Plaintiff-Appellant Makina Ve Kimya Endustrisi A.S. (“MKE”) appeals from a judgment of the United States District Court for the Southern District of New York arising from MKE’s suit against Defendants-Appellees for their unauthorized use of MKE’s wordmark and logo in connection with soliciting customers to purchase MKE ammunition.
Pamela M. O’Neill has spent more than 30 years as a valuation professional and has directed more than 900 valuation assignments. Early in her career, she was called to testify before the New York Stock Exchange Arbitration Panel and was cited by the Panel as “an excellent expert witness”.
Her international valuation career has included significant assignments in North America, South America, Europe, Asia, the Middle East, Australia, and New Zealand. She has prepared expert reports for litigation purposes as well as for financial and tax reporting, dispute resolution, investigations, antitrust matters, negotiations, acquisitions, divestitures, reorganizations, solvency and bankruptcy.
To determine reasonable royalty damages, O’Neill calculated a royalty rate based on the royalty rates from six licensing agreements that she asserted were comparable to the license, and which would have resulted from a hypothetical negotiation between MKE and Defendants-Appellees for the “MKE” wordmark and logo when the infringement began. In doing so, however, O’Neill considered only the fact that the six licensing agreements concerned the same broad industry (“ammunition”) without accounting for any differences in the type of intellectual property, product, or royalty payment structure at issue. The District Court did not manifestly err in excluding the testimony on the ground that her royalty rate calculation was based on insufficient facts and data and that there was “simply too great an analytical gap between the data and the opinion proffered.”
O’Neill determined corrective advertising damages by calculating MKE’s combined spending on “Marketing, Sales, & Distribution” as a percentage of revenue for each year between 2013 and 2021, and applying the differential percentage spent in 2022 to the revenue MKE generated in 2022.
But this calculation provided O’Neill only with the total dollar amount MKE spent on all of marketing, sales, and distribution in 2022 over what it had spent historically, not how much of that spending constituted corrective advertising in response to Defendants-Appellees’ infringement. It was not error for the District Court to find that O’Neill’s conclusion lacked a sufficient factual foundation.
The Second Circuit found that the District Court properly excluded expert testimony that lacked sufficient factual foundation, as O’Neill’s reasonable royalty calculation failed to account for key differences between licensing agreements and her corrective advertising calculation was too speculative.
Held
The Second Circuit affirmed the District Court’s judgment in all respects, including the exclusion of O’Neill’s testimony.
Key Takeaway
A decision to exclude is not an abuse of discretion unless it is manifestly erroneous.
Case Details:
Case Caption:
Makina Ve Kimya Endustrisi A.S. v. A.S.A.P. Logistics LTD
Docket Number:
25-1807
Court Name:
United States Court of Appeals for the Second Circuit
Plaintiff State of Washington alleged that Novo Nordisk Inc. (“NNI”) caused physicians to prescribe its drug, NovoSeven®, to Washington hemophilia patients by: (1) promoting it “off-label” for prophylaxis and “high dose” use; (2) paying kickbacks to physicians; and (3) paying bribes to patients, all of which rendered claims to Medicare and Washington Medicaid false.
The State of Washington has been investigating this case for almost fifteen years, hoping to find evidence of unlawful conduct that allowed its Medicaid program to recoup money it paid for a medically necessary, life-saving drug.
The State of Washington filed a Daubert motion to exclude the testimony of Defendant NNI’s expert witness, Nicholas J. Janiga. Janiga’s report concluded that the compensation NNI paid to 12 healthcare providers between 2005 and 2016 was consistent with fair market value.
Washington challenged Janiga’s testimony because “his opinions are not premised on sufficient facts or data, nor are they the product of reliable principles and methods.”
For instance, Washington objected that Janiga analyzed only 12 physicians, and argued that he should have considered how many other consultants “in a position to prescribe NovoSeven” were paid by NNI. The Court, however, regarded this disagreement over the scope of discovery as merely a matter for cross-examination.
Business Valuation Expert Witness
Nicholas J. Janiga is an Accredited Senior Appraiser in Business Valuation by the American Society of Appraisers. He is currently the Managing Director of HealthCare Appraisers, Inc.
Janiga has extensive knowledge and experience in appraising healthcare business enterprises and medical professionals’ compensation. Moreover, he has extensive experience in analyzing the fair market value of healthcare transactions and arrangements involving the Anti-Kickback Statute (AKS).
First, Washington argued that Janiga incorrectly assumed that the physicians provided necessary bona fide services. It also claimed Janiga’s opinion omitted other benefits physicians received from NNI, such as expenses for meals, lodging, and travel, and assistance with writing and publishing medical scholarship.
NNI asked Janiga only to opine about whether the physicians’ compensation was fair market value. He was not asked to, and did not, opine on any other elements of the AKS’ “Safe Harbor.” Although the Court acknowledged that these were valid subjects for cross-examination, it held that they did not warrant disqualifying Janiga merely because of the limited scope of his study.
Washington also asserted that Janiga’s report did not account for the fact that NNI’s compensation structure is based on a physician’s “geographical sphere of influence.”
It argued that this compensation structure is improper because physicians may end up receiving work and compensation for the purpose of influencing other physicians. The Court viewed a physician’s influence in the medical community akin to stature and reputation. This is a valid factor in determining a physician’s compensation and affects the weight, not the admissibility, of Janiga’s testimony.
Finally, Washington argued that Janiga’s report did not mention that Craig Kessler, the Editor-in-Chief of the publication Haemophilia, received “revenue based compensation from that publication whose revenue was enhanced by [NNI’s] purchase of reprints.” Washington additionally contended that NNI directly paid Kessler for his advice on this case.
Since Kessler’s advice to NNI on this case pre-dates Washington’s allegations that NNI inappropriately paid Kessler, any compensation he received for his advice is not relevant to Janiga’s opinion that Kessler was compensated at fair market value.
Held
The Court denied Washington’s motion to exclude the testimony of Nicholas J. Janiga.
Key Takeaway:
Janiga has sufficient expertise and experience appraising healthcare enterprises and compensation arrangements. Basically, his knowledge, background, and opinions about whether NNI compensated the 12 physicians at fair market value satisfy Rule 702‘s requirement in that his testimony will assist the jury in understanding the evidence and determining facts in issue.
His testimony will be permitted because he is a qualified expert in the healthcare compensation appraisal through education, training, experience, knowledge, and skill, his report is based on sufficient facts or data, and his opinions are the product of the reliable application of principles and methods.
Please refer to the blogs previously published about this case:
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.
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
Plaintiff American Northwest Distributors Inc. (“ANW”) was the Washington distributor of Four Roses bourbon, produced by Defendant Four Roses Distillery LLC (“Four Roses”), for about five years from 2015-2020. In 2020, after a pattern of late payments from ANW, Four Roses terminated the distribution agreement and switched to a competitor, Young’s Market Company, LLC (“Young’s Market”). ANW went to arbitration with Young’s Market, as provided for in Washington’s statutes regulating liquor distribution, and the arbitrator awarded ANW what she found to be the fair market value of ANW’s lost distribution rights.
After the arbitration, ANW sued Four Roses, claiming Four Roses had breached the parties’ contract and interfered with ANW’s other business relationships, causing ANW damages beyond what it received from Young’s Market in arbitration. Four Roses counterclaimed for invoices ANW had never paid.
ANW has retained Neil Beaton to analyze and determine the damages it has incurred as the result of Four Roses’ wrongful termination of ANW’s distribution agreement.
Four Roses filed a motion to exclude ANW’s expert witness, Neil J. Beaton. Four Roses first argued that Beaton’s testimony regarding ANW’s lost profits is inadmissible because ANW cannot recover those profits as a matter of law, so that any testimony on this issue is “not helpful to the trier of fact.” The Court held that ANW may seek such recovery under common law contract claims and Four Roses’ argument on this point is unpersuasive. Four Roses also contended that Beaton’s testimony is a “rehash” of the damages he attested to in arbitration. While there may be overlap in Beaton’s financial figures, there are genuine disputes between the parties as to how that impacts the damages analysis in this case.
Business Valuation Expert Witness
Neil Beaton is a Managing Director with Alvarez & Marsal Valuation Services in Seattle. He specializes in the valuation of public and privately held businesses and intangible assets for purposes of litigation support (lost profits claims, marriage dissolutions and others), acquisitions, sales, buy-sell agreements, ESOPs, incentive stock options and estate planning and taxation. He also performs economic analysis for personal injury claims, wrongful termination and wrongful death actions.
Four Roses also questioned the reliability of Beaton’s financial projections, asserting that they are overly optimistic and lack “reasonable certainty.” The Court held that while Beaton’s projections may be “optimistic,” that does not make his testimony unreliable if he lays an acceptable foundation for those calculations.
Beaton has disclosed his assumptions and methodology for projecting lost profits, and Four Roses has not shown that those methods lack a reliable basis in the knowledge and experience of Beaton’s discipline. Four Roses can challenge Beaton’s approach at trial, but his choice of assumptions does not render his testimony inadmissible—only more or less persuasive when evaluated as a whole.
The judge at arbitration took a similar approach, recognizing that Beaton held undeniable expertise in business valuation—but the assumptions upon which he applied that expertise did not lead to a persuasive conclusion.
As the judge at arbitration recognized, business valuation “is as much an art as a science.” Four Roses did not challenge Beaton’s methods—it questioned the growth assumptions and discretionary factors that were necessary to financial projections and challenged the figures he arrived at.
Beaton’s convoyed sales estimate relied on the assumption that Four Roses’ conduct interfered with ANW’s sales relationships. Beaton’s testimony regarding “convoyed sales,” however, is no longer relevant, even if it could be considered reliable (an issue the Court need not decide). Beaton opines that ANW’s sales of Four Roses products motivated its customers to buy more products overall—such that Four Roses’ termination negatively impacted these purchases. In light of the Court’s determination, however, that Four Roses did not tortiously interfere with ANW’s other business relationships, Beaton’s “convoyed sales” testimony is no longer relevant and will be excluded.
Held
In conclusion, the Court denied Four Roses’ motion to strike the testimony of Neil J. Beaton as to testimony regarding lost profits and other damages and granted it as to testimony regarding ANW’s loss of “convoyed sales.”
Key Takeaway:
The Court has “broad latitude” in determining an expert’s reliability and finds no reason to question the reliability or relevance of Beaton’s testimony on lost profits under Rule 702. Moreover, Beaton has disclosed his assumptions and methodology for projecting lost profits, and Four Roses has not shown that those methods lack a reliable basis in the knowledge and experience of Beaton’s discipline.
Case Details:
Case Caption:
American Northwest Distributors Inc V. Four Roses Distillery Llc
Docket Number:
2:22cv1265
Court:
United States District Court for the Western District of Washington
In this trademark infringement action, Plaintiffs, Makina Ve Kimya Endustrisi AS (“MKE”) accused the Defendants, A.S.A.P. Logistics Ltd. of engaging in massive fraud when they offered to sell millions of rounds of Plaintiff’s military goods, to multiple purchasers, without permission or right.
MKE’s damages expert, Pamela O’Neill, opined that MKE suffered millions of dollars in damages. She offered three alternative bases of calculating MKE’s alleged damages: $11.175 million for a reasonable royalty, $7.4 to $8.1 million for corrective advertising costs, or a “floor calculation” of $4.34 million for lost profits from a single customer. Defendants moved to have O’Neill’s opinions excluded.
Reasonable royalties are an especially bad fit here, where there was no licensing agreement ever contemplated between the parties, no sales related to the infringing use, and no rationale for why a licensing agreement would have ever been agreed to.
Business Valuation Expert Witness
Pamela O’Neill has spent more than 30 years as a valuation professional and has directed more than 900 valuation assignments. Early in her career, she was called to testify before the New York Stock Exchange Arbitration Panel and was cited by the Panel as “an excellent expert witness”.
Her international valuation career has included significant assignments in North America, South America, Europe, Asia, the Middle East, Australia, and New Zealand. She has prepared expert reports for litigation purposes as well as for financial and tax reporting, dispute resolution, investigations, antitrust matters, negotiations, acquisitions, divestitures, reorganizations, solvency and bankruptcy.
The Court held that O’Neill’s use of a reasonable-royalty model is not a fit for the facts of this case.
In addition, her calculation of the royalty rate is plainly unreliable. Since O’Neill could not rely on a licensing agreement that the parties had with each other or with third parties, she attempted to identify comparable licensing agreements. But the six licensing agreements she cites are far from comparable. O’Neill did not actually review the licensing agreements themselves. Instead, she reviewed summaries of transactions available on a database. Also, Defendants say that two other transactions involved celebrity endorsement deals. O’Neill’s report does not acknowledge any of these differences or explain how she accounted for them in her calculation.
O’Neill applied a royalty rate of 5% (gleaned from these allegedly comparable licenses) not to Defendants’ sales—because there were none—but rather to two transactions that resulted in no sales: an unsigned contract with TD Group for $216 million, and an unfulfilled $7.5 million purchase order and invoice relating to M42, resulting in a calculation of $11.175 million in damages.
In selecting these transactions, her report simply states that they were chosen because TD Group and M42 “intended to enter into and be bound by these contracts.” O’Neill does not point to any evidence that a hypothetical negotiation between the parties would have been informed by these deals (which arose after the infringement commenced), anything in the parties’ dealings with each other or third parties that would support their use, or anything from the allegedly comparable licenses to support this kind of royalty base. Plus, O’Neill does not even address the fact (which MKE does not dispute) that the TD Group contract allowed the purchase of “up to” $216 million in ammunition but did not have any minimum purchase requirement.
Lost Profits
Defendants did not put forward a traditional lost-profits model of damages, and O’Neill confirmed that there was insufficient evidence to support such a model.
MKE pointed to O’Neill’s expert report, which it says “directly ties Defendants’ misconduct to MKE’s lost profit damages.” MKE says that O’Neill relied on an interview she did with John Sharpley, the individual who handles procurement and contractual issues for non-party Shawnee Outdoors, in reaching her conclusions. Sharpley allegedly told O’Neill that he had conversations with Bear Tactical’s CEO. But “a party cannot call an expert simply as a conduit for introducing hearsay under the guise that the testifying expert used the hearsay as the basis of his testimony.”
MKE contended that O’Neill may properly rely on otherwise inadmissible “facts or data” as a basis for her opinion. But here MKE is just using O’Neill to skirt the rules of evidence by having her relay double hearsay to the jury on an issue of historical fact as to which her expert opinion would not be permitted—the reasons for Bear Tactical’s termination of its contract. O’Neill’s testimony cannot serve as factual support that MKE’s lost profits from Bear Tactical can be attributed to Defendants.
Due to the lack of admissible evidence linking MKE’s claimed lost profits to Defendants, the Court did not consider Defendants’ motion to exclude O’Neill’s lost-profits calculations.
Corrective Advertising
The Court held that O’Neill’s so-called expert analysis simply involved a calculation of the relative increase in MKE’s “Marketing, Sales & Distribution” expenses for the first half of 2022. As a threshold matter, the Court notes that while O’Neill’s report was required to include “a complete statement of all opinions the witness will express and the basis and reasons for them,” her discussion of corrective advertising damages is limited to two paragraphs and a related exhibit containing calculations. Those paragraphs and the exhibit don’t explain the specifics of what the “Marketing, Sales & Distribution” category contains, does not explain why advertising—as opposed to some other factor—accounted for the increase in that line-item for 2022, and provides no basis—not even explaining conversations had with MKE—to attribute that increase to corrective advertising due to Defendants’ conduct.
O’Neill admitted that she did not know what was encompassed within the sales component or the distribution component of the figure and said the expenses that these categories may include are different for each company.
The Court held that O’Neill therefore lacked reliable basis to conclude that the increase of the “Marketing, Sales & Distribution” figure (which may or may not have included MKE’s advertising that may or may not have taken place in response to Defendants’ conduct) was an accurate approximation of corrective advertisement in this case.
As the Court can see, O’Neill did not rely on any information, such as the underlying expenses that made up the financial data. In fact, MKE never provided O’Neill that data despite her specific requests.
Held
The Court granted in part the Defendants’ motion to exclude Pamela O’Neill’s opinions.
Key Takeaway:
The Court cannot ignore the limited number of licensing agreements that O’Neill considered, the differences identified between those licensing agreements and the alleged hypothetical negotiation here, and O’Neill’s failure to acknowledge or account for these differences in her report.
The Court noted that O’Neill was left to rely on MKE’s sayso that calculating the change in the “Marketing, Sales & Distribution” expenditure would measure corrective advertisement. And since the Court does not even know who provided O’Neill these assurances, the Court cannot verify just how reliable that source of information was. All to say, as an expert witness, O’Neill was not permitted to simply rely on her client’s assurances that it expended money.
Case Details:
Case Caption:
Makina Ve Kimya Endustrisi A.S V. A.S.A.P. Logistics Ltd Et Al
Alan Solomon with the University of Tennessee (“UT”) developed the 11-1F4 antibody, and the “ownership of the Antibody materials and associated materials are held by Plaintiff.” The Antibody is effective in treating amyloidosis.
In 2009, Solomon applied for and received two different orphan drug designations for two indications of the 11-1F4 Antibody. Defendant Caelum Biosciences, Inc. was founded to advance the clinical development research from Solomon. Plaintiff University of Tennessee Research Foundation alleged that Defendant’s “sole focus and mission was to commercialize the Antibody technology, which it has renamed to CAEL-101.”
Plaintiff entered into several different agreements relating to the Antibody. In 2013, Plaintiff entered an Inter-Institutional Agreement (“IIA”) with former party, The Trustees of Columbia University in the City of New York (“Columbia” or “Columbia University”), allowing it to work on clinical trials with respect to the Antibody.
According to Plaintiff, in 2017, Defendant “began publishing press releases containing false statements regarding the ownership of the 11-1F4 technology, [made] false disclosures on its website, and . . . [made] false disclosures with the U.S. Food and Drug Administration claiming that it had licensed the 11-14F4 technology from Columbia University and that [Defendant] was now the owner of the 11-14F4 Orphan Drug Designations.”
Defendant retained Neil J. Beaton, a certified public accountant, as its damages expert. University of Tennessee Research Foundation (“UTRF”) requested that the Court exclude several opinions of Neal J. Beaton pursuant to Federal Rule of Evidence 702.
Business Valuation Expert Witness
Neil Beaton is a Managing Director with Alvarez & Marsal Valuation Services in Seattle. He specializes in the valuation of public and privately held businesses and intangible assets for purposes of litigation support (lost profits claims, marriage dissolutions and others), acquisitions, sales, buy-sell agreements, ESOPs, incentive stock options and estate planning and taxation. He also performs economic analysis for personal injury claims, wrongful termination and wrongful death actions.
Specifically, UTRF requests that the Court preclude Beaton from testifying that: (1) the release between UTRF and Columbia University “shows that UTRF itself did not regard the UTRF Assets … as having any value”; (2) “the evidence shows that UTRF itself placed little or no value on the UTRF Assets”; (3) “the alleged trade secrets UTRF has identified in this case are generally known in the industry and/or are readily ascertainable,” making damages unavailable; and/or (4) opining that UTRF only is entitled to damages of $371,600 if it prevails against Caelum in this lawsuit.
Specifically, Plaintiff pointed to paragraphs 36, 44, and 45 of Beaton’s expert report. These paragraphs provided as follows:
36. This broad release of “all claims and liability” shows that UTRF itself did not regard the UTRF Assets as of June 12, 2017 as having any value.
44. Since UTRF essentially abandoned the UTRF Assets and Solomon transferred the Investigational New Drug (“IND”) for nothing in return, the evidence shows that UTRF itself placed little or no value on the UTRF Assets.
45. As I understand is detailed in other reports being served by Caelum, the alleged trade secrets UTRF has identified in this case are generally known in the industry and/or are readily ascertainable from publications, presentations, ATCC deposits, patents, and/or other proper means such that no real economic value would be obtained from their disclosure. Thus, it is my understanding that UTRF cannot recover damages for its trade secret misappropriation claim.
Beaton’s first two opinions would not assist the trier of fact
The Court found that the first and second opinions were not within Beaton’s specialized knowledge such that they would assist the trier of fact. Beaton acknowledged that his first opinion is based on the Court’s order dismissing Columbia from this case. And his second opinion is based on his interpretation of the facts of the case, including Solomon transferring the IND without compensation.
Beaton’s third opinion is not helpful to the jury
For his third opinion, Beaton stated that his understanding is that Plaintiff cannot recover damages because other experts have opined that Plaintiff’s purported trade secrets are generally known in the industry and/or are readily ascertainable. Plaintiff argued that this testimony is not helpful but additionally, it asserted that the “rules do not permit an expert to rely on opinions developed by another expert for purpose of litigation without independent verification of the underlying expert’s work.” Experts are permitted to rely on another expert’s opinion “[i]f experts in the particular field would reasonably rely on those kinds of facts or data in forming an opinion on the subject.”
Even so, the Court found Beaton’s testimony on this issue was not helpful to the jury. Beaton is essentially stating that if there are no trade secrets, Plaintiff’s damages are zero. But the jury need not hear from an economist to reach that conclusion. The Court therefore found Plaintiff’s arguments well taken on this ground.
The Reliability of Beaton’s Opinions
Plaintiff challenged Beaton’s alternative opinion that should Plaintiff prevail on its claims, it is entitled to only $371,600. It argued that “Beaton’s conclusion is based on incorrect facts and lumps together [Plaintiff’s] breach of contract and trade secret misappropriation claims,” rendering his opinion unreliable.
Plaintiff stated that in its Amended Complaint, it alleged that Defendant breached the Confidentiality Agreement executed on March 14, 2017, but in assessing damages on the breach of contract claim, Beaton used a date of January 1, 2017—more than two months before the contract existed. Plaintiff stated that his reliance on January 1, 2017, to calculate damages is unreliable.
Defendant responded that Beaton evaluated the UTRF Assets using the date of January 1, 2017, because this is when the 2017 Caelum/Columbia Agreement was executed. Beaton explained that choosing a different date would not affect his damages calculation. Plaintiff argued that although it has separate claims for breach of contract and trade secret misappropriation, “Beaton did not provide separate damages opinions for these claims.”
The Court could not conclude that Beaton’s opinions were unreliable or unhelpful simply because he performed an aggregate damages calculation. Plaintiff cited no authority for the proposition that an aggregated damages calculation is inherently unreliable, and to the extent the jury finds Defendant liable on the trade secret misappropriation claim and the breach of contract claim, Beaton’s opinions are helpful. The Court found cross examination and jury instructions are more appropriate than exclusion on these grounds.
Held
To conclude, the Court granted in part and denied in part the Plaintiff’s Daubert motion to exclude the testimony of Neil J. Beaton.
Key Takeaways:
Experts are permitted to rely on another expert’s opinion “if experts in the particular field would reasonably rely on those kinds of facts or data in forming an opinion on the subject.”
The Court found that Beaton’s opinions regarding the value or lack thereof of Plaintiff’s trade secrets are not helpful to the jury.
At the same time, the Court found Beaton’s damages calculation reliable and helpful.
Moreover, Beaton essentially stated that if there are no trade secrets, Plaintiff’s damages are zero. The Court held that this type of conjecture claiming ‘if there was no violation, there are no damages’ does not require expert testimony; it is a rhetorical argument to make to the jury.”
Case Details:
Case Caption:
University Of Tennessee Research Foundation V. Caelum Biosciences, Inc.
Docket Number:
3:19cv508
Court:
United States District Court for the Eastern District of Tennessee
A district judge in Florida limited the testimony of a Business Valuation Expert Witness because he did not identify how exactly the CFO breached his unidentified standard of care.
This case arises out of Nextplat’s termination of its former Chief Financial Officer (“CFO”), Thomas Seifert. Nextplat contended in its Second Amended Complaint (among other things) that Seifert breached his employment contract with Nextplat and sought damages as a result. Specifically, Nextplat claimed that Seifert’s errant administration of a $45,000.00 wire in response to a phishing scam breached the section of the employment agreement that required him to act “with such duties, responsibilities and authority as are commensurate and consistent with his position, as may be, from time to time, assigned to him by the [Nextplat board of directors].”
The bulk of Nextplat’s breach of contract claim, then, hinged on whether Seifert adequately complied with that subsection of the employment agreement. To support its case, Nextplat sought to elicit testimony from Gary Moll, CPA, MSA, to opine on Seifert’s duties and responsibilities as CFO and whether Seifert’s adequately performed those duties and responsibilities. Seifert, of course, disputed that he breached the employment agreement and disputed that he acted beneath the CFO standard of care incorporated by the employment agreement.
Seifert filed a motion to strike the testimony of Gary Moll on February 3, 2023.
Business Valuation Expert Witness
Gary A. Moll is the Director of Forensic & Valuation Services at Fiske & Company, a CPA firm specializing in business valuation and litigation support services. He joined Fiske & Company in 2022 and has provided business valuation and litigation support services to manufacturers, wholesalers, retailers, medical practices, restaurants, service entities, and family limited partnerships, including valuing intangibles and intellectual property. He is a frequent speaker on topics such as business valuation, economic damages, and forensic accounting and has written articles on these topics. Additionally, he is a member of the American Institute of Certified Public Accountants (“AICPA”) Forensic & Valuation Section (“FVS”).
The Court first addressed Seifert’s argument that Moll should be excluded because he was not timely disclosed as an expert.
After both parties moved for deadline extensions, the Court extended the deadline for disclosing expert witness summaries and reports to November 11, 2022. Subsequently, the Court ordered that the parties disclose their expert reports on or before December 19, 2022. Seifert argued that, while Moll’s expert report was filed on December 19, 2022, Moll’s expert summary was not disclosed before November 11, 2022, nor was he even disclosed as an expert witness. Essentially, then, Seifert had no idea that Moll was going to be an expert witness—despite the November 11 deadline to disclose expert summaries—until on December 19 when his full expert report was disclosed. The proper remedy for this failure to disclose, argued Seifert, was to strike Moll as an expert witness.
Even if a disclosure is untimely, there must be resulting harm. The Court observed that Seifert still had (and will have) adequate time to prepare for Moll’s testimony.
The Court acknowledged Nextplat’s failure to adequately and timely disclose its expert witness. But Seifert suffered no prejudice and thus had no remedy under Rule 37(c)(1) since that failure was promptly cured.
B. Whether Moll is qualified
Seifert argued that Moll’s undisputed experience as a Certified Public Accountant (“CPA”), CFO, and financial analyst did not qualify him to render opinions in this case. Specifically, Seifert argued that Moll had not served as a CFO for a publicly traded company, and that his curriculum vitae failed to specify the amount of time for which he served in his roles. Further, Seifert took issue with the fact that Moll had never written internal accounting controls.
Moll’s testimony and expert report indicated that he had experience as a financial analyst for a company that underwent the IPO process, had served as a CFO, and had CPA experience relevant to internal control issues. Given Moll’s experience serving in positions and in factual situations relevant to this case, the Court found that Moll is at the very least “minimally qualified” to serve as an expert witness in this case.
C. Whether Moll’s methodology is reliable
In Moll’s expert report, he rendered two expert opinions still relevant to this case: (1) that the “CFO is tasked with creating systems and controls to ensure the safeguarding of company assets” and ensuring compliance with those controls; and (2) that Seifert’s administration of the errant $45,000.00 phishing scam wire fell “far short of proper conduct of a CFO.”
Seifert argued that Moll, in reaching his expert opinions, employed no accepted method or analysis; rather, he just offered his personal, unsubstantiated judgment as to what the CFO should have done. As Seifert characterized it, Moll’s report was primarily “based on his review of various articles, internet searches, and the allegations provided by Nextplat’s counsel.”
Seifert bolstered this argument with the fact that Moll largely inherited the file from two of his associates, and relied substantially on their research and investigation to draw his conclusions.
Seifert argued that Moll’s experience did not carry the burden of rendering his opinion reliable—this was in fact his first time researching the “niche area of cyber security and the CFO’s role.”
1.Moll’s opinion as to the responsibilities of a CFO
Moll concluded that “the CFO is tasked with creating systems and controls to ensure the safeguarding of company assets on a company-wide basis, and additionally, has responsibility for following those controls and safeguards in place.”
The Court noted that Moll has experience as a CFO; as a financial analyst working closely with a CFO for a company who was undergoing the IPO process; and as a CPA and auditor. His experience in this arena is coupled with his review of relevant SEC guidelines and other scholarly articles on the topic.
While Moll did not employ a peer-reviewed methodology to conclude that CFOs are responsible for implementing and ensuring compliance with certain internal controls, Seifert did not suggest a method that should have been used instead, nor did he point the Court even to the existence of such a method for this niche, non-scientific request.
The Court held that Moll’s testimony—based on his review of scholarly articles, the materials in this case, and Nextplat’s policies (or lack thereof); and his professional judgment—passed the threshold of reliable testimony under Daubert. If Seifert finds his testimony to be “shaky” or wishes to attack the factual underpinnings of Moll’s opinion, he can do so before the jury.
2.Moll’s opinion as to whether Seifert fell short of the proper conduct of a CFO
Moll concluded that Seifert’s errant administration of the Phishing Wire fell “far short of proper conduct of a CFO.”
The Court acknowledged Moll’s general qualifications but held that Moll’s experience and methodology were not sufficient to produce reliable findings.
Moll admitted that assessing whether Seifert’s actions conformed with a CFO’s standard conduct was more of a “one off” than it is a “typical type project” for which he is engaged as an expert. In fact, Moll had never assessed whether a CFO has complied with his duties.
Moreover, Moll’s auditing experience did not include “an audit of internal controls,” and did not include “cybersecurity risk assessment measures.” Additionally, Moll’s audit experience involved private—not public—companies, and involved audits that he did not “run or manage.”
Moll concluded that it is the CFO’s job to “develop internal controls to prevent or to preserve the security of the assets of the company.” Moll plainly admitted that he did not know what internal controls Seifert should have put in place.
The Court held that the lack of relevant experience and expertise could not be overcome on a reliability analysis, especially when Moll concluded with certainty that Seifert’s actions fell “far short” of proper conduct. Also, a pivotal area of this case is cybersecurity—i.e., the area in which Moll believed Seifert acted below standard. Moll conceded in his deposition that this case represented his first time researching the “niche area of cyber security and the CFO’s role.”
Moll did not explain how he arrived at his conclusion that Moll breached his standard of conduct as CFO, leaving the Court to infer that, simply, Moll made a judgment call.
D. Whether Moll’s testimony will assist the trier of fact
For this analysis, the Court addressed only the portion of Moll’s proffered testimony that was deem reliable; i.e, that “the CFO is tasked with creating systems and controls to ensure the safeguarding of company assets on a company-wide basis, and additionally, has responsibility for following those controls and safeguards in place.”
Seifert’s argument as to this prong was primarily aimed at the portion of Moll’s testimony that the Court held to be unreliable (i.e., the Seifert fell short of the proper conduct of a CFO). But to the extent Seifert may argue that the reliable portion of Moll’s testimony is unhelpful, the Court disagreed. Here, it would certainly aid a jury to hear from a proffered expert that the SEC requires internal controls, the burden to implement those controls falls on the CFOs of publicly-traded companies, and those controls should include cybersecurity measures. The nature of Moll’s testimony (i.e., the duties and expectations of a CFO in publicly-traded companies in the context of cybersecurity) clearly goes beyond the “understanding and experience of the average citizen.”
Additionally, much, if not all, of Seifert’s argument in this area attacked the implications of the factual underpinnings of Moll’s testimony. But it is well established that Seifert can attack those factual underpinnings at trial.
E. Whether Moll’s Limited Testimony is Misleading Under Rule 403
As for Seifert’s argument that Moll’s testimony is likely to mislead, confuse, and persuade the jury to follow his opinions, the Court addressed only the portion of Moll’s proffered testimony about the CFO being tasked with creating systems and controls to ensure the safeguarding of company assets.
To this point, Seifert’s only argument concerned the portion of Moll’s testimony that was already deemed unreliable; i.e., that Seifert breached the proper conduct of a CFO. And specifically, at the heart of that argument was Seifert’s viewpoint that Moll would offer an impermissible legal conclusion as to Seifert’s conduct. Seifert advanced no argument that the other, reliable portion of Moll’s testimony violated 403—especially because his legal conclusion concerns did not extend to Moll’s standard-based testimony. Accordingly, this issue was effectively moot.
Held
The Court granted the Defendant’s motion to exclude Moll’s opinion and testimony as to whether Seifert’s conduct here fell “far short of proper conduct of a CFO.” The Court denied the Defendant’s motion in all other respects.
Key Takeaway:
Moll never assessed whether a CFO had performed within his standard of care; had never researched cybersecurity; had not suggested what internal controls Seifert should have put in place; had not analyzed how Seifert breached his un-identified standard of care; had not identified the methodology he used to conclude that Seifert breached that standard of care; and did not, it appears, complete the bulk of the relevant research in his report. Moll’s invalidating testimony, lack of methodology, and dearth of direct experience undermine the reliability of his opinion that Seifert acted beneath the proper standard of conduct for a CFO.
Yet, Moll’s opinion about the responsibilities of a CFO —based on his experience as CFO, financial analyst, and CPA of similarly-situated companies; his review of scholarly articles, the materials in this case, and Nextplat’s policies (or lack thereof); and his professional judgment—passed the threshold of reliable testimony under Daubert.
Massimo Motor Sports, LLC (“Massimo”) and the Defendants were engaged in the manufacturing and sale of sports vehicles, such as utility terrain vehicles (UTVs) and all-terrain vehicles (ATVs). The moving Defendants included Shandong Odes Industry Co., Ltd. (“Shandong”), Odes Usa Inc. (Cal) (“Odes Cal.”), Odes Usa Inc. (Tex) (“Odes Tex.”), Lil Pick Up, Inc. (“Lil Pick Up”), SMG Distribution & Associates, Inc. (“SMG”), 14078 Meridian, Parkway Inc. (“Meridian”), and Nathan D. Threet (“Threet”).
Plaintiff Massimo acted as a distributor of specific ATVs and UTVs in the United States for Shandong, a manufacturer while Lil Pick Up, Meridian, SMG, and Odes Cal. worked in various capacities to facilitate the sales and distribution of these products. Threet served as the Chief Operating Officer for Massimo before accepting a consulting position for Odes Cal. Following the dissolution of the relationship between Massimo and Shandong, Massimo initiated legal proceedings alleging trademark infringement, breach of contract, trade secret misappropriation, unfair competition, cybersquatting, tortious interference, false designation of origin, breach of the implied covenant of good faith and fair dealing, breach of the duty of loyalty, and unjust enrichment.
Massimo’s expert, Bryan M. Van Uden, served reports calculating Massimo’s damages. The Defendants moved to strike and exclude some of Uden’s opinions, including: (1) all damage opinions relating to Massimo’s trademark infringement, false designation of origin, and unfair competition claims, (2) all damage opinions relating to Massimo’s breach-of-contract claim against Threet, (3) any damage opinion relating to Massimo’s claims for trade secret misappropriation and cybersquatting, (4) any damage opinion assessing damages against SMG or Meridian, and (5) any damage opinion relating to trademark infringement, false designation of origin, or unfair competition calculated against Threet.
Defendants’ expert, Christopher Earle also served reports assessing the damages. On November 15, 2022, the parties had exchanged their experts’ opening reports regarding damages. By January 17, 2023, they had also exchanged their rebuttal expert reports. Then, on April 4, 2023, the Defendants had served Earle’s first amended supplemental report, followed by Massimo’s service of its supplemental report and supplemental rebuttal report on April 17, 2023. Earle’s opening report on November 15, 2022, rebuttal report on January 17, 2023, and first amended supplemental report on April 4, 2023, would be collectively referred to as “Earle’s Initial Reports. The Court’s scheduling orders had mandated completion of discovery by May 26, 2023, and filing of any Daubert motions by July 21, 2023. However, on May 24 and May 26, 2023, the Defendants provided Massimo with nearly 500 new documents containing financial data. Subsequently, Massimo deposed Earle on May 31, 2023. Then, on July 14, 2023, Defendants served Massimo with Earle’s second amended report and a new rebuttal report, referred to as “Earle’s July 2023 Reports”. Massimo had not been given the opportunity to depose Earle regarding these new reports, which Massimo argued were untimely. Nonetheless, the Defendants contended that the Court’s scheduling order had allowed exchanging reports until September 6, 2023.
On July 21, 2023, Massimo had filed a motion to exclude certain aspects from Earle’s Initial Reports, specifically targeting (1) Earle’s affirmative testimony about Shandong’s breach of contract counterclaim, and (2) Earle’s rebuttal testimony regarding the Defendants’ costs associated with selling vehicles that Massimo claimed infringed its trademarks. Following this, Massimo had also filed a motion to strike Earle’s July 2023 Reports, arguing that they were untimely and consisted of entirely new opinions and documents.
Financial Expert Witness
Bryan M. Van Uden serves as the Managing Director at Ocean Tomo, a division of J.S. Held, where he leverages over 20 years of expertise in financial consulting. His specialization lies in valuations, dispute analysis, and strategies aimed at enhancing business operations and profitability. Van Uden has a wide array of experience in patent infringement, trademark infringement, copyright infringement, misappropriation of trade secrets, securities violations, veil piercing, breach of contract, personal injury, wrongful termination, unfair business practices, and business and intellectual property valuation. He pursued his Master of Business Administration from the University of Mississippi and also holds a Bachelor of Applied Science in Strategic Management from Louisiana State University.
Business Valuation Expert Witness
Christopher Earle, the Managing Director of Business Valuation at Reynolds & Earle, LLC, has over 20 years of experience in overseeing and conducting analyses related to various aspects of commercial litigation, intellectual property infringement litigation, insurance claims, business disputes, and valuation disputes. His extensive litigation case background encompasses areas such as lost profits, incremental profits, fixed and variable costs, valuation, diminution in value, and apportionment. Earle earned his Master of Business Administration from the University of Dallas, Graduate School of Management, after graduating with a Bachelor of Arts in Economics from the University of Dallas, Constantine College.
Discussion by the Court
The motion to exclude Van Uden’s opinions had raised three key issues: (1) whether or not Van Uden needed to calculate damages for trademark infringement using separate calculations for each individual trademark, (2) whether the lost profits resulting from Threet’s alleged breach must account for other variables potentially influencing lost sales, and (3) whether Van Uden should be prevented from offering damages opinions for certain causes of action that the Defendants believed he had not already addressed.
The Defendants argued that Van Uden’s opinions regarding Massimo’s trademark infringement claims were flawed citing his failure to break down his calculations separately by each of Massimo’s alleged trademarks. However, the Court noted that the Defendants did not cite any case law where a Court had excluded a damages expert’s report for this reason. Massimo’s trademark infringement claim involved alleged infringement upon eight of its trademarks, and Van Uden’s damages calculation aggregated the Defendants’ infringing sales for all eight of Massimo’s alleged trademarks. The Defendants argued that this method was unreliable because Massimo needed to establish likelihood of confusion for each trademark independently for liability purposes. However, the Court disagreed, finding no inherent unreliability in an aggregate damages calculation. Therefore, the Court denied the Defendants’ motion to exclude Van Uden’s damages calculation based on aggregating all of the Defendants’ alleged infringing sales.
The Defendants argued that Van Uden’s opinions on lost profits resulting from Threet’s breach of contract and the Defendants’ tortious interference were unreliable considering they ceased to eliminate alternative causes of the lost profits. However, the Court disagreed, stating that ruling out potential alternative variables was not an admissibility issue, noting that many cases in the district had rejected this argument. Therefore, the Court denied the Defendants’ motion regarding Van Uden’s Threet-related lost profits calculations.
The Defendants sought the Court’s instruction that Massimo could not apply Van Uden’s damages opinions to certain Defendants against whom Massimo had not put forth specific claims. They specifically requested the exclusion of any Van Uden opinions supporting Massimo’s trade secret misappropriation claims against Lil Pick Up or Meridian, as Massimo’s second amended complaint had excluded them as Defendants as to those claims. However, as there was no such existing Van Uden opinion to exclude, the Court declined to make that kind of instruction at the time. Additionally, the Court refused to prohibit Van Uden from offering any damage testimony or evidence against SMG or Meridian, as the Defendants had not adequately demonstrated that he failed to opinions against these Defendants. Therefore, the Court denied the Defendants’ motion to exclude opinions that Van Uden had not made and potential damage opinions against SMG and Meridian.
The Court initially addressed the timeliness concern regarding Earle’s July 2023 Reports. Due to a prior amended scheduling order, which set expert disclosures after the deadline for motions to strike (July 21, 2023) and the close of discovery (May 26, 2023), the parties faced a dilemma. In fairness, the Court decided to grant Massimo the opportunity to redepose Earle on Earle’s July 2023 Reports. Massimo could then file any motion to strike or exclude after the deposition, and Massimo’s own expert could serve a rebuttal report to Earle’s second amended report. Consequently, the Court denied the motion to clarify/amend the Court’s scheduling order and strike Christopher Earle’s July 14, 2023 expert reports.
The Court, while addressing the the timeliness issue regarding Earle’s July 2023 Reports in Massimo’s motion to exclude, noted that both parties acknowledged that Earle’s July 2023 Reports significantly altered his Initial Reports. The Defendants contended that the new reports mooted a lot of the issues raised in Massimo’s motion to exclude because Earle’s July 2023 Reports addressed errors raised in Massimo’s motion and were based on new information and documents. Massimo’s motion focused on several aspects: Firstly, it sought to exclude Earle’s affirmative testimony on Shandong’s breach of contract counterclaim, including his relief from royalty opinion deeming it irrelevant and unreliable, as well as his unjust enrichment calculation. Additionally, Massimo aimed to exclude Earle’s rebuttal testimony regarding the Defendants’ costs associated with selling products that allegedly infringed its trademarks.
Regarding Earle’s relief from royalty calculation, both parties acknowledged that Earle’s July 2023 Reports significantly altered his relief from royalty opinion in the Initial Reports. Consequently, the Court determined that Earle’s relief from royalty opinion in his Initial Reports was superseded, rather than supplemented, by his opinions in the July 2023 Reports. Thus, the Court deemed Massimo’s motion to exclude Earle’s relief from royalty opinion as moot. Massimo was granted the opportunity to redepose Earle on his July 2023 Reports. Massimo could subsequently file a motion to strike or exclude, if desired.
Earle’s report analyzed the Defendants’ damages for their breach-of-contract counterclaim using an unjust enrichment calculation, which involved estimating Massimo’s profits from sales allegedly resulting from Massimo’s improper use of the Defendants’ confidential information. The central issue revolved around whether Texas law allowed this disgorgement remedy for breach-of-contract claims as restitution damages, especially when an express contract covered the parties’ dispute, as it prohibited unjust enrichment claims in such instances. The Court cited Hoffman v. L & M Arts, 838 F.3d 568, 585 (5th Cir. 2016), where the Fifth Circuit, ruled that the Supreme Court of Texas would reject a disgorgement remedy for breach-of-contract claims. It reasoned that breach-of-contract damages should primarily aim to compensate for the claimant’s actual losses, whereas disgorgement sought to deprive the wrongdoer of any ill-gotten gains instead of compensating the victim. Consequently, disgorgement was not deemed a suitable remedy for the Defendants’ breach-of-contract counterclaim. Thus, the Court partially granted Massimo’s motion to exclude Earle’s expert testimony pertaining to his unjust enrichment methodology for the Defendants’ breach-of-contract counterclaim.
Regarding Earle’s rebuttal testimony concerning the Defendants’ costs associated with selling products allegedly infringing Massimo’s trademarks, the Defendants argued that Earle’s July 2023 Reports supplemented and corrected the issues raised by Massimo, as they were based on cost data for all 20 accused products, not just the partial data sought to be excluded by Massimo. Massimo also acknowledged that Earle’s July 2023 Reports addressed this issue with new information. The Court deemed Massimo’s motion to exclude Earle’s testimony on this matter moot based on his opinions in the July 2023 Reports, similar to the reasonable royalty opinion. Massimo was allowed the opportunity to redepose Earle on these reports and subsequently file a motion to strike or exclude, if desired.
Held
The Court denied the Defendants’ motion to strike and exclude certain expert opinions of Bryan M. Van Uden, as well as Massimo’s motion to clarify or amend the Court’s scheduling order and strike Christopher Earle’s July 14, 2023 expert reports. Additionally, the Court granted in part Massimo’s motion to exclude Earle’s unjust enrichment methodology for the Defendants’ breach-of-contract counterclaim, while otherwise denying the motion. Massimo was allowed to redepose Earle on Earle’s July 2023 Reports and subsequently file a motion to strike or exclude, if required.
The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.
Key Takeaways
Firstly, the Court upheld the reliability of aggregating damages across multiple trademarks in a trademark infringement case, rejecting the argument that damages must be separately calculated for each individual trademark. This decision emphasized that establishing likelihood of confusion for each trademark independently isn’t necessary for liability purposes. Secondly, the Court clarified that ruling out potential alternative variables influencing lost profits or damages is not a prerequisite for the admissibility of expert testimony, noting that many cases have rejected this argument. Additionally, the Court underscored the importance of expert opinions aligning with the specific claims made against each defendant, refusing to exclude opinions where no existing opinions targeted specific Defendants or where inadequacies hadn’t been demonstrated. Regarding the timeliness of expert reports, the Court emphasized adherence to court orders and granted opportunities for redeposition or further motions if significant changes were made to expert opinions. Furthermore, the Court highlighted the necessity for expert opinions to align with applicable legal principles and remedies, particularly concerning disagreements over the appropriateness of certain remedies, such as disgorgement for breach-of-contract claims. Lastly, the Court noted that motions to exclude may be deemed moot if subsequent expert reports address and correct issues raised in those motions, granting parties opportunities for further actions based on updated expert opinions.
Case Details
Case Caption
Massimo Motor Sports, LLC v. Shandong Odes Indus. Co., Ltd.
Docket Number
3:21cv2180
Court
United States District Court, Texas Northern
Citation
2024 U.S. Dist. LEXIS 20343, 2024 U.S. Dist. LEXIS 20345
This case involved a dispute over the admissibility of expert testimony regarding damages in a lawsuit filed by Innovative Solutions International, Inc. (“Plaintiff”) against multiple Defendants, including Houlihan Trading Company, Inc. and Pilgrim’s Pride Corporation (“Pilgrims”).
Pilgrims, a company involved in preparing and packaging chicken for resale, supplied chicken that went through several vendors before reaching Defendant Houlihan Trading Co., Inc., who then sold it to the Plaintiff. The Plaintiff used the chicken in various food products that were ultimately sold to Trader Joe’s. Following customer complaints about bones in the products, Trader Joe’s terminated its contract with the Plaintiff. Consequently, the Plaintiff initiated legal proceedings against several entities in the supply chain, including Houlihan and Pilgrims. The lawsuit was filed on the grounds of multiple breaches of warranty and contract, misrepresentation, negligence, and violations of consumer protection laws. To support its claim for damages, the Plaintiff sought the admission of expert testimony from Steven J. Kessler. However, Pilgrims petitioned the Court to exclude or limit Kessler’s expert testimony, citing Rule 702 and the Daubert v. Merrell Dow Pharmaceuticals case (509 U.S. 579, 1993).
Business Valuation Expert Witness
Steven J. Kessler, C.P.A., A.B.V., C.F.F., has significant experience in the valuation and analysis of economic damages for business and personal injury cases and contested economic damages litigation cases. He is a Certified Public Accountant. He earned professional certifications such as Accredited in Business Valuation (ABV), Certified Valuation Analyst (CVA) and Certified in Financial Forensics (CFF), among many others.
Discussions by the Court
Pilgrims initially argued for the exclusion of Kessler’s testimony, contending that his method of calculating profits did not adhere to a “generally accepted way.” The Court noted that Pilgrims incorrectly applied the Frye standard, emphasizing that it had been superseded by Federal Rule of Evidence 702 according to the Daubert decision. The Daubert standard represented a departure from the stringent “general acceptance” standard set by Frye, emphasizing that while general acceptance within a scientific community could be a relevant factor, Daubert aimed to establish a more flexible test for the admissibility of expert testimony. Daubert clarified that expert testimony must be both reliable and relevant to the trier of fact, with general acceptance of a methodology, being just one factor among others in the non-exhaustive list of considerations.
In the Daubert inquiry, Kessler’s methodology for establishing expert evidence was assessed. Kessler began by calculating the Plaintiff’s average sales growth rate, determining it to be slightly over 10% based on a seven-year period from 2013 through 2019. Next, he calculated the Plaintiff’s estimated lost profits for 2022 by using the 2019 sales volume as a base, applying the 10% annual growth rate, and factoring in the average selling price per pound for that year. In performing these calculations, Kessler employed actual figures for products sold, sales price, overhead costs, and other relevant variables for the relevant year. Lastly, Kessler utilized the annual growth rate and net loss in profits as inputs to calculate future lost profits for the subsequent 14 years. This projection involved applying the appropriate growth rate to the estimated lost profits amount.
According to Daubert, a proponent of expert testimony must provide a precise explanation of how conclusions were reached and reference objective sources to support reliability. Mere assertions of “universal acceptance” are insufficient; instead, the proponent must demonstrate in an objective manner that the chosen scientific method is reliable. Despite Pilgrims’ challenge to the reliability of Kessler’s report, which it claimed lacked evidence of widespread acceptance, the Court noted that Daubert’s focus is on reliability and relevance rather than general acceptance.
The Court found Kessler’s methodology, as detailed in calculating the Plaintiff’s damages, to be both reliable and relevant. The method, involving the comparison of profits over benchmark periods before and after an alleged injury, is widely accepted across jurisdictions. The Court cited the “before and after” or “profit history” method, endorsed in cases such as Bigelow v. RKO Radio Pictures 327 U.S. 251 (1946). Despite Kessler not explicitly labeling his approach as such, the Court deemed it fundamentally the same as the endorsed methods.
In light of Daubert’s liberal approach, the Court found Kessler’s method reliable. Any disagreement with specific calculations could be addressed through cross-examination during trial, as per Daubert’s recommendation for challenging admissible evidence.
In the alternative, Pilgrims sought to exclude Kessler’s testimony, claiming faulty data. According to Federal Rule of Evidence 702(b), expert testimony must be based on sufficient facts. However, the emphasis of Rule 702(b) is not to allow the Court to exclude testimony based on a belief in one version of the facts over another. Pilgrims’ argument was deemed unsuccessful, as it essentially amounted to a disagreement about the underlying set of facts, which Rule 702(b) prevents from being a basis for exclusion.
Pilgrims’ additional argument contends that Kessler’s failure to include mitigation in his calculation of damages renders his testimony unreliable. Specifically, Pilgrims asserted that Kessler should have factored in Plaintiff’s potential profits to offset the damages outlined in his report. However, the Court disagrees with this stance, noting that although the failure to mitigate can be considered in a damage award, there is no authoritative basis for excluding testimony solely due to the omission of mitigation in the damages calculation. According to Daubert, Kessler’s decision not to include mitigation does not render his testimony unreliable or irrelevant, as the question of whether Plaintiff could have mitigated its damages is a matter of fact for the jury to determine.
Pilgrims challenged Kessler’s inclusion of a 15-year projected loss of profits, claiming insufficient basis for extending sales projections post-recall. However, Kessler’s report clarified that the projected loss of profits across a 15-year period aligned with the Plaintiff’s sales relationship with Trader Joe’s, which spanned 15 years. Court acknowledged Pilgrims concern that a longstanding business relationship didn’t guarantee future business but highlighted that such a guarantee wasn’t a requirement for the admissibility of the expert testimony.
Defendant challenged a crucial assumption in Kessler’s damages computation, specifically his exclusion of the year 2020 due to the COVID pandemic. Again, Pilgrim’s fails to explain why decisions made by an expert are anything more than questions of reasonableness best left for a jury to decide. Emphasizing the principles in Daubert, the Court asserted that once an expert meets the reliability threshold, questions regarding the weight of the testimony are within the jury’s purview, not the Court’s. In essence, the Court clarified that the reasonableness of Kessler’s assumptions in calculating damages is a matter for the jury to decide and does not constitute grounds for exclusion.
Held
The Court denied Defendant Pilgrims’ Pride Corporation’s motion to exclude or limit the expert testimony of Steven J. Kessler. The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.
Key Takeaways
This case demonstrates that under the Daubert standard that now governs the admissibility of expert testimony, the focus is on the reliability and relevance of the expert’s principles and methodology, not the rigorous “general acceptance” standard. While the Defendant argued that the methodology employed by Plaintiff’s expert, Steven Kessler’s wasn’t generally accepted, the Court found it satisfied Daubert because it was reliable and relevant. Where the expert meets the reliability threshold as explained in Daubert, questions regarding the weight to be accorded to the testimony are for the jury, not the Court. Secondly, the Court held that outright exclusion is not warranted if the expert does not include mitigation as part of his calculation of damages. Finally, opposing parties can challenge the facts underlying an expert’s assumptions through cross-examination rather than exclusion. Disagreements about the facts are not enough to exclude expert testimony as unreliable.
Plaintiff John Doe, who was referred to by a pseudonym by the Court, brought an action against the Trustees of Dartmouth College (“Dartmouth”) alleging that Dartmouth had violated Title IX of the Education Amendments of 1972 and had breached a contract by expelling him from Dartmouth’s Geisel School of Medicine. This expulsion followed Dartmouth’s determination that he had sexually assaulted another medical student. Doe had been a fourth-year medical student at Geisel, and Dartmouth had subjected him to an internal disciplinary proceeding in response to allegations made by his former roommate, Sam Smith. Smith had alleged that Doe had performed oral sex on him without his consent. Following this proceeding, Dartmouth concluded that Doe had indeed sexually assaulted Smith, leading to Doe’s expulsion from Geisel. Subsequently, Doe initiated this legal action seeking injunctive and monetary relief. He contended that Dartmouth’s disciplinary procedure had failed to adhere to the requirements of Title IX, as well as Dartmouth’s own policies, constituting a breach of contract.
The Court had considered Dartmouth’s motion to exclude Doe’s expert, Cyndi J. Livermore, on matters related to lost wages and lost earning capacity, as per Federal Rule of Evidence 702, Daubert v. Merrell Dow Pharmaceuticals, Inc, and its progeny.
Livermore’s report had analyzed the lost wages and lost earning capacity incurred by Doe due to his expulsion, considering two potential career paths: internal medicine and cardiology. Her ultimate determination was that Doe had already suffered damages amounting to at least $429,000 (in the case of pursuing internal medicine) and up to $784,000 (if he had pursued cardiology). She also concluded that Doe’s future lost earnings would have ranged from $1.52 million (as a practitioner of internal medicine) to $3.97 million (as a cardiologist). In arriving at these figures, Livermore had considered several factors, including: (1) an estimation of Doe’s remaining work life; (2) Doe’s anticipated life expectancy; (3) the probability of employment in each career path; and (4) Doe’s projected earnings for each career path had he not been expelled. To determine his projected earnings but-for his expulsion, Livermore had factored in: (a) Doe’s earnings prior to his expulsion from Dartmouth; (b) the probability, expectancy, and reasonability of future earnings; and (c) future growth. Additionally, Livermore had taken into account Doe’s post-expulsion income and projections of actual or mitigated earnings.
Business Valuation Expert Witness
Cyndi Livermore is a Vice President at Management Planning Inc. She has performed hundreds of business valuations ranging from pre-revenue start-up to $1B revenue pre-IPO companies, and across many industries, including: Agribusiness, Automotive, Banking, Construction, Family Offices, Precision Machinery, Real Estate Holding. Cyndi J. Livermore successfully earned her Bachelor of Science degree in Business Administration from DeVry University, followed by the attainment of her Master of Business Administration (M.B.A.) from the Southern Methodist University – Cox School of Business. Livermore was the director of ComStock Advisors, a provider of professional services in the area of business valuation, litigation support services, and management consulting prior to joining Management Planning Inc.
Discussions by the Court
Dartmouth had initially argued that Livermore lacked the necessary expertise to testify as an expert regarding Doe’s lost wages and lost earning capacity. Dartmouth contended that her specialization in business valuation rendered her unqualified to provide opinions on these matters, especially in the context of a medical student’s interrupted education. Additionally, Dartmouth emphasized that Livermore had never testified as an expert in cases involving medical students or doctors’ lost wages or earning capacity. However, the Court found Dartmouth’s argument unconvincing. Livermore, an economist with more than a decade of experience in financial analysis, held both a bachelor’s and a master’s degree in business administration. At the time of preparing her report, she served as the director of ComStock Advisors, a firm specializing in business valuation, litigation support, and management consulting. While Livermore acknowledged her primary focus on business valuation, she testified that she possessed substantial experience in conducting financial valuations of primary care physicians and cardiologists. Furthermore, she had previous experience in performing lost wages and lost earning capacity analyses. The fact that Livermore had not previously undertaken such an analysis for someone in Doe’s precise situation did not render her unqualified considering an expert need not be a preeminent practitioner in the relevant field to possess sufficient knowledge.
Dartmouth had contended that Livermore’s expert opinion regarding Doe’s lost future earnings wouldn’t be beneficial to the jury in determining a fact in issue, as Doe was seeking equitable relief in the form of reinstatement at Geisel, making Livermore’s opinion on lost earning capacity immaterial. Dartmouth argued that if Doe succeeded at trial, he would return to Geisel and regain his ability to earn a doctor’s income, and if he failed, he would have no basis for recovering damages related to lost earning capacity. However, the Court disagreed with Dartmouth’s argument. Doe had brought claims against Dartmouth based on contract and Title IX, seeking both injunctive relief in the form of reinstatement and monetary damages. Typically, Courts do not order equitable relief in Title IX or contract-related cases when monetary damages would suffice to compensate the Plaintiff. As highlighted in Doe’s objection, the Court had the discretion to decide not to grant the injunctive relief sought even if he prevailed on one or more of his claims. Consequently, evidence concerning Doe’s lost earning capacity would indeed assist the jury in comprehending the evidence and determining a relevant fact in the case.
Dartmouth had argued that Livermore’s expert opinion lacked a reliable methodology because, during her deposition, she had acknowledged that a comprehensive damages analysis should include a “skills analysis” (examining the range of jobs suited to an individual’s transferable skills and talents) as well as a “labor market analysis” (evaluating the available job opportunities and earning potential for individuals with Doe’s skills). Additionally, Dartmouth raised concerns about Livermore’s failure to consider the potential for bonuses, stock options, or promotions in Doe’s current job.
Upon reviewing Livermore’s report, the Court concluded that her methodology was indeed reliable in forming her conclusions. In her assessment of Doe’s lost wages and earning capacity, Livermore began by considering factors such as Doe’s remaining life expectancy and the portion of that life expectancy during which he would be expected to work. She also factored in Doe’s probability of employment, which encompassed his present employment, the likelihood of him completing his medical degree if his expulsion were reversed, the chances of degree completion if his expulsion were not reversed, and the probability of Doe securing a residency if he completed his degree. Moreover, Livermore took into account projections of Doe’s future earnings in specific medical professions based on published data. She further applied a discount to calculate the present value of future earnings and estimated annual inflation-based raises.
The Court agreed with Doe, emphasizing that Dartmouth’s objections pertained more to the factual inputs used in Livermore’s analysis rather than the reliability of her methodology. Dartmouth’s contentions, particularly those related to alternative job opportunities for Doe and the potential for promotions, stock options, or bonuses in his current position, were deemed suitable for cross-examination rather than grounds for excluding Livermore’s testimony.
Dartmouth had argued that Livermore’s opinions regarding Doe’s lost wages and lost earning capacity as a cardiologist were not aligned with the facts of the case and should not be presented to the jury. The Court concurred with Dartmouth on this matter. Doe’s complaint explicitly indicated his intention to pursue a career as a primary care physician, with no mention of considering a career in cardiology. Additionally, during his deposition, Doe confirmed his plan to become a primary care physician upon completing his medical degree.
Under New Hampshire law, which applied to Doe’s breach of contract claims, damages cannot be awarded for “speculative losses”, as was held in Miami Subs Corp. v. Murray Family Trust & Kenneth Dash Partnership. The remedies available in private Title IX actions paralleled those found in traditional contract claims. Rather than compensating for speculative losses, contract damages were designed to restore the prevailing party to the position they would have been in had the contract been performed. In this case, Doe’s expressed intent was to pursue a career as a primary care physician if allowed to complete his medical degree. Consequently, Livermore’s opinions concerning Doe’s lost wages and earning capacity as a cardiologist were deemed irrelevant, not assisting the jury in determining a fact in issue, and not grounded in the factual circumstances of the case.
Held
Dartmouth’s motion to exclude Cyndi Livermore’s testimony was granted in part and denied in part. Specifically, it was granted to the extent that it sought to exclude testimony related to Doe’s lost wages and lost earning capacity as a cardiologist. However, the motion was otherwise denied.
The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.
Key Takeaways
This case demonstrates how Courts serve as gatekeepers regarding expert witness testimony under Daubert and Rule 702. When expert testimony is challenged, the Court must assess the witness’s qualifications, the relevance of their testimony, and the reliability of their methodology. Here, the Court found the Plaintiff’s expert was qualified to testify about lost earnings despite lacking direct experience with similar cases on account of her significant experience conducting financial valuations in the exact same industry.
However, the Court agreed part of the expert’s testimony regarding speculative lost earnings as a cardiologist was irrelevant. This demonstrates that experts cannot testify about damages that are too speculative based on the facts of the case. Experts must tailor their testimony to the circumstances at hand. The Court also assessed the reliability of the expert’s methodology under Daubert’s flexible test. The Court found her methodology reliable amidst objections about the factual inputs she used. This shows that mere disagreement about an expert’s assumptions is fodder for cross-examination rather than exclusion.
