In March 2021, United States Department of Health and Human Services (“DHHS”) awarded Airboss Defense Group (“ADG”) a contract to supply 18,200,000 boxes of nitrile gloves by March 15, 2022. Under the contract, the government would pay ADG $12.98 per box of gloves and transportation costs of $2.85 per box. The total contract price was $288,106,000. Shortly after the contract award, Hutchins & Hutchins, Inc. (“H&H”), which represented various glove manufacturers, contacted ADG, and offered to assist ADG in meeting its obligations under the contract. Specifically, H&H arranged meetings between ADG and the glove manufacturer, Halyard.
On April 29, 2021, the two parties entered into an Non-Disclosure Agreement prepared by ADG. The negotiations which H&H facilitated between Halyard and ADG were initially unsuccessful and ADG purchased nitrile gloves from two other companies. But, in March 2022, ADG and Halyard entered into a contract for the purchase of nitrile gloves to fill a gap in deliveries from one of ADG’s other vendors. The company did not include H&H in its March 2022 deal with Halyard or obtain H&H’s permission to conclude any purchase of nitrile gloves. Because H&H “introduced” Halyard to ADG, and because ADG contracted with Halyard without first obtaining H&H’s written consent, the company alleges ADG violated the NDA’s non-circumvention provision and deprived H&H of profits it would have otherwise received through a finder’s fee or a resale.
Airboss Defense Group, LLC, filed a motion in limine to exclude expert testimony relating to (1) the total amount of damages and the calculation of such damages resulting from the alleged breach, (2) the opinions set forth in expert witness Roland Davis’ (“Davis”) supplemental report using the “Lehman Formula,” and (3) Davis’ testimony on the applicable gross profit margin.
Roland Davis’ Expert Reports
Davis opined that an 11.4%-13.4% gross margin from the ADG and Halyard transaction would have been “reasonable by the relevant industry standards” because the Waterstone Transaction gross margin “is well below Industry Standard Gross Margins.” In Davis’ second opinion, he opined that ADG would have expected that H&H would have benefited from the transaction between ADG and Halyard given the NDA, either through a resale of the product or through a finder’s fee.
On February 7, 2024, Davis supplemented his first expert report with a second report, rebutting ADG’s expert. In this supplemental report, Davis “opine[d] on accepted industry standards for calculating finder’s fees paid to intermediaries who bring businesses together and/or facilitate multimillion dollar commercial transactions between them.” Specifically, Davis opined that the “Lehman Formula” represents a standard method for calculating finder’s fees, although it is “often used in the mergers and acquisitions context.
Finally, Davis submitted two surrebuttal reports dated October 13, 2023, and June 25, 2024. These reports did not modify any of Davis’ prior opinions but responded to issues previously raised by ADG’s expert. Davis clarified the scope of his testimony in deposition, expressly stating that he would not be applying his gross profit margin opinion to any final calculation of damages. He also stated that his use of the Lehman Formula to determine an alternate value for the finder’s fee was urged on him by counsel and not something he independently would apply to a wholesale transaction like ADG’s glove purchase from Halyard.
Current Motion
ADG moved to exclude Davis’ testimony in its entirety. The company first argues that Davis should be precluded from opining on an amount of damages because Davis’ expert report does not include an opinion as to the total dollar amount of damages, and because Davis admitted in his deposition that he was not retained to provide a complete damages analysis. ADG also moved to exclude Davis’ opinions in his supplemental report, namely his use of the Lehman Formula.
ADG also moved to exclude testimony on the applicable gross profit margin, claiming that Davis’ opinion is not based on sufficient facts or data, is not the product of reliable principles and methods, and is based on cherry-picked data.
Business Valuation Expert Witness
Roland Davis serves as President of Davis Business Appraisers, Inc., where the company provides consulting services, business valuations, and machinery and equipment appraisals. Davis has decades of experience selling products to government agencies and appraising and valuing businesses engaged in similar government contract work.
He previously owned a company that sold products to the federal government as a wholesaler, and has twenty years of experience of M&A sales with experience selling federal government contractors and nine years of experience valuing private corporations, including government contractors and wholesalers.
Discussion by the Court
I. Davis is Precluded from Opining on the Calculation of Damages or the Total Amount of Damages
H&H conceded that “H&H did not retain Davis to offer an opinion as to what H&H’s ‘total dollar amounts of damages’ are or the calculation of those amounts.” Further, H&H stated that Davis “has not offered and will not offer an opinion as to what H&H’s total damages are or any calculations of those total damages.”
Given H&H’s assertions both in writing and at the hearing, the Court granted ADG’s motion, precluding Davis from providing any opinion as to the total calculation of damages or the precise calculation of what H&H’s damages would be. However, the Court permitted Davis to testify as to certain gross profit margin percentages, which—depending on other evidence—may be relevant to H&H’s claimed damages.
II. Davis is Precluded from Opining About Finder’s Fees Using the Lehman Formula
ADG argued that Davis’ use of the Lehman Formula to calculate a finder’s fee must be excluded because Davis disavowed this opinion at his deposition. ADG also argued that Davis’ Lehman Formula testimony should be excluded because the formula is most often used in the mergers and acquisitions context, not in transactions concerning the sale of personal protective equipment.
The Court held that Davis did not reach this conclusion by his own independent analysis. If his testimony were admitted solely on the basis of a lawyer’s instruction, it would leave ADG without any ability to test the reliability of his opinion before the jury. Because Davis testified that the Lehman Formula was an inappropriate measure of damages, his expert opinion that the Lehman Formula could be used to calculate a finder’s fee must be excluded.
III. Davis’ Opinions on the Gross Profit Margin as it Applies to an Intermediary in the Sale of Goods are Sufficiently Reliable under Federal Rule of Evidence 702
ADG took issue with several aspects of Davis’ gross profit margin testimony as it applies to both a resale transaction and a transaction including a finder’s fee, arguing that the testimony should be excluded as to both types of transactions. ADG also argued that Davis should be precluded from testifying about ADG’s expectations surrounding the transaction in entering into the NDA with H&H.
The Court held that Davis is permitted to opine as to what an applicable, reasonable, and below industry standard gross profit margin would be with respect to a resale transaction. However, Davis is precluded from testifying as to how this same gross profit margin calculation would apply to a transaction including a finder’s fee. Finally, Davis is precluded from opining on ADG’s expectations in entering into the NDA with H&H.
A. Testimony About the Gross Profit Margin as it Relates to a Resale Transaction
Regarding Davis’ resale transaction conclusion, ADG broadly asserted that Davis’ testimony on the applicable gross profit margin must be excluded because Davis is not a qualified expert, his opinion is not based on sufficient facts or data, his opinion is based on both cherry-picked and overbroad data, and his testimony is not the product of reliable principles and methods.
First, ADG claimed that Davis is not qualified to testify to the applicable gross profit margin as he lacks experience in the area of government contracts or the sale of medical supplies. Davis has significant experience as a business owner and appraiser. He evaluated, sold, and appraised wholesalers and became familiar with the terms of transactions similar to the present case over a period of many years.
Davis examined many transactions but selected the Waterstone Transaction as his closest comparator
Davis properly cited this experience in support of his opinions. At the outset, his report explained that the following opinions were “based on [his] review of the documents above, literature, financial data given to [him] by H&H, and his education and experience.” Davis relied on his experience several times throughout his deposition, backing his responses to questions ranging from pricing to financial data.
Further, Davis did not produce the 11.4%-13.4% gross profit margin range based on the Waterstone Transaction alone. In fact, as outlined in his report, Davis explained that his opinion about the gross profit margin range “is justified by two different sources.” He cited a higher average gross profit margin percentage from companies comparable in size to H&H of 27.15% in 2021 and 26.46% in 2022 as revealed from the Bizminer’s financial report to inform his opinion.
Additionally, he relied on the DealStats financial report to inform his conclusion. This financial report examined wholesalers within NAICS code 423450, the same code H&H falls within, compiling data from December 4, 1998, to December 28, 2018.
Davis singled out the Waterstone Transaction in his analysis because he believed it was the “most credible comparator available from H&H’s resale history.”
This Court recognized that Davis’ testimony is not perfect. But these flaws do not render otherwise admissible expert testimony inadmissible.
B. Testimony About the Gross Profit Margin as it Relates to a Finder’s Fee and ADG’s Expectations in Entering into the NDA
Regarding Davis’ finder’s fee conclusion, ADG asserted that this opinion should be excluded because it is based on an improper and unsupported assumption that the 11.4%-13.4% gross profit margin would be applicable to two different types of transactions, “whether the ultimate transaction was (a) a resale transaction in which H&H purchased nitrile gloves from Halyard and resold them to ADG or (b) if ADG purchased nitrile gloves directly from Halyard and H&H would have received some sort of finder’s fee.”
ADG also argued that this Court should exclude any testimony Davis provided speculating as to what ADG’s expectations would have been or were concerning the NDA because Davis provided no analysis or independent basis in reaching this conclusion.
After arriving at his opinion on gross margin and without any reliable explanation, Davis equated the gross profit margin for a resale transaction and for a transaction involving a finder’s fee, failing to distinguish between each type of transaction. The Court held that Davis did not have any cited basis to conclude that a finder’s fee would have been calculated in the same way as a resale gross profit margin estimate. Further, Davis cannot testify that in entering the NDA, ADG would have expected to pay H&H any finder’s fee, much less what that finder’s fee would have been.
Held
The Court granted in part and denied in part Defendant’s motion in limine to exclude the testimony of Plaintiff’s damages expert Roland Davis.
Key Takeaway:
The Court held that Davis’ gross profit margin opinion is rooted in data from H&H’s business practices and industry sources, and is therefore admissible.
The Court held that because of Davis’ reliance on financial reports, H&H’s financials, and his own experience, the reasoning underlying his proffered opinion is reliable, and his opinion as to the gross profit margin of a resale transaction may be relevant to facts at issue.
However, Davis cannot testify that in entering the NDA, ADG would have expected to pay H&H any finder’s fee, much less what that finder’s fee would have been.
The Court held that this testimony is unsupported by data or Davis’ relevant experience. Because Davis put forth such assertions with no independent analysis and with insufficient support, Davis is precluded from testifying that a 11.4%-13.4% gross profit margin would apply to a finder’s fee, or that ADG would have expected to pay H&H a finder’s fee of any kind in entering into the NDA.
Case Details:
| Case Caption: | Hutchins & Hutchins, Inc. V. Airboss Defense Group, LLC |
| Docket Number: | 2:23cv67 |
| Court: | United States District Court, Virginia Eastern |
| Order Date: | September 6, 2024 |
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