an employee benefit. The benefit is the payment of the premium by the employer for life and disability insurance, or any other kind of insurance for that matter, not the ultimate payout on such a policy. The 10% figure is reasonable.
The parties' respective tax offset calculations were in agreement, and I have adopted those figures in arriving at a final award for past, present, and future wage loss. Additionally, the parties used a 1% rate to calculate the cost of future life care items. See Joint Status Report, docket no. 104, filed Mar. 8, 2016. The parties provided that the total discounted present value of the life care items is
In accord with the foregoing, I find that petitioner is entitled to the following amounts for damages:
Section 15(f)(4)(A) of the Vaccine Act provides that compensation shall be paid "in a lump sum of which all or a portion may be used as ordered by the special master to purchase an annuity or otherwise to be used, with the consent of the petitioner, in a manner determined by the special master to be in the best interests of the petitioner." Petitioner has asked for a lump sum payment of compensation with no annuity. The undersigned finds this request reasonable as petitioner is an adult woman with professional experience as a corporate attorney, and thus reasonably capable of making an informed decision. Accordingly,
The Clerk of the Court is directed to enter judgment in accordance with this decision.
