The opinion of the court was delivered by: JAMES FRANCIS, Magistrate Judge
For want of unbiased data, expert evidence is lost. The defendants in
this antitrust case have moved to exclude the proposed testimony of the
plaintiffs' expert witness, Dr. Frederick C. Dunbar, pursuant to Federal
Rules of Evidence 702 and 703 on the ground that his methods and the
resulting testimony are unreliable. Many of the defendants' arguments are
without merit. However, because the plaintiffs have failed to demonstrate
that the data set upon which Dr. Dunbar's analysis was based was
unbiased, the defendants' motion must, in large part, be granted.
The plaintiffs in this action are electrical contractors who employ
workers represented by the Communications Workers of America, AFL-CIO
(the "CWA") to install telecommunications systems for commercial
customers. The plaintiffs allege that the defendants who include
the International Brotherhood of Electrical Workers ("IBEW") Local Union
Number 3, AFL-CIO ("Local 3") and a number of electrical contractors
conspired to violate the antitrust laws by excluding from the
market contractors who, like the plaintiffs, employ workers who are
members of the CWA, rather than Local 3. The plaintiffs have alleged
violations of the Sherman Antitrust Act, 15 U.S.C. § 1, 2 (the
"Sherman Act"), and New York's Donnelly Act, N.Y. Gen. Bus. Law § 340
(the "Donnelly Act"). (Second Complaint dated Feb. 22, 2002 ("Sec.
Compl.") ¶¶ 70-92).*fn1 The plaintiffs' principal claim is that the
defendants have "combined and conspired with each other, and others
presently unidentified, to carry out a common plan to coerce and induce
building owners and tenants, building managers, general contractors,
information technology consultants, and others in the
construction industry to exclude the plaintiffs from the market for
telecommunications installation work." (Sec. Compl., ¶ 36). The
plaintiffs further allege that "[i]n the absence of collusion, each
electrical contractor defendant would have an economic incentive to
perform the electrical installation work correctly and without incident
in order to satisfy the customer. No rationally profit-maximizing
contractor in the defendants' position would commit the illegal
activities that the defendants have committed except in furtherance of
the unlawful conspiracy among the defendants." (Sec. Compl., ¶ 40).
Finally, the plaintiffs claim that "because of the universal nature of,
and reliance by all businesses upon, the telecommunications industry, an
antitrust violation in this arena is especially harmful." (Sec. Compl.,
The plaintiffs seek to introduce the expert testimony of Dr. Dunbar on
economic issues related to antitrust liability and damages in this case.
(Declaration of Dr. Frederick C. Dunbar Opposing Defendants' "Daubert"
Motion dated March 7, 2003 ("Dunbar Decl."), ¶ 1). Dr. Dunbar is a
Senior Vice President of National Economic Research Associates, Inc.
("NERA"), specializing in antitrust and financial economics. (Dunbar
Decl., ¶ 3). Dr. Dunbar's practice at NERA includes "providing
valuation services, performing economic research on public policy
matters, and consulting on antitrust economics." (Dunbar Decl., 1 4). Dr.
Dunbar issued an initial report on October 3, 2002, as well as a
rebuttal report on December 17, 2002, outlining his findings.
(Dunbar Decl., ¶ 1). Additionally, he was deposed for three and
one-half days regarding his conclusions. (Declaration of Jeffrey M.
Eilender in Support of Defendants' Motion to Exclude the Testimony of
Plaintiffs' Proposed Expert, Dr. Frederick C. Dunbar, dated Feb. 7, 2003
("Eilender Decl."), ¶ 15). The defendants have submitted several
expert reports of their own, including reports by a certified public
accountant, Stephen W. Shulman, and economists Orley C. Ashenfelter,
Henry S. Farber, and John R. Woodbury. (Expert Report of Stephen W.
Shulman, CPA, dated Oct. 31, 2002 ("Shulman Report"); Expert Report of
Orley C. Ashenfelter and Henry S. Farber dated Oct. 31, 2002
("Ashenfelter/Farber Report"); Expert Report of John R. Woodbury dated
Oct. 30, 2002 ("Woodbury Report")).
Dr. Dunbar's initial report analyzed a number of issues that are
relevant to the plaintiff's claim of monopoly leveraging that is,
the use of market power in one market (electrical installation services)
to reduce competition and inflict antitrust injury in another market
(telecommunications installation). (Dunbar Decl., ¶ 7; Expert Report
of Frederick C. Dunbar dated Oct. 3, 2002 ("Dunbar Report") at 40). To
establish a Sherman Act conspiracy, the plaintiffs must produce evidence
sufficient to show: (1) a combination or some form of concerted action
between at least two legally distinct economic entities; and (2) that
combination or conduct constituted an unreasonable restraint of
trade either per se or under the "rule of reason."
U.S. Information Systems, 2002 WL 91625, at *4; see
also Tops Markets, Inc. v. Quality Markets, Inc.,
142 F.3d 90, 95-96 (2d Cir. 1998). The plaintiffs must also "adequately . . .
define the relevant product market." Rock TV Entertainment, Inc. v.
Time Warner, Inc., No. 97 Civ. 0161, 1998 WL 37498, at *2 (S.D.N.Y.
Jan. 30, 1998) (quotations and citation omitted). Finally, the plaintiffs
must establish that they have "antitrust standing" and have suffered
"antitrust injury." National Camp Association, Inc. v. American
Camping Association, Inc., No. 99 Civ. 11853, 2000 WL 1844764, at *3
(S.D.N.Y. Dec. 15, 2000); Atlantic Richfield Co. v. USA Petroleum
Co., 495 U.S. 328, 334 (1990).
In examining these elements of the plaintiffs' claims, Dr. Dunbar
asserts that he applied "well-recognized statistical procedures to
unbiased data as well as well-accepted economic theory to facts." (Dunbar
Decl., ¶ 7). He summarized his findings in five categories.
First, Dr. Dunbar examined the market for electrical installation and
discussed how "market power" could be asserted in that market.
Market power is the ability to raise prices above
competitive levels persistently. Market power is
absent if an attempt to raise prices above
competitive levels would be made unprofitable by
an increase in supply from
other firms in the market or by short run
entry from firms outside the market.
(Dunbar Report at 4). Using this "standard economic definition for
market power," Dr. Dunbar concluded that the defendants have monopolized
the market for electrical installation by controlling the supply of
electricians.*fn2 (Dunbar Report at 5). Dr. Dunbar came to this
conclusion by examining several factors.
First, he analyzed the market for electrical installation services
generally and Local 3's role in that market. Local 3 is the sole
collective bargaining agent of electricians in the New York metropolitan
area, giving it significant power to control the labor force and raise
the wages of its members. (Dunbar Report at 6). Because Local 3 does not
deal directly with end users, it works in conjunction with electrical
contractors to sell its members' services. (Dunbar Report at 7). Local 3
has agreements with the New York Electric Contracting Association and the
Association of Electrical Contractors, Inc. that provide that for each
job, certain key decision makers of the contractor must be Local 3
members. (Dunbar Report at 8). Additionally, a Joint
Industry Board ("JIB"), consisting of fifteen members representing
the union and fifteen members representing the employers, controls and
manages the supply of electricians to the contractors and administers
benefits and pensions. (Dunbar Report at 9).
To estimate the size of the electrical installation services market in
the New York metropolitan area, Dr. Dunbar relied upon: (1) data that
Local 3 produced in its semi annual surveys regarding the total
number of inside construction electricians and the number of electricians
used in the commercial construction industry in Local 3's jurisdiction;
(2) the ratio of the National Electrical Benefit Fund ("NEBF") wages
earned within Local 3's jurisdiction relative to the county wages (data
that was also produced by Local 3); (3) the value of commercial
construction in New York State that is published by the Bureau of Census;
and (4) data on the dollar value of the top construction projects in New
York, as published by the New York Construction News. (Dunbar Report at
10). Local 3 surveys estimate that electricians employed on commercial
projects represent about 35% of the total inside electricians and that
NEBF wages represent 70% of the total wages of the relevant counties.
(Dunbar Report at 10). From this, assuming all Local 3 workers to be
equally productive, Dr. Dunbar calculated the wages of electricians who
are working in the construction industry to be approximately $344
million. (Dunbar Report at 10-11). Assuming that labor represents 40% to
50% of the total value of the work,
Dr. Dunbar estimated the size of the market for electrical
installation to be in the range of $1 billion to $1.2 billion. (Dunbar
Report at 11).
Dr. Dunbar next examined Local 3's dominance over the supply of
electricians to large commercial projects within its jurisdiction. After
reviewing evidence from several sources, including testimony of members
of the JIB, testimony of a member of the IBEW, and court transcripts from
cases dealing with Local 3 over the past 60 years, Dr. Dunbar concluded
that "electrical contractors who are bidding on electrical installation
jobs in the New York metropolitan area employ only Local 3 electricians."
(Dunbar Report at 11-14).
Dr. Dunbar next examined the market for telecommunication installation
services and the market for electrical installation services to determine
whether there were strong economic reasons for providing the two services
together. He concluded that the two markets are "historically separate,"
that "the jobs are bid separately and often the contractors are two
independent companies," and that there are "no obvious economies to
having electrical and telecom installation provided by the same
contractor." (Dunbar Report at 14). In analyzing the size of the
telecommunications installation market, Dr. Dunbar relied heavily on a
consulting report for Information Transport Systems ("ITS"), a New York
telecommunications contractor. (Dunbar Report at 15). The report
estimated that the size of the New York metropolitan market was between
$300 million and $500 million annually. (Dunbar Report at 15).
Dr. Dunbar identified several reasons why the provision of
telecommunications installation is separate from electrical installation.
First, telecommunications installation requires specialized training
different from the training needed to perform electrical installation.
(Dunbar Report at 17). Based on a survey conducted by the IBEW and the
National Electrical Contractors Association ("NECA"), the IBEW concluded
that in Local 3, the percentage of the union's journeymen who can perform
telecommunications installation work is about 38%, with just over half of
those actually having the certification to do so. (Dunbar Report at 17).
Relying on this same survey, Dr. Dunbar pointed out that when asked
whether their region could support a separate telecommunications unit
within their local area and whether such a unit would require separate
classifications, training programs and agreements, over 80% of local
unions responded that their area could support a separate unit, and over
90% responded that such a unit would require a distinct structure.
(Dunbar Report at 18).
Next, Dr. Dunbar pointed to the separate bidding processes for
telecommunications and electrical installation supporting his
determination that the two markets are distinct. Dr. Dunbar
discussed the way that "bid leveling" sheets are prepared by
consultants hired to review bids submitted by various parties. Separate
bid leveling sheets are prepared for the electrical and
telecommunications segments of each project. (Dunbar Report at 21). Dr.
Dunbar identified several examples, including the renovations on the
Doubletree Hotel in New York City and the construction project for the
National Football League's offices. (Dunbar Report at 21-22).
Finally, Dr. Dunbar attempted to show that "[t]he defendants, and
industry participants in general, view electrical and telecommunications
installation as separate markets." (Dunbar Report at 23). He examined the
2002 Strategic Marketing Plan" of ITS and defendant IPC Communications,
Inc., as well as the depositions of various parties and non-parties, to
demonstrate what he found to be a generally-held belief that the markets
are distinct. (Dunbar Report at 23-24).
3. Anticompetitive Conduct
Dr. Dunbar next examined whether there was "parallel behavior, motive
and opportunity, the ability to communicate, and behavior that was
inconsistent with independent action in a competitive market" in order to
determine whether there was anticompetitive conduct by the defendants.
(Dunbar Decl., ¶ 25; Dunbar Report at 25-35). He asserted that this
methodology is widely accepted by economists and that "[p]laintiffs often
point to parallel business
behavior, such as stable, noncompetitive pricing, and add it to
evidence that implies the existence of an explicit agreement. Thus,
plaintiffs search for so-called plus factors i.e., other factors
and circumstances that supplement evidence of parallel behavior
to support an inference of conspiracy." (Dunbar Decl., ¶ 25). He
concluded that "Local 3, in concert with defendant electrical
contractors, engaged in anticompetitive conduct to injure competition in
the telecommunications installation services market." (Dunbar Report at
25). Dr. Dunbar claimed that "the predictions of market equilibrium when
suppliers would be competing independently on the merits are quite
different from the outcomes that are observed in this market." (Dunbar
Decl., ¶ 29). According to Dr. Dunbar, this imbalance in market
equilibrium leads to the situation where "the union needs the contractors
to leverage its monopoly into telecommunications; and the contractors
employ the reputation effect of being able to control delays and
vandalism in order to compete with lower priced, equally or
better qualified CWA contractors." (Dunbar Decl., ¶ 29).
Dr. Dunbar reached his conclusions by examining several factors: (1)
lack of demarcation between Local 3 and the electrical contractors, (2)
communication by defendant electrical contractors of Local 3's threats of
possible vandalism and unwillingness to work overtime, (3) the failure to
discipline workers who refused to work, (4) the incentive of defendant
electrical contractors that rely on
Local 3 labor to act in concert with Local 3 to reduce competition
from lower priced bidders that use CWA labor, and (5) the benefits that
would come to the defendant electrical contractors based on this scheme.
(Dunbar Report at 25-29). Dr. Dunbar identified several instances where
the plaintiffs' telecommunications installation work was vandalized. He
pointed to deposition testimony from various sources claiming that
members of Local 3 committed these acts of vandalism. (Dunbar Report at
29-32). He also described instances when the defendants "agreed not to
work overtime on projects where the plaintiffs (or other firms that did
not use Local 3 labor) obtained the telecommunications installation
services contract." (Dunbar Report at 32-35 & Attachment 4).
After looking at the conduct described above, Dr. Dunbar concluded that
it constituted "an attempt by the union and co-defendants to expand into
a distinct market." (Dunbar Report at 35). He opined that "[i]f such an
expansion was from competition on the merits, then we would expect lower
prices and/or improved service quality. . . . Local 3 intends to extend
its monopoly power from electrical installation into telecommunications
installation with the result being higher prices and no service
improvement." (Dunbar Report at 35). Dr. Dunbar asserted that "[a]ll of
the elements necessary to establish a monopoly leveraging claim
are present here. The practices permitted the defendants to gain a
competitive advantage over the plaintiffs in the telecommunications
installation services market, causing injury to both the plaintiffs (in
the form of lost profits and business) and to consumers generally (in the
form of higher prices)." (Dunbar Report at 35).*fn3
Dr. Dunbar addressed a common criticism of the monopoly leveraging
argument: that "there is only one monopoly profit, which implies that the
monopolist gains nothing by seeking to leverage its monopoly into another
market;" the monopolist would instead "charge the monopoly price in its
primary market and garner its monopoly profits there." (Dunbar Report at
36). Dr. Dunbar disputed the relevance of that argument to the facts at
hand for several reasons. First, because individual members of the union
get compensation only if they actually work, the union cannot simply
increase the union wage and reduce the total number of hours worked, as
that would deny some members of the union any benefit:
[T]he nature of the union implies that it can
extract some, but not all, of the monopoly profits
available in its primary market, the market for
electrical installation services. Consequently, it
would benefit by increasing the number of hours
worked in markets other than the electrical
installation services market, such as the
telecommunications installation market. Given that
the defendants charge higher prices than other
parties that supply telecommunications
installation services, they could either lower the
prices that they charge in
that market (a competitively acceptable
practice) or take steps to leverage their monopoly
power in the electrical installation market into
the telecommunications installation market (a
competitively harmful practice).
Dr. Dunbar also asserted that, because craft trades other than
electrical installation contractors are also present at the construction
site, the defendant contractors would have an incentive to extend their
monopoly into other trades in order to avoid sharing profits. (Dunbar
Report at 36-37). According to Dr. Dunbar, as a result of such
incentives, "the defendants repeatedly took steps to dissuade the
customers of telecommunications installation services . . . from
utilizing the services of the plaintiffs for reasons not related to
competition on the merits but rather to achieve anticompetitive ends."
(Dunbar Report at 37). Additionally, Dr. Dunbar claimed that there is
"considerable evidence that the defendants charged significantly more for
telecommunications installation services than did the plaintiffs."
(Dunbar Report at 38). To make this determination, he "analyzed the
bidding and bid leveling data" which purportedly shows that "bids
submitted by Local 3 contractors for telecommunication installation
services are 46% higher than those submitted by CWA contractors." (Dunbar
Decl., ¶ 34; Dunbar Report, Exhs. V-l, V-2, V-3). Based on the data,
he also contended that "for those instances in which a CWA contractor was
the low bid, but the contract was awarded to a Local 3 contractor, the
customer paid on average 36% more than the low bid." (Dunbar
Decl., ¶ 34).
Because of what he identified as "anticompetitive leveraging," Dr.
Dunbar asserted that "Local 3 contractors have managed to coerce
consumers into hiring them at higher prices." (Dunbar Report at 40-41).
Out of 24 bids for which he had data on the winning bidder, he found that
a CWA contractor was chosen only three times and that a Local 3
contractor was chosen 20 times (and in one case the union affiliation was
unknown). (Dunbar Report at 41). This, according to Dr. Dunbar,
demonstrates that "Local 3 contractors are at or close to market
dominance" and that the practices at issue "pose a very real risk of
producing a market where the only firms supplying telecommunications
installation services are firms that use Local 3 workers. (Dunbar Report
After reaching the conclusion the plaintiff USIS has been injured by
the anticompetitive practices of the defendants, Dr. Dunbar addressed the
issue of damages. (Dunbar Report at 41-45). First, he identified the
various sources of damages as follows: (1) occasions where USIS won the
competition to provide telecommunications installation services, but
subsequently lost the contract to a Local 3 contractor; (2) projects
where USIS was not awarded a project even though it was the lowest
bidder, with the project ultimately going to Local 3; (3) the loss of
follow-up maintenance work on contracts USIS was not awarded; (4) costs
incurred by USIS due to vandalism committed on projects where USIS
was providing the telecommunications installation services; (5)
additional marketing, sales, and supervisory costs to "counter the impact
on prospective customers and their advisors from the anticompetitive
conduct of the ...