Financial analysis of wrongful termination: Joseph Kidwell.(Instructor's Note)

Berg, M. Douglas ; Stretcher, Robert

CASE DESCRIPTION

The primary subject matter of this case concerns the valuation of economic damages incurred by Mr. Joseph Kidwell upon his wrongful termination from Gilad Lexus of Billings, Montana. A secondary issue examined involves brand specific knowledge which is not transferable to the selling of other automobiles. The course has a difficulty level appropriate for the advanced undergraduate or first year masters students, practicing HR managers or those seeking to become forensic economists. The case is designed to be taught in one and a half class hours and is expected to require two hours of outside preparation by students.

CASE SYNOPSIS

Joseph Kidwell, a talented sales manager for a Lexus dealership, was terminated for refusing to call the police and report a car as being stolen. It was later found that an employee had borrowed the car without permission, but Joseph had already been terminated. Joseph brought a lawsuit against the dealership for wrongful termination, the details of which are presented in this case. The reader is tasked with analyzing the economic loss suffered by Joseph due to the termination.

INSTRUCTORS' NOTES

Suggested Teaching Approach

This case is useful for teaching the application of economic and finance principals in a real world setting. The estimation of economic loss requires the idea of opportunity cost and forecasting what the plaintiff's economic picture would be if the damage had not occurred and the future economic picture after the damage has occurred. The use of present value techniques should be employed to compute the value at the time of the trial of losses which will be experienced by Joseph after the trial has taken place.

Suggested Questions for Students Needing Structured Guidance

1. What are the major components of Joseph's economic damages?

The major components of Joseph's economic damages are lost earnings, lost 401k contributions, and additional health insurance costs. These losses should be determined for the time period between the time of dismissal and the date of the trial (June 3, 2006-August 1, 2007). These are termed Past Losses since they occur prior to the trial. Similarly, estimates of these costs for some time period after the trial date are termed Future Losses.

2. What role does future inflation play in estimating future damages?

What Joseph's future earnings would have been at Gilad Lexus are unknown. Since his compensation was tied to gross sales, anything which affected the sale of Lexus automobiles would also affect his income. Without building an econometric model of Lexus sales, the conservative approach is to assume that Joseph's earnings would have kept up with the rate of inflation. But that raises the question of what will be the future rate of inflation? Estimate the rate of inflation by use of a geometric mean of the Consumer Price Index (CPI) for the same number of years used in computing the discount rate.

3. What discount rate should be used to calculate the present value of future damages?

Future Losses should be discounted to the date of the trial by use of a suitable discount rate. The choice of an appropriate discount rate arouses considerable debate among economists. The student should have a sound logic to back-up the choice of discount rate regardless of the rate chosen. The geometric mean for the last fifteen years of the constant maturity 3-month Treasury bill is often used as a discount rate. The justification for this rate is that it reacts more quickly to changing inflation expectations. Since the past is being used to predict the future, the more variable short-term rate is seen as being a better predictor.

4. How many years will it take Joseph to attain his previous level of earnings? How does Joseph's level of education and geographic location figure in the damage calculations?

The number of years into the future to compute damages is unclear. A low skilled individual earning a low wage should be able to find equivalent employment in less time than an individual with highly specialized training who earns a high income. The less transferable a person's skill set, the longer it will take to regain the same level of earnings. Joseph's value in the marketplace rests upon his knowledge of Lexus automobiles and the Lexus way of doing things. This specialization will make it more difficult for him to recover. If he is lucky enough to find a position with another Lexus dealership, his recovery time will be shorter. If he is forced to take a position selling another brand of automobile or perhaps an entirely different product, his recovery time will be longer. There are numerous academic papers which suggest that the average length of time to recover from an involuntary dismissal is 5 years.

Possible Solution to the Case

One possible solution is summarized in the tables which follow. Other solutions could certainly result. Typically, expert witnesses are hired by attorneys to support the particular lawsuit, so in reality, the analysis is usually substantially biased. The lesson here, though, is to present a plausible solution. Attorneys and courts have a strict preference for 'the right number.' A range of outcomes may be a desirable exercise for forensic economics; however, the particular methods and assumptions are left to the professor.

EPILOGUE

The case was settled out of court for $400,000. Joseph and his family moved to Minneapolis, Minnesota where he was able to obtain a sales position at another Lexus dealership. It took 6.5 years for his earnings to reach the same level as his inflation adjusted earnings at Gilad. He still misses his family and friends in Billings.

M. Douglas Berg, Sam Houston State University

Robert Stretcher, Sam Houston State University Table TN1: Summary of Economic Damages (detailed in table TN 2). Summary of Economic Damages Past Damages Earnings $212,800 401k Contributions $19,152 Insurance Costs $6,970 Total Past Damages $238,922 Future Damages Earnings $308,570 401k Contributions $27,771 Total Future Damages $336,341 Total Damages $575,263 Table TN2. Detailed Analysis. Joseph Kidwell trial date 08/01/07 inflation 3.0% discount rt 3.5% recovery rt 33.3% Year Earnings w/o Earnings with Lost Earnings Growth Dismissal Dismissal Factor 2006 $221,868 $137,934 $83,934 1.000 2007 $128,866 $0 $128,866 1.000 2007 $93,002 $68,967 $24,035 1.000 2008 $221,868 $91,933 $129,935 1.030 2009 $221,868 $122,547 $99,321 1.060 2010 $221,868 $163,355 $58,513 1.092 2011 $221,868 $217,752 $4,116 1.125 Year 401k 401k Lost Growth Contributions Contributions Contributions Factor w/o Dismissal with Dismissal 2006 $19,968 $12,414 $7,554 1.000 2007 $11,598 $0 $11,598 1.000 2007 $8,370 $6,207 $2,163 1.000 2008 $19,968 $8,274 $11,694 1.030 2009 $19,968 $11,029 $8,939 1.060 2010 $19,968 $14,702 $5,266 1.092 2011 $19,968 $19,598 $370 1.125 Year Insurance Insurance Insurance Growth Costs w/o Costs with Damages Factor Dismissal Dismissal 2006 $2,787.95 $6,272.88 $3,484.93 1.000 2007 $2,787.95 $6,272.88 $3,484.93 1.000 2007 $2,012.05 $2,012.05 $0.00 1.000 2008 $4,800.00 $4,800.00 $0.00 1.030 2009 $4,800.00 $4,800.00 $0.00 1.060 2010 $4,800.00 $4,800.00 $0.00 1.092 2011 $4,800.00 $4,800.00 $0.00 1.125 trial date inflation discount rt recovery rt Year Discount Economic Cumulative Factor Value 2006 1.000 $83,934 $83,934 2007 1.000 $128,866 $212,800 2007 0.986 $23,687 $23,687 2008 0.952 $127,355 $151,042 2009 0.919 $96,824 $247,866 2010 0.888 $56,734 $304,600 2011 0.858 $3,970 $308,570 Year Discount Economic Cumulative Factor Value 2006 1.000 $7,554 $7,554 2007 1.000 $11,598 $19,152 2007 0.986 $2,132 $2,132 2008 0.952 $11,462 $13,594 2009 0.919 $8,714 $22,308 2010 0.888 $5,106 $27,414 2011 0.858 $357 $27,771 Year Discount Economic Cumulative Factor Value 2006 1.000 $3,484.93 $3,484.93 2007 1.000 $3,484.93 $6,969.86 2007 0.986 $0.00 $0.00 2008 0.952 $0.00 $0.00 2009 0.919 $0.00 $0.00 2010 0.888 $0.00 $0.00 2011 0.858 $0.00 $0.00 Note: Economic value is the present value of lost earnings, lost contributions, and insurance damages (first, second, and third panels of exhibit TN2).