In 2007, SCANA received legislative approval to construct two nuclear reactors at the V.C. Summer Nuclear Generating Station in Fairfield County, South Carolina” (the “Nuclear Project”). Deloitte served as SCANA’s external auditor for over 70 years. International Brotherhood of Electrical Workers Local 98 Pension Fund alleges that, “[t]hroughout the Class Period, Deloitte repeatedly violated its professional responsibilities, failed in its role of gatekeeper and deceived investors about SCANA’s accounting for, and expected completion of” the Nuclear Project.
Deloitte allegedly “gave unqualified, ‘clean’ audit reports on SCANA’s financial statements and internal control over financial reporting, misleading investors into believing that SCANA would complete the Nuclear Project in time to obtain $1.4 billion in nuclear tax credits[,] despite voluminous evidence that SCANA could not possibly achieve this goal.”
The Consolidated Complaint alleged that SCANA, its investors, government regulators, and Deloitte understood that the success of the Nuclear Project depended on SCANA obtaining $1.4 billion in federal production tax credits and being able to raise energy rates on consumers to cover construction costs.
Plaintiff International Brotherhood of Electrical Workers Local 98 Pension Fund filed a motion for class certification, appointment of class representative, and appointment of class counsel (the “Class Certification Motion”) while Deloitte filed a motion to exclude the damages-related opinion offered in Dr. Matthew D. Cain’s expert report.
Economics Expert Witness
Matthew D. Cain is a Ph.D in Finance, a Senior Fellow at the Berkeley Center for Law and Business, and a Senior Visiting Scholar at Berkeley Law School, University of California. He teaches courses, delivers guest lectures, participates in academic seminars, and conducts research in various topic areas related to finance, economics, accounting, law, and business.
His research is focused on topics including empirical corporate finance, corporate governance, board independence, mergers and acquisitions, hostile takeovers, shareholder lawsuits, negotiations, financial contracting, disclosures of financial information, and shareholder activism. Cain worked at the SEC between 2014 and 2018 as a Financial Economist. Before working at the SEC, he was an Assistant Professor of Finance at the University of Notre Dame. Cain has also published research in leading peer-reviewed finance, accounting, law, and economics journals.
Deloitte did not challenge Cain’s qualifications, and the Court concluded that Cain is qualified to opine on the matters discussed in his reports.
Based on his analysis, Cain “formed the opinions that the market for shares of SCANA’s Common Stock was efficient during the Class Period” and that “damages in this matter can be calculated on a class-wide basis subject to a common methodology.” Deloitte challenged only Cain’s opinion regarding damages and, thus, the Court limited its discussion to Cain’s damages-related opinion.
Cain’s first report, dated April 30, 2021 (the “First Report”), explained that “[t]he ‘out-of-pocket’ method of calculating damages represents a standard and well-accepted methodology under Section 10(b) of the Exchange Act” and that the “approach calculates damages formulaically as the artificial inflation in the share price at the time of purchase minus the artificial inflation in the share price at the time of sale.”
Deloitte challenged Cain’s damages-related opinion on two bases. First, Deloitte argued that IBEW asserted two damages theories––a materialization of risk theory and a corrective disclosure theory––but that Cain’s report ignored the materialization of risk theory.
Deloitte’s Challenge Regarding the Materialization of Risk Theory
Deloitte contended that Cain’s report appears to be referencing corrective disclosures rather than risk.
However, as the Fourth Circuit has explained, “the ultimate loss causation inquiry under either the corrective disclosure theory or the materialization of a concealed risk theory is the same: whether a misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security.”
The First Report stated that Cain will use the out-of-pocket method for calculating damages on a class-wide basis. The out-of-pocket method calculates the difference between the price at which the stock sold and the price at which the stock would have sold absent any artificial inflation cause by a Defendant’s alleged misrepresentations or omissions.
Accordingly, the Court concluded that Cain has offered a reliable damages model consistent with IBEW’s liability case and has demonstrated that IBEW’s damages are attributable to that theory of liability.
Deloitte’s Challenge Regarding Damages Attributable Only to Deloitte
Deloitte next argued that Cain failed to identify or offer a “methodology by which damages attributable to SCANA, its officers, or others could be separated from damages attributable to Deloitte.” However, at the class certification stage in a securities fraud class action, a methodology is not required “to make an allowance for any damages caused by things other than the Defendants’ alleged fraud.”
Moreover, Cain has explained that “event studies are widely-employed to calculate artificial inflation [and] measure stock price reactions to corrective disclosures which reveal the relevant truth that was concealed by alleged material omissions and/or misrepresentations.”
Additionally, Cain opined, “to the extent that reliable evidence is introduced to show that a material portion of the difference in the artificial inflation between the purchase and sale of the securities may be attributed to non-fraud related factors, the impact of such ‘confounding information’ on the price of SCANA securities can be determined on a common, classwide basis using various accepted methodologies.” Accordingly, the Court concluded that Cain’s damages-related opinion should not be excluded.
Held
The Court denied Deloitte’s motion to exclude damages-related expert opinion of Dr. Matthew D. Cain.
The Court granted IBEW’s motion for class certification, appointment of class representative, and appointment of class counsel.
Key Takeaways:
Cain’s damages-related opinion were admissible because Cain has offered a reliable damages model consistent with IBEW’s liability case and has demonstrated that IBEW’s damages are attributable to that theory of liability.
Moreover, at the class certification stage in a securities fraud class action, a methodology is not required “to make an allowance for any damages caused by things other than the Defendants’ alleged fraud.”
Case Details:
Case Caption:
International Brotherhood Of Electrical Workers Local 98 Pension Fund V. Deloitte & Touche Llp Et Al
Plaintiff Securities and Exchange Commission (“SEC”) charged that Defendant Matthew Panuwat engaged in insider trading in violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 (the “Exchange Act”), by using his insider knowledge about Medivation, Inc.’s plan to announce an upcoming merger to make leveraged, short-term trades in Incyte Corporation (“Incyte”) call options.
Following a one-week jury trial, the jury returned a verdict in the SEC’s favor. Panuwat, subsequently, renewed his motion for judgment as a matter of law and, in the alternative, moved for a new trial.
Panuwat argued that a new trial is warranted because the Court “erred by allowing Chyhe Becker to testify as an expert, and then compounded the error by allowing her to introduce hearsay testimony.”
Economics Expert Witness
Chyhe Becker is currently the Deputy Chief Economist and Deputy Director of the Division of Economic and Risk Analysis at the U.S. Securities and Exchange Commission. In her role, she leads a division of approximately 200 economists, statisticians, and data scientists who integrate financial economics and data analytics to support the SEC’s policy, rule-making, enforcement, and examination activities.
Becker joined the Securities and Exchange Commission in March 2008, leading the Office of Litigation Economics until May 2018. She was previously a Principal with Chicago Partners LLC, where she specialized in securities litigation. Prior to Chicago Partners, she was a Principal with the Economic Consulting group at Deloitte Financial Advisory Services LLP where she provided expert testimony and analysis in securities class action matters as well as contract disputes. She received an M.B.A. and Ph.D. in Financial Economics from The University of Chicago Graduate School of Business, and a B.A. in Psychology from Yale University. Her research has been published in the Journal of Financial Intermediation and she taught corporate finance at The University of Chicago Graduate School of Business.
The Court denied Panuwat’s motion in limine to exclude Becker’s testimony. Panuwat asserted then and now that Becker was unqualified to opine about mergers and acquisitions in the biopharmaceutical industry because she “lacked necessary expert qualifications, used unreliable methodologies, and impermissibly relied on hearsay to prepare her report.” But Becker had significant experience in market and risk analysis, and her opinions on how the market would perceive Medivation and Incyte’s stock prices in relation to one another (which was her key area of testimony) did not require specific biopharmaceutical knowledge.
Panuwat contended that “three specific errors” occurred at trial with respect to Becker. The Court addressed each piece of challenged testimony.
Confounding News
The first error, Panuwat argued, occurred when the SEC “violated the Court’s ruling that Becker could testify about analyst reports as relevant to the existence of confounding news … by introducing analyst reports related to a wholly separate issue.” He said that the SEC “in fact introduced no analyst reports as relevant to Becker’s confounding news analysis and introduced the hearsay opinions of three analysts solely in support of Becker’s claim that the so-called economic phenomenon of a spillover effect . . . was relevant to the biopharma industry.”
Panuwat believed that Becker adopted the contents of three article exhibits without conducting any independent analysis. Becker’s testimony at trial suggested that she relied on hearsay opinions asserted in analyst reports to confirm her opinions, not for their truth.
Contrary to Panuwat’s assertion that Becker “adopted the contents of [these exhibits] …without conducting any independent analysis,” the Court held that her testimony showed that she had bases for her own opinions on spillover effects in the market.
She stated that there was peer-reviewed research on the idea of spillover effects, explained why news of a merger would lead to a spillover effect, and why market observers would have expected Incyte’s stock price reaction to Medivation’s merger news, using exhibits. She went on to explain the other things she did to determine whether, in her expert opinion, spillover effects would have affected Incyte’s stock price. At no point did Becker testify that her opinion on spillover effects was based on the at-issue article exhibits. The Court held that her testimony about confounding news was proper and complied with the Court’s limiting order.
Limiting Instruction
Panuwat argued that “even if these hearsay opinions were relevantly admitted to explain Becker’s conclusions on confounding news, the Court erred by failing to issue the required limiting instruction.” The judge, William H. Orrick, instructed the jury generally, several times, that news articles were not admitted for their truth, but only for the “fact that this news was out, such as it is,” or to show “what market observers were saying.”
Cherry Picked Statements
Panuwat also contended that Becker’s opinions relied on “cherry-picked results” from the outset. He posits that her opinion that “market observers would expect Incyte’s stock price to increase” on announcement of Medivation’s merger was not based on objective criteria, but was instead result-oriented. He said that her explanation for how she reached her conclusions was prejudicial because “the jury lacked the skillset necessary to properly evaluate the unreliability of her methods.”
When asked “how she identified” the event studies she used, Becker stated that “what I looked for was were there times when pretty much the same thing had happened in the past . . . and when I say the same thing, I mean the same thing as Medivation’s August 22 merger announcement, and what I’m looking to see is how did Incyte’s stock price react to those prior events that are similar.” She even prepared a demonstrative to help explain what she meant.
Becker explained that she found two prior similar events that she used as event studies. One was a prior announcement that Medivation was a takeover target, the second was a rumor that another company that was “similar” to Medivation (in that it was a biopharmaceutical company focused on oncology drugs) was also a takeover target.
The Court held that Becker provided the jury with an explanation for why she chose the event studies she did. Panuwat had the opportunity to cross-examine her; his argument that they were cherry-picked is conclusory. As for his argument that the jury “lacked the skillset necessary” to determine whether Becker’s opinion was reliable, Panuwat provides no evidence or reason in support of this position.
Held
As a result, the Court denied the Defendant’s motion for judgment as a matter of law and also denied his motion for a new trial.
Key Takeaway:
The Court denied Panuwat’s motion in limine filed against admitting Becker’s testimony. When Panuwat argued that a new trial is warranted because the Court erred by allowing Becker to testify as an expert, the Court held that Becker provided the jury with an explanation for why she chose the event studies she did. Panuwat had the opportunity to cross-examine her; his argument that they were cherry-picked is conclusory.
She stated that there was peer-reviewed research on the idea of spillover effects, explained why news of a merger would lead to a spillover effect, and why market observers would have expected Incyte’s stock price reaction to Medivation’s merger news, using exhibits. She went on to explain the other things she did to determine whether, in her expert opinion, spillover effects would have affected Incyte’s stock price.
Plaintiff David Swartz brought this case against Defendants Dave’s Killer Bread, Inc. and Flowers Foods, Inc. under the California Unfair Competition Law, alleging that Defendants violated Food and Drug Administration (“FDA”) regulations, and therefore California’s Unfair Competition Law (“UCL”), by including unlawful labels on their bread products.
Plaintiff moved to certify a class on a single UCL claim. In response, Defendants filed a motion to strike the declaration of Plaintiff’s expert, Colin B. Weir.
Defendants filed objections against the conjoint analysis and damages model provided by Weir and contended that his proposed methodology is not scientifically valid.
Economics Expert Witness
Colin B. Weir is Vice President at Economics and Technology, Inc. Weir conducts economic, statistical, and regulatory research and analysis, and testifies as an expert witness. Weir’s experience includes work on a variety of issues, including: economic harm and damage calculation; liquidated damages provisions; lost profits; false claims; diminution in value; merger/antitrust analysis; Early Termination Fees (ETFs); Late Fees; determination of Federal Excise Tax burden; and development of macroeconomic analyses quantifying the economic impact of corporate actions upon the US economy and job markets. Weir holds an MBA with honors from Northeastern University. He also holds a Bachelor of Arts degree cum laude in Business Economics from The College of Wooster.
The Court held that Weir’s damages model satisfies the requirements articulated in Comcast Corp. v. Behrend. To the extent there are any flaws in the methodology, they go to weight, and not admissibility, and do not support striking the declaration. Also, Weir’s methodology sufficiently tests the liability theory upon which the Court allowed Plaintiff to proceed. It measures any premium associated with Defendants’ violation of the regulations at issue, and is therefore permissible.
Scientific Validity of Weir’s Methodology
1.The Model’s Pricing Assumptions
Weir stated that his data set included “through the register transaction data” for California during the class period, sourced from Information Resources, in addition to other methods. The Court held that such real-world sales data is sufficient for admissibility.
First, Defendants argues that Weir’s survey will artificially focus participants on the protein statements, but this argument did not persuade the Court because “district courts have found that alleged focalism bias goes to the weight of the expert’s opinion, not its admissibility.”
Defendants’ second and third arguments urge that Weir’s surveys design relies on undocumented interviews. The Court held that the survey design interviews at issue are merely a tool used in a survey design, and failure to take notes does not warrant exclusion. Defendants may still “cross-examine” Weir “about the questions in his survey,” regarding its questions, methodology, and the lack of development drafts.
Defendants’ fourth and fifth arguments posit that Weir’s survey will cause confusion because some label statements do not perfectly replicate labels as they would be seen in a store. However, the Court held that criticisms about a survey’s failure to replicate real world conditions . . . go to the weight of the survey rather than its admissibility.
Defendants’ sixth and seventh arguments criticized Weir’s methodology for not accounting for whether some consumers were or were not misled, or for different geographies, retailers, or time periods. Whether consumers were misled is not relevant to Plaintiff’s theory, however, and Weir’s analysis does account for different geographies, retailers, and time periods. The Court held that Weir has provided enough specificity, and any methodological issues with addressing changes over time can be addressed after the study is carried out.
3. Market Simulation Scientific Validity
After conducting a consumer survey, Weir will use a market simulation tool to provide an estimate of any price premium that purchasers paid solely as a result of front-of-package protein claims. Defendants argued that this step fails to account for competition because it does not include competitive offerings. Competitive offerings are accounted for in the data, however, because Weir includes questions about their labels in the survey. The simulator then holds competition constant to compare real world pricing and but-for world pricing. The Court held this method to be sufficiently scientific.
4. Supply Side Equilibrium Analysis
Defendants argued that Weir’s analysis should include a supply-side equilibrium analysis, rather than a method that considers supply-side factors through real-world pricing data. Moreover, this method did not account for the effect of a seller’s willingness to sell the products on the price of the products. Conjoint analyses “can adequately account for supply-side factors . . . when (1) the prices used in the surveys underlying the analyses reflect the actual market prices that prevailed during the class period; and (2) the quantities used (or assumed) in the statistical calculations reflect the actual quantities of products sold during the class period.” The Court held that Plaintiff satisfied both prongs.
Held
I. The Court granted Plaintiff’s motion for class certification under Rule 23(b)(3) for a class defined as:
“All persons in the State of California who purchased the Products between December 29, 2017 and September 5, 2023.”
II. The Court denied Defendants’ motion to strike the declaration of Colin Weir.
Key Takeaways:
Weir has provided enough specificity because his analysis accounts for different geographies, retailers, and time periods.
Weir’s analysis adequately accounts for supply-side factors.
Defendants argued that Weir’s use of a market simulation tool fails to account for competition because it does not include competitive offerings. The Court held that competitive offerings are accounted for in the data, however, because Weir includes questions about their labels in the survey.
Plaintiffs Richard Dennis, Port 22, LLC, and Michael Glass asserted Commodity Exchange Act and Sherman Antitrust Act claims, alleging that the Andersons, Inc. and Cargill Incorporated, who were supposed competitors, operated multiple grain storage warehouses in Ohio and collaborated to manipulate prices of soft red winter wheat futures and options contracts on the Chicago Board of Trade.
According to the Plaintiff, the Andersons, Inc. sold SRW wheat to the major purchasers in October and November 2017 to suppress demand for physical SRW wheat and then, on November 29, 2017, registered for delivery two thousand certificates of CBOT December 2017 SRW wheat.
This registration (falsely, Plaintiffs say) signaled that TAI would sell ten million bushels of physical SRW wheat to parties holding long positions in December 2017 SRW wheat futures and caused a marked price decrease in the December 2017 SRW wheat futures contract and widened the spread between the December 2017 and March 2018 SRW wheat futures contracts.
TAI and Cargill later repurchased some of the shipping certificates TAI had delivered at the decreased prices. Plaintiffs allegedly transacted in December 2017 and March 2018 SRW wheat futures and lost money because of the decreased prices caused by the scheme.
Plaintiffs’ expert Craig Pirrong opined in relevant part that Defendants artificially depressed prices of the December 2017 and March 2018 SRW wheat futures through a market manipulation that injured Plaintiffs on a class-wide basis; Pirrong also provided a methodology for determining individual damages. Through the report of their expert, Professor Justin McCrary, Defendants purported to challenge the reliability of Pirrong’s studies. Plaintiffs attacked Professor McCrary’s qualifications.
Economics Expert Witnesses
Justin McCrary is an “economist with expertise in microeconomics, economic modeling, and statistical method,” who teaches at the Law School at Columbia University. He has taught courses on economic theory econometric theory, antitrust, law and economics, and statistics and is a reviewer for leading peer-reviewed economics journals. He served on the Board of Directors of the American Law and Economics Association and has published papers in prominent economic journals.
Craig Pirrong‘s extensive qualifications includes approximately 30 years of concentrating professionally on competition and manipulation of prices with a focus on Chicago Mercantile Exchange wheat, soybean, and corn futures contracts; publishing a dozen peer-reviewed articles and a book on commodity futures manipulation and pricing; presenting to and consulting with federal agencies on manipulation; and testifying as an expert.
Plaintiffs argued McCrary: (1) is unqualified to give an opinion in this class action alleging market manipulation in wheat futures and options; (2) tenders opinions that are unreliable because they lack a scientific basis and he has never performed such quantitative work before; and (3) offers irrelevant opinions.
McCrary’s Qualifications
Plaintiffs insisted McCrary is unqualified to render an opinion in the realm of the commodity futures market, a conclusion they say is underscored by his professed unfamiliarity with “basic industry terminology” like “front month,” “spot month,” “strong stopper,” and “cash contract.”
The Court held that Plaintiffs’ surface-level attack on McCrary’s background and education is insufficient to demonstrate his lack of qualification, and the Court declines to exclude McCrary’s opinions, which Plaintiffs do not deny are rooted in statistics and economics, merely because he neither purports to be nor appears to be an expert in commodities futures trading or manipulation.
Reliability of McCrary’s Opinions
Plaintiffs argued McCrary’s opinions are unreliable, first, for lacking a scientific basis—because he opines Pirrong’s analyses fail to account for confounding fundamental factors that McCrary himself neither identified nor analyzed to determine any potential impact. But, as Defendants retort, that was not McCrary’s task; neither Daubert nor Rule 702 required McCrary to perform independent studies.
Although Plaintiffs labelled McCrary’s analysis thin and McCrary a mere mouthpiece for the defense, the Court finds he sufficiently explained the underpinnings for his opinions, which flow from his review of relevant literature, his expertise, experience and knowledge.
Finally, Plaintiffs attacked an isolated sentence of McCrary’s opinion regarding Pirrong’s event study and further attacked his criticism of Pirrong’s damages model because McCrary had “never worked with” data types he used in performing his calculations. The Court agreed with Defendants that the former argument takes McCrary’s statement out of context , and the latter argument lacks force because Plaintiffs identified no errors in McCrary’s calculations.
Relevance of McCrary’s Opinions
Plaintiffs finally briefly recycle most of the foregoing arguments, which the Court already has rejected, into an argument that Professor McCrary’s opinions will not help the trier of fact. Again, the Court disagreed. Although Professor McCrary does regurgitate some record evidence (such as that SRW wheat would be aging between December 2017 and March 2018), he does not merely repeat evidence but adds his opinions to the evidence he recites, including that Pirrong should have accounted for the aging of the wheat and other factors. For these reasons and those set forth above in addressing Plaintiffs’ prior arguments, the Court declines to strike McCrary’s opinions because they are relevant to understanding and analyzing Pirrong’s opinions regarding class certification.
Craig Pirrong
Plaintiffs proffered their expert witness, Dr. Craig Pirrong, an economist, who intended to testify that Defendants’ alleged manipulation artificially deflated prices in the December 2017 and March 2018 SRW wheat futures markets and caused damages to the proposed class that are capable of calculation on a class-wide basis.
In support, he presented: (1) an event study with regression analysis meant to measure the existence and amount of alleged price-artificiality in the December 2017 and March 2018 SRW futures and options contracts that is attributable to Defendants’ conduct rather than chance or other market factors; and (2) a damages model that takes the output from the event study as an input to calculate a range of aggregate damages. Such models may meet Plaintiffs’ burdens at the class certification stage.
A.Pirrong’s Event Study with Regression to Predict “But For” Wheat Prices
Pirrong first employed an event study with regression analysis intended to predict what prices would have been absent Defendants’ actions and statements.
In the context of this case, Pirrong’s regression model uses other grain commodities traded on CBOT as control variables; he estimates the historical relationship among the SRW wheat futures prices and the control variables by using “a control period consisting of data from March 1 to November 29 for the CBOT wheat futures contract for each year from 2005 through 2017.”
According to Pirrong, the model computes what would have been, but for Defendants’ conduct, the prices for December 2017 and March 2018 SRW wheat futures for each trading day between November 30, 2017 and December 14, 2017. He attributed the difference between his model’s output of estimated prices for December 2017 and March 2018 SRW wheat futures prices and the actual December 2017 and March 2018 SRW wheat futures prices to a “price artificiality” due to Defendant’s conduct.
Thought Defendants acknowledged that statistical regression is an established methodology, they argued that Pirrong “employed a ‘reliable methodology in an unreliable way” because the “results” are not “statistically significant” under generally accepted statistical principles and lead to an unacceptably high rate of false positives (predicted price manipulation in years in which none is alleged). They insisted that the study “cannot rule out” other potential causes of the SRW wheat futures price changes and has “dubious predictive value.”
1. Statistical Significance
Pirrong himself described p-values as “giving the probability of observing the residual,” which, here, is price artificiality, and conceded that “conventional thresholds” for statistical significance are five percent (0.05) and ten percent (0.1).
Defendants asserted that p-values above 0.05 indicate unreliable regression study results and emphasize “Pirrong offered no thresholds for determining when his event study results should be considered statistically significant,” despite having agreed that one must “choose a threshold” to “establish statistical significance.”
The Court is unconvinced that all of his results should be excluded due to some p-values above 0.05, particularly where seven of eleven days (November 30 through December 8, 2017) within the December 2017 SRW wheat contracts regression analysis returned p-values with statistical significance at the five percent level. Nor does the Court find that Pirrong’s non-articulation of a statistical significance threshold warrants blanket exclusion of his results here.
Second, even if Defendants sought to exclude just dates for which a p-value above 0.05 was returned, the Court under these circumstances declines to adopt a “hard and fast rule” requiring p-values of 0.05 or below, which in essence “evaluates statistical significance as a binary question” where “statistical significance lies at the 4.99% level but not at the 5.01% level.’”
Pirrong also emphasized that “eminent statisticians” have increasingly criticized the use of statistical significance cutoffs “because it is misleading and leads to erroneous conclusions” and that one should avoid “‘dichotomization as statistically significant or not.’”
The Court held that Defendants’ arguments go to the weight, rather than the admissibility, of the regression study results. Pirrong’s event study results in the December 2017 and March 2018 SRW Wheat futures contracts are sufficiently reliable for consideration.
2. Rate of False Positives
Defendants next asserted Pirrong’s study is undermined by the rate of “false positives,” or instances in which Pirrong’s model predicts price artificiality in years in which no manipulation is alleged. Defendants argued the higher the threshold for statistical significance one accepts as to the event study, the higher the rate of false positives the model returns. Accepting, for example, a 43% threshold for statistical significance (drawn from the highest p-value result Pirrong endorses, 0.43, applied across both the December 2017 and March 2018 studies) suggested price manipulation on 85% of the days for which Plaintiffs did not claim manipulation.
Adopting a 5% statistical significance level (which would result in statistical significance for the results of just seven days in the December 2017 study and none in the March 2018 study) garners a 19.66% rate of false positives. Defendants argued that these rates of false positives show the event study does not reflect a reliable application of statistical methods to this case.
Although the explanation regarding false positives is not robust, the Court nevertheless found that Pirrong’s testimony is “closer to shaky than unreliable.”
B. Pirrong’s Damages Estimates
Pirrong proffered damages methodologies to calculate individual damages and estimate aggregate class-wide damages using linear programming (the LP model).
1. Pirrong’s Use of “Permanent Artificiality” in March 2018 SRW Wheat Futures from December 14, 2017 through March 14, 2018
Defendants first attacked Pirrong’s opinion that the March 2018 SRW wheat futures contract had a permanent fixed artificial price depression of 1.2¢ per bushel from December 14, 2017 to March 14, 2018. Defendants asserted this use of a constant 1.2¢ residual is undermined by Pirrong’s choice to use a day-to-day approach for other transactions, as well as his opinion that publicly available information is immediately incorporated into the SRW futures marketplace.
Pirrong, though, opined that Defendants “distorted consumption by making excessive deliveries,” only a “fraction” of which they later repurchased, causing immediate consumption of wheat that “should have remained in storage for consumption later.” The effects of their actions “persisted into the indefinite future beyond November 30, 2017,” thus “distorting supply-demand fundamentals far into the future” and causing ongoing effects on prices. This price artificiality, Pirrong asserted, would remain constant after the December 2017 SRW wheat contract expired both because Defendants’ actions in the December contract could not affect prices after the expiration, and in an efficient futures market, the impacts of Defendants’ actions would be reflected in prices quickly and permanently.
Pirrong’s explanation provides support for his choice. And, despite Defendants’ attack, the Court held that his testimony is not “unsupported ipse dixit” because, rather than “pluck his conclusions out of thin air” he reviewed the identified records, performed studies, and applied his extensive experience in futures markets to reach those conclusions.
2. Outputs of the Damages Model
Defendants challenged the LP Model outputs for the model’s reliance “on the daily artificiality residual (i.e., the daily artificiality estimate produced by the event study) to calculate hundreds of thousands of hypothetical possible trade scenarios and conjures a supposed aggregate damage range for class members,” because it “cannot be applied to estimate the loss for any class member,” includes “computational errors that artificially inflate the damages estimate,” and did not “account for characteristics specific to many entities and individuals included in the group Pirrong purports to study,” like intraday traders and traders with offsets.
The Court held that Pirrong’s calculations, based upon his event studies, are sufficient to meet Plaintiff’s low burden here.
Defendants’ argument that “the LP model has several computational errors that artificially inflate the damages estimate” did not suggest damages cannot be calculated on a class-wide basis, and the Court is not seeking to calculate actual damages at this stage. As Plaintiffs point out, Defendants’ related argument that Pirrong’s model did not account for the characteristics of certain traders, boils down to an argument that some members of the defined class “ultimately were not harmed” by Defendants conduct, i.e., that their claims “will fail on the merits if and when damages are decided,” which is “a fact generally irrelevant to the district court’s decision on class certification.”
C. State-of-Mind Opinions and Legal Conclusions by Pirrong
Defendants argued that “Pirrong, an economist, lacks an analytically sound basis for ostensibly psychological conclusions” about Defendants’ “knowledge or intentions.”
The Court held that Pirrong properly may testify regarding “conclusions drawn only in his capacity as an economist.” This includes opining on potential economic motives of a party but not testimony of what a party knew because Pirrong is not more qualified than an ordinary juror to make the latter inferences.
Held
The Court denied Plaintiffs’ motion to exclude the testimony of Professor Justin McCrary, and the Court granted in part and denied in part the Defendants’ motion to exclude the testimony of Craig Pirrong.
Key Takeaways:
Professor McCrary neither purports to be nor appears to be an expert in commodities futures trading or manipulation but his opinions are rooted in statistics and economics.
The Court, like many others presented with the question, declines to use statistical significance at the five percent level as a proxy for reliability, and thus admissibility, for the purposes of Rule 702 and Daubert. Considering the entire data set presented, Pirrong’s explanations, and the class definition Plaintiffs propose regarding transactions of December 2017 and March 2018 SRW wheat set forth above, Defendants’ arguments go to the weight, rather than the admissibility, of the regression study results.
First, the Court has resolved the related argument regarding p-values, finding they do not render Pirrong’s testimony inadmissibly unreliable, in large part due to Pirrong’s explanation that “sound economic reasoning” indicates the impact of Defendants conduct would not have dispersed within days, despite the p-value results, and the spread was wider than anticipated for the December 2017 through March 2018 SRW wheat futures. Because Defendants’ false positives argument spins off from the p-values discussion and applies an across-the-board 43% threshold for statistical significance not adopted by Pirrong, the Court is disinclined to reach a different result here. Second, Defendants point to no flaws in Pirrong’s inputs to his studies. Defendants may explore false positives or other questions as to Pirrong’s studies through traditional evidentiary mechanisms.
Legal conclusions are inadmissible, while state-of-mind testimony is admissible where helpful to the jury and its probative value is not outweighed by a risk of unfair prejudice. The admissibility of alleged state-of-mind assertions is more nuanced. Direct opinions regarding state of mind are improper, although an expert may testify regarding the consistency of a certain action with a particular state of mind.
Plaintiff I-Mab Biopharma (“I-Mab” or “Plaintiff”) brought trade secret misappropriation claims against Defendants Inhibrx, Inc. (“Inhibrx”) and Brendan Eckelman (“Dr. Eckelman” and collectively with Inhibrx, “Defendants”).
Plaintiff asserted that Defendants misappropriated nine trade secrets (that correspond to molecules designed to treat cancer) that are referred to herein as Trade Secret 1, Trade Secret 2, Trade Secret 4, Trade Secret 5, Trade Secret 6, Trade Secret 7, Trade Secret 8, Trade Secret 9 and Trade Secret 10.
Plaintiff sought to exclude three categories of Defendants’ damages expert Dr. Richard Manning‘s opinions.
Economics Expert Witness
Dr. Richard Manning’s expertise includes economic valuation and damages, intellectual property, breach of contract, fraud, and other commercial litigation. He provides testimony and consultation in all these areas and on securities litigation, tax, antitrust and competition, and public policy.
A. Manning’s reliance on the “Book of Wisdom” doctrine
Under the reasonable royalty framework of damages permitted under the Defend Trade Secrets Act, parties rely upon a hypothetical negotiation analysis to “attempt to ascertain the royalty upon which the parties would have agreed had they successfully negotiated an agreement just before [misappropriation] began.” The hypothetical negotiation must attempt to “recreate the ex ante licensing negotiation scenario and to describe the resulting agreement.”
However, the analysis “permits and often requires a Court to look to events and facts that occurred thereafter and that could not have been known to or predicted by the hypothesized negotiators.” Facts that post-date the hypothetical negotiation may sometimes be relied upon in a reasonable royalty analysis as part of the “Book of Wisdom.”
Plaintiff asserted that Manning’s opinions based on events that occurred years after the date of the hypothetical negotiation in November 2021 should be excluded because he improperly utilizes the Book of Wisdom. According to Plaintiff, while the Book of Wisdom would permit an expert to rely on post-negotiation evidence to demonstrate a party’s actual state of mind in November 2021, Manning does not rely on such evidence in this way—and instead improperly uses it to replace the inquiry into what the parties would have anticipated.
Plaintiff asserted that Manning improperly used the Book of Wisdom with respect to two types of post-negotiation evidence: (1) evidence regarding Inhibrx’s decision to terminate INBRX-105 in January 2024 (“opinions relating to INBRX-105’s termination”) and (2) changes at I-Mab that took place in 2022 through 2024 (“opinions relating to later-occurring events at I-Mab”).
1. Opinions relating to INBRX-105’s termination
Parties’ Position
Defendants argued that it would be nonsensical to use I-Mab’s information to modify INBRX-105 when doing so would require starting over on manufacturing and toxicity development to support an entirely new IND application and filing that new application with the FDA.
The Court refused to exclude Manning’s opinions relating to INBRX-105’s termination for two main reasons. First, as Defendants point out, it was Plaintiff’s damages expert who initially opined about INBRX-105’s termination, stating that it “does not change the parties’ perspectives and negotiating positions as of a hypothetical negotiation in November 2021.” As a general matter, it is of course appropriate for an expert’s rebuttal report to respond to another expert’s opinions. And Manning does just that in at least certain of the challenged portions of his report.
Beyond that, Plaintiff’s argument is that at the time of the hypothetical negotiation, Defendants viewed INBRX-105 “as having significant value” and therefore the decision to terminate the program in January 2024 does not reflect what the parties were thinking in November 2021 (and thus Manning’s related opinions must be excluded). But Defendants are of course permitted to point to evidence to rebut the notion that they viewed INBRX-105 as having significant value in November 2021. Indeed, Defendants point out that Plaintiff’s own experts opine that leading up to the hypothetical negotiation, Inhibrx was concerned about INBRX-105’s likelihood of success.
Court’s Decision
In that vein, Defendants argued that Manning’s opinions relating to INBRX-105’s termination are consistent with Defendants’ views in November 2021 that there was much uncertainty regarding the development of INBRX-105. The Court concluded that it was not an improper use of the Book of Wisdom. In the end, it will be up to the jury to ultimately decide, based on all of the evidence, how Defendants viewed the INBRX-105 program at the time of the hypothetical negotiation.
Opinions relating to later occurring events at I-Mab
Plaintiff also moved to exclude Manning’s reliance on changes at I-Mab that occurred after the November 2021 hypothetical negotiation, including its decreasing stock price in 2022, termination of its partnership with AbbVie in September 2023 and I-Mab’s restructuring in April 2024; Plaintiff argued that this was improper use of the Book of Wisdom.
The two paragraphs at issue in Manning’s rebuttal report discuss I-Mab’s termination of its partnership with AbbVie and related decreasing stock price, and they are clearly responding to points made by Plaintiff’s experts regarding I-Mab’s partnership with AbbVie. Similarly, the two paragraphs at issue in Manning’s supplemental report relate to I-Mab’s restructuring and respond to points made by Plaintiff’s damages expert regarding this event.
The Court, once again, held that it is proper for Manning to respond to opinions raised by Plaintiff’s experts.
Manning’s opinion regarding “actual damages”
The DTSA provides that damages for misappropriation may be quantified in two ways: (1) damages for actual loss plus unjust enrichment or (2) a reasonable royalty.
Manning opined that he cannot rule out the conclusion that Plaintiff’s “actual damages” are zero (the “zero damages opinion”). Plaintiff argued that Manning’s zero damages opinion should be excluded as irrelevant because Plaintiff’s damages claims are not based on actual loss, and even if Plaintiff’s actual damages were zero, Plaintiff would still be entitled to a reasonable royalty.
The Court agrees with Plaintiff that Defendants ignored the “actual words” that Manning used, as he did not opine in the zero damages opinion that Plaintiff’s “reasonable royalty damages” are zero (nor do Defendants point to anywhere else in Manning’s report where he opined that Plaintiff’s reasonable royalty damages should be zero). Nor did Defendants explain why an opinion that Plaintiff’s “actual damages . . . are zero” should be interpreted to actually mean that Plaintiff’s “reasonable royalty damages are zero.”
Moreover, the Court agreed with Plaintiff that Manning does not seem to provide any facts or analysis in support of the zero damages opinion.
Held
Plaintiff sought to exclude three categories of Dr. Richard Manning’s opinions. The third category was about Manning’s alternative damages theory but the Court reserved decision on the third category until it resolved Plaintiff’s motion to exclude the opinions of Roland Newman. One of Plaintiff’s arguments is that Manning’s alternative damages theory should be excluded because Manning relied only on a conversation with Newman in support. The Court granted this portion of Plaintiff’s Daubert motion regarding Manning’s opinions.
In conclusion, the Court granted in part and denied in part the Plaintiff’s motion to exclude Manning’s opinions.
Key Takeaway:
Manning did not improperly utilizes the Book of Wisdom. Also, it is of course appropriate for an expert’s rebuttal report to respond to another expert’s opinions. And Manning does just that in at least certain of the challenged portions of his report. However, Manning’s zero damages opinion was excluded as the Court agreed with Plaintiff that Manning does not seem to provide any facts or analysis in support of the zero damages opinion.
Plaintiffs are a group of current and former KCS employees working as conductors and engineers, collectively referred to as Train, Engine & Yard (“TE&Y”) employees by the parties. They alleged an FMLA (Family and Medical Leave Act) discrimination claim based on KCS’s practice of placing on-call employees at the bottom of job boards (i.e., at the bottom of the list to be called to work) after returning from FMLA leave.
Plaintiffs alleged that certain policies violate the FMLA because they reduce the hours of work—and thus the ultimate take-home pay—of TE&Y employees who take FMLA leave.
TE&Y employees who work on-call schedules may be assigned to one of a few types of job boards. The basic functioning of the board types is the same: TE&Y employees assigned to a board are placed on a rotating list based on when they last worked and are generally called to work in that order.
Plaintiffs retained Andrew D. Schwarz, an economist, to provide expert testimony as to a class-wide, formulaic methodology to assess the damages arising from the bottom-of-the-board policy. At the core of Schwarz’s expert testimony is the assumption that, by being placed at the bottom of a job board upon returning from FMLA leave, TE&Y employees are harmed because of the additional waiting time before being called to a job.
Economics Expert Witness
Andrew D. Schwarz is an economist specializing in antitrust, class actions, and damages analysis, and has served as an economic expert in a variety of state and federal litigation. Schwarz’s primary practice is as a consulting expert, providing privileged advice to counsel and working with experts in very large, complex litigation matters in antitrust, intellectual property, sports and entertainment, and banking and insurance. He has extensive experience in class action litigation, providing assistance to counsel for Defendants and for Plaintiffs.
Schwarz identified two ways waiting-time damages present themselves: Schwarz called damages arising from the time an employee spends waiting on a board prior to taking leave, and losing the spot gained by that waiting, “Lost Priority Damages.” He referred to damages arising from an employee being placed on OK Hole Status, even after being marked up, as “Off-the-Board Damages.”
KCS moved to exclude Schwarz’s testimony on the bases that it is legally irrelevant and unreliable.
Timing
Plaintiffs seek class certification in this action. In doing so, they cite Schwarz’s expert testimony as support for the existence of a class-wide, formulaic methodology to assess damages arising from the Defendant’s “bottom-of-the-board” policy. Plaintiffs also contend that the class-certification stage is not the proper time for resolution of the admissibility of expert testimony.
The Court held that the admissibility of Schwarz’s expert opinion is relevant to the pending motion for class certification. In their class certification briefing, Plaintiffs point to Schwarz’s testimony as evidence that there is a “class-wide, formulaic methodology to assess the damages each Class member suffered” in relation to their bottom-of-the-board claim. Before a Court may certify a Rule 23(b)(3) “damages class,” the Plaintiff must show that “the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.”
Relevancy
KCS first argued that Schwarz’s testimony is not legally relevant because it does not calculate a type of damages recognized by the FMLA. Under the FMLA, an employee—upon proving a violation—may recover “damages equal to the amount of any wages, salary, employment benefits, or other compensation denied or lost to such employee by reason of the violation.” The Court, however, held that Schwarz has provided a method with relevant insight to the question of damages.
Plaintiffs claimed actual monetary loss in the form of lost pay as a result of the alleged FMLA discrimination. Schwarz has attempted to articulate a method to capture the actual monetary damage employees suffered as a result of KCS’s “bottom-of-the-board” policy. Schwarz calculates “the expected earnings per marked-up timeslot.” Then he multiplies this number by the “number of timeslots each Class member was denied the benefit of being marked up.” The result is one potential calculation for earnings expected, but not received. In other words, lost wages, or at least a reasonable proxy for them.
KCS argued that the measure of damages must be the exact “pay that the employee would have received but for the challenged policy.” Admittedly, Schwarz does not calculate the exact difference between any particular employee’s pay and what they would have received had they not been moved to the bottom of the board upon returning from FMLA leave. However, his method, which considers time marked up, time worked, and take-home pay, arguably makes more or less probable Plaintiffs’ allegations of lost wages.
The Court does not relieve Plaintiffs of their burden to prove damages. However, Schwarz’s method provides insight into the damages calculation by serving as a proxy for a highly difficult, if not impossible, calculation of exact wages lost as a result of the FMLA discrimination allegation.
Reliability
KCS asserts Schwarz does not reliably apply the ex ante principles he relies on to the facts of the case. KCS’s argument is premised on alleging that (1) Schwarz relies on incorrect factual assumptions, and (2) he does not consider clearly known or knowable later circumstances apparent in the facts of the case in his model, as is required by an ex ante approach.
The Court finds that Schwarz’s discussion of Plaintiff Scott Carter’s experience shows that employees returned to the bottom of the board may face longer waits for work, and that these longer waits may even compound into the future.
Schwarz properly accounts for this “knowable” event in his ex ante method
The Court noted that Schwarz accounts for a number of knowable events— including that some employees will receive minimum compensation regardless of taking leave. Schwarz provides three examples, only one of which he attributes harm to the employee upon taking FMLA leave, marking up, and going back on FMLA leave prior to working a job (this is the case where the employee is returned to the board at a lower spot each time they return from FMLA leave).
In other words, it seems KCS believes no harm accrues from the wait time between the first and second leave, even if the employee loses spots upon returning from leave both times, because the employee did not expect to work in the time between the first and second leave. However, the Court acknowledged Schwarz’s point that if an employee loses their spot on the job board both times, this would put the employee further away from work after each leave (a sort of compounding effect). This then correlates to a longer wait for work and less take-home pay than if the employee had taken only one leave.
The Court also finds Schwarz’s opinion is based on sufficient data. Schwarz’s opinion reflects and relies on the best data available to him—KCS’s own records of employees’ time spent marked up, time spent working, and ultimate take-home pay.
Held
The Court denied KCS’ motion in limine to exclude the testimony of Plaintiffs’ economist Andrew Schwarz.
Key Takeaways:
Schwarz’s ultimate method is an ex ante approach to damages calculation, which is a well-established calculation in economic literature.
Schwarz’s method provides insight into the damages calculation by serving as a proxy for a highly difficult, if not impossible, calculation of exact wages lost as a result of the FMLA discrimination allegation.
Case Details:
Case Caption:
Roberson Et Al V. The Kansas City Southern Railway Co.
Plaintiff, Raul Rodriguez brought this suit to recover for personal injuries sustained by Plaintiff as a result of an accident which occurred on February 22, 2021 in Jal County, New Mexico on a well owned and operated by Defendant, Kaiser-Francis Oil Company. Rodriguez was an independent contractor attempting to open a ball valve on a skid mounted manifold which was built and maintained by Defendant, Flow Testing, Inc. on Defendant’s, Kaiser-Francis Oil Company, well when he fell causing personal injuries.
Brian McDonald is an economist who served as the director of the Bureau of Business and Economic Research (BBER) at the University of New Mexico (UNM) from 1982 to 2000. Brian Earned his B.A. in economics from Georgetown University and went on to earn his Ph.D. in economics from The University of Pennsylvania
During his tenure as director, McDonald oversaw research on the economic conditions of New Mexico, including analyzing the state’s energy sector, labor market, and income distribution. He also led efforts to expand the BBER’s outreach to the broader community by establishing partnerships with government agencies, businesses, and other organizations to provide economic analysis and forecasting.
Plaintiff agreed that McDonald may not testify to a specific number or range for Plaintiff’s hedonic damages but argues that Defendants’ proposed limits on McDonald’s testimony are overbroad.
Judge M. Christina Armijo excluded any attempt by McDonald to quantify the Plaintiff’s hedonic damages because “the majority rule in federal courts … is that expert testimony which places a dollar figure before the jury in an attempt to quantify the value of a human life is inadmissible and does not meet the relevance and reliability factors set forth in Daubert and its progeny.”
The Court found Judge Armijo’s analysis persuasive and adopted it herein. In conclusion, McDonald’s testimony relating to hedonic damages will be limited to explaining the meaning of hedonic damages and areas of human experience that the jury may consider in quantifying such damages. The Court will not permit McDonald to provide any quantification of Plaintiff’s loss of enjoyment of life or to testify about the statistical value of life or studies related thereto because such testimony would be irrelevant, unreliable, and unfairly prejudicial. Nor will the Court permit McDonald to testify about or explain the caselaw regarding hedonic damages that he discusses at length in his report.
Held
The Court granted the Defendant’s motion to exclude any testimony by M. Brian McDonald insofar as McDonald may not testify about caselaw on hedonic damages but he may testify about other aspects of hedonic damages, including its definition and a general explanation of the components of an individual’s life that the trier of fact may consider in deciding whether to award hedonic damages and, if so, in what amount.
Key Takeaway:
It is well settled in the Tenth Circuit that an expert may not testify about his quantification of the value of Plaintiff’s hedonic damages. However, an economist expert may testify about the meaning of hedonic damages, how they differ from other damages, and areas of human experience to be considered in determining hedonic damages.
Jeremy Knorr (“Plaintiff”) worked as a firefighter for the Daisy Mountain Fire District (“the District”) from 1992 until 2019, when he was terminated at least in part due to his inability to comply with a new fitness policy (“the Health Center Policy”), adopted by the Daisy Mountain Fire District Board (“the Fire Board”) in late 2017, that required all District firefighters to take a yearly treadmill test and receive a Metabolic Equivalent Task (“MET”) score—which is a measure of cardiorespiratory and aerobic fitness—of at least 12.
In this action, Plaintiff has sued the District, the Fire Board, and the individual members of the Fire Board (together, “Defendants”) for age discrimination and retaliation in violation of the Age Discrimination in Employment Act (“ADEA”) and for disability discrimination in violation of the Americans with Disabilities Act (“ADA”).
Defendants retained Mark Hyland to “review and analyze the necessity for, and the requirements of, the Health Center Policy at the Daisy Mountain Fire District and to explain the various tests offered by the District to measure cardiovascular and aerobic fitness ability” while Plaintiff retained Michael Stokes to “calculate and revise the present value of the loss of earnings, income and fringe benefits sustained by Plaintiff.”
Plaintiff moved to exclude the opinions of Hyland while Defendant filed a motion to exclude the opinions of Stokes.
Occupational Therapy Expert Witness
Mark Hyland is a licensed occupational therapist, is “certified in functional capacity evaluation,” has been the director of clinical operations at STI for nearly 30 years, has “performed extensive research and analysis into the health and fitness needs of local business in various industries” including “the Phoenix, Glendale, Goodyear, Prescott and Tempe Fire Departments,” has “consulted on the subject of various government rules, regulations, and laws, including the [ADA] and OOSHA compliance,” and has testified as an expert in multiple occasions since 2001.
Michael J. Stokes earned a Master’s in Business Administration from the Isenberg School of Management at the University of Massachusetts Amherst with a focus in entrepreneurship. He is a partner at Beta Business, a leading consulting firm throughout the Southwest. Beta Business provides economic analysis reports, research and expert testimony for economic damage claims involving personal injury, wrongful death, employment (loss of earning capacity) and more.
Hyland opined that the “the District has a legitimate interest and duty to determine and ensure its employees can perform their duties safely.”
Plaintiff moves to preclude Hyland from testifying on the grounds that “1) Hyland is not medically qualified to testify regarding several areas and 2) the few areas he may have experience with do not require expert testimony.”
Hyland is not medically qualified to testify regarding several areas
Plaintiff’s primary objection to Hyland’s remaining opinions is that Hyland is unqualified to render them because they call for medical expertise but Hyland is not a doctor and did not play a direct role in administering the treadmill tests at STI. Although this challenge is not frivolous, the Ninth Circuit has emphasized that Rule 702 “is broadly phrased and intended to embrace more than a narrow definition of qualified expert.”
The Court is satisfied that this background, training, and experience as the director of clinical operations provides the necessary “minimal foundation” for Hyland to be qualified to opine on the the suitability and necessity of the Health Center Policy for firefighters; whether Plaintiff’s inability to comply with the Health Center Policy precluded Plaintiff from performing the functions of his job; the differences between the treadmill test, the walking test, and the bike test; and how Plaintiff would have fared on the latter two tests.
Nor is there any merit to Plaintiff’s contention that Hyland’s opinions on these topics should be excluded because they are contradicted by other evidence. As the Ninth Circuit has repeatedly emphasized, “[s]haky but admissible evidence is to be attacked by cross examination, contrary evidence, and attention to the burden of proof, not exclusion.”
The few areas Hyland may have experience with do not require expert testimony
As an initial matter, Plaintiff argues in his motion that several of Hyland’s proffered opinions should be excluded as irrelevant and unfairly prejudicial because they relate to obvious, undisputed issues that do not require expertise.
However, Defendants make no effort to respond to these arguments in their response. Instead, they contend— incorrectly—that “the only opinions [Plaintiff] challenges are Hyland’s opinions regarding the fitness tests provided to the District’s employees, the suitability and availability of other tests, and [Plaintiff’s] overall health and fitness levels” and then proceed to offer a defense of those opinions. It follows that Defendants have forfeited any defense of the subset of Hyland’s opinions challenged on relevance/403 grounds and have thus not met their burden of establishing the admissibility of those opinions.
Accordingly, the Court excluded Hyland’s first (“Firefighters require a high standard of physical fitness for safe and efficient job performance for their essential job demands.”), second (“The District had a legitimate interest and duty to determine and ensure its employees can perform their duties safely and that its employees are not a danger to themselves, their coworkers, and members of the public”), and fifth (“Cardiovascular standards are necessary for firefighters to adequately perform their job and for the health and safety of the firefighters, their coworkers, and the public.”) opinions.
Hyland’s opinions are not based on methods and procedures of science, but rather on subjective belief or unsupported speculation
Plaintiff’s motion also raises a fleeting challenge to the reliability of Hyland’s opinions but Hyland explains in his report that the Health Center Policy “was developed and based upon National Fire Protection Association (‘NFPA’) 1500 & 1582,” which “standards include, among other factors, spirometry pulmonary function screening and sub-maximal ECG performance tests”; that Hyland has also reviewed “[r]esearch with firefighters [that] indicates that a minimum aerobic capacity of 12.0 METS . . . is necessary for safe fire ground operations.” The Court held that Hyland has adequately explained how his opinions are “grounded in an accepted body of learning or experience in the expert’s field” and has also adequately “explain[ed] how the conclusion is so grounded.”
Hyland’s opinions are not subject to exclusion based on late disclosure
As background, under the scheduling order in this case, expert opinions were subject to a staggered disclosure schedule—the “party with the burden of proof on an issue” was required to provide expert disclosures by a certain date and the “responding party (not having the burden of proof on the issue)” was required to provide expert disclosures about a month later. Both sides were subject to the same deadline for completing expert depositions, which was about a month after the responding party’s disclosure deadline.
Plaintiff’s hyper-technical argument, raised for the first time in his reply, is that because Defendants have now clarified that Hyland’s opinions are intended to support Defendants’ affirmative defenses (as opposed to being used to undermine Plaintiff’s claims), they should have been disclosed by the first expert disclosure deadline in the scheduling order rather than the second, slightly later one. But even assuming this is correct, the Court held that the fact that Hyland’s opinions were disclosed about one month late would not automatically compel their exclusion.
As per Rule 37, any late disclosure was harmless because Plaintiff still received Hyland’s report more than a month before the expert-deposition deadline and was, in fact, able to depose him by that deadline.
Michael Stokes
Stokes calculated the present value of the loss of earnings, income and fringe benefits sustained by Plaintiff as $749,041. When doing so, Stokes assumed that but for Plaintiff’s termination, Plaintiff would have worked for an additional 13.5 years as a firefighter. Stokes also used Plaintiff’s past earnings as a firefighter as the foundation for his assumptions about what Plaintiff would have earned during this 13.5-year period.
Defendants argued that Stokes’ opinions should be excluded because they are based on the false assumption that Plaintiff would have worked for another 13.5 years as a firefighter but-for his termination. According to Defendants, this assumption is false because Plaintiff successfully applied for disability benefits in 2020, with a disability onset date of February 20, 2019. Defendants conclude: “Stokes’ did not know [Plaintiff] is disabled. This fundamental error permeated throughout Stokes’ entire analysis, including wrongfully relying upon a ‘normal work life expectancy’ rather than a disability work expectancy, and wrongfully assuming no disability exists in his calculation of [Plaintiff’s] claimed economic damages.”
Stokes’ opinion is based upon incorrect and incomplete facts
Stokes assumed, for purposes of his calculations, that Plaintiff would have worked for another 13.5 years as a firefighter (until the age of 64.6) and also used Plaintiff’s past earnings as a firefighter as the foundation for his assumptions about what Plaintiff would have earned during this 13.5-year period. If it were undisputed that Plaintiff became permanently disabled as of 2019, such that Plaintiff was thereafter unable to hold any paying job, there is a strong argument that Stokes’ assumptions would simply be too untethered to reality to permit the admission of his opinions.
However, Plaintiff retained the ability to continue working and earning wages and will continue to work until the age of 64.6, just as Stokes assumed. Furthermore, although the disability finding may eliminate the possibility that Plaintiff could have held one particular job—his previous job as a firefighter—following his termination, this at most means that Stokes’ assumptions about the amount of wages Plaintiff would have earned from his 13.5 years of posttermination work are incorrect. The Court held that the possibility that Stokes’ calculated damages figure may need to be reduced, because it is based on an inaccurate assumption, is not a reason to categorically exclude Stokes from testifying.
Held
The Court granted in part and denied in part the Plaintiff’s motion to exclude Mark Hyland.
The Court denied the Defendants’ motion to exclude Michael Stokes.
Key Takeaway:
Despite Hyland’s lack of medical expertise, the real reason the Court limited his opinions was that the Defendants forfeited any defense of the subset of Hyland’s opinions challenged on relevance/403 grounds, and therefore, they did not meet their burden of establishing the admissibility of those opinions.
Stokes did not know that the Plaintiff is disabled but his testimony was admitted despite this fundamental error.
Case Details:
Case Caption:
Knorr V. Daisy Mountain Fire District Et Al
Docket Number:
2:22cv608
Court:
United States District Court for the District of Arizona
This case arises out of Plaintiffs’ employment with McKesson and their allegation that McKesson discriminated and retaliated against them by denying them religious accommodations to McKesson’s COVID-19 Vaccination Protocol and terminating their employment. Plaintiffs sought damages which, including lost wages, in the form of back pay and front pay, and fringe benefits.
Plaintiffs retained Larry D. Stokes, Ph.D., of Beta Business Consulting, LLC, as an expert witness to provide his opinions of the economic losses purportedly suffered by each Plaintiff.
Defendants claimed that Stokes’ reports and testimony are inadmissible because his lack of knowledge reveals them to be wholly unreliable.
Economics Expert Witness
Larry D. Stokes is a forensic economist with over 40 years of experience in litigation related economics. He founded the Beta Business Consulting, LLC which provides provides economic analysis reports, research and expert testimony for economic damage claims involving personal injury, wrongful death, employment (loss of earning capacity) and more.
Stokes based his opinions on Plaintiffs’ earnings history, including the value of fringe benefits. To begin with, economists typically rely on W-2’s, personal information supplied by Plaintiffs in answers to economists’ questionaries, and employers’ information about compensation.
The Court found that Defendants’ motion lists seven items Stokes did not recall at his deposition. However, Defendants have not shown that these seven items are information essential to Stokes’ opinions. For example, Defendants argue that “Stokes did not know how he was retained for this case or when he began working on the analysis,” but fail to explain how this information is necessary foundation for his opinions.
Defendants have not addressed the facts and data Stokes used in reaching his opinions. That he did not remember at his deposition seven questions asked by Defense counsel might make for fruitful cross-examination, but the Court held that his failure to remember when he was employed or what information was requested of Plaintiffs does not show he lacked reliable data.
Defendants also argued that Stokes’ opinions should be excluded at trial because he “conceded that there were multiple errors in his initial reports at least one of which was a ‘pretty obvious mistake’ which ‘had a substantial impact.”’ However, the Court found that Stokes’ initial reports were revised, and the conceded errors were corrected.
The motion also sought exclusion of Stokes’ opinions from trial because he relied on unverified information provided by Plaintiffs or their counsel. However, the Court held that there is no basis to expect an expert to personally interview Plaintiffs and verify their history. To the contrary, Fed. R. Evid. Rule 703 specifically authorizes experts to base opinions “on facts or data in the case that the expert has been made aware of or personally observed.”
Held
The Court denied the Defendants’ motion to strike the expert testimony and report of Plaintiffs’ expert witness Larry D. Stokes.
Key Takeaways:
Expert reports are hearsay and normally not admitted at trial, absent stipulation. Experts are expected to be prepared to discuss their opinions and the basis of their opinions when they are deposed. But if an expert does not remember how the data was gathered or who prepared what portion of a report, his opinion is not discarded if the report sufficiently details the information he relied on in reaching his opinions. Typically, the expert is allowed to review his report and refresh his memory.
That an expert makes errors that are later corrected in supplemental reports does not show that the expert’s opinions lack sufficient facts or data. A few inconsequential errors in an initial report that was later revised to correct the errors do not warrant the exclusion of the expert’s opinions.
Charles Slaughter is a licensed physical therapist who owns a physical therapy clinic in Jackson, Mississippi. He brought this constitutional challenge to Mississippi’s Certificate of Need (CON) program because Mississippi has had a moratorium on issuing CONs to new home health care businesses for the past 42 years.
This case was initiated in the wake of the COVID-19 pandemic. Slaughter hoped to expand his business and offer in-home physical therapy to homebound patients during the pandemic. He says he was blocked from doing so. A set of Mississippi laws requires health care facilities to apply and receive a state-issued CON before opening, expanding, relocating, changing ownership, or even acquiring major medical equipment. Even if he were able to successfully apply and meet the requirements for approval of a CON, the Board of Health has made no recommendation to lift the moratorium as to at-home health facilities.
Slaughter alleged that the CON regime violated the equal protection and substantive due process clauses of the United States and Mississippi Constitutions.
Slaughter retained Dr. Thomas Stratmann as an expert witness and utilized Stratmann’s opinions to support his allegation that the CON laws and moratoria do not lower consumer costs, increase access to care, or increase the quality of care.
Mississippi Association for Home Care (MAHC) is a nonprofit whose members are licensed home health agencies that serve Mississippians. MAHC filed a motion to exclude Stratmann as Slaughter’s expert witness, claiming their long-established economic interests as CON holders, as well as care to indigent patients, would be impaired.
Economics Expert Witness
Thomas Stratmann holds a Ph.D. in economics from the University of Maryland. He is a Distinguished University Professor at Mason and holds an appointment as Professor of Economics at the Department of Economics and has a courtesy appointment at the Antonin Scalia Law School.
He has also coauthored policy briefs on CON laws, testified about CON laws before two state legislatures and served as an expert in five other lawsuits.
MAHC took numerous exceptions to Stratmann’s report. It argued that he is not a health care expert but rather an economist who has only worked in academia and presents “one-sided advocacy for free markets.” Additionally, MAHC argued Stratmann’s report is not helpful in determining if a rational basis existed at the time the CON laws were created because he bases his opinions on information after the enactment of the Mississippi home health CON laws.
MAHC also challenged the materials Stratmann used to create his report. It argued that while Stratmann’s report focuses on articles related to home health care costs, the report often ignores significant markers of success in home health care such as improvements in patients ADL’s.
MAHC took particular issue to the fact that Stratmann focused primarily on national information instead of Mississippi specific data from the Centers for Medicare and Medicaid Services (“CMS”). It says this shows that he lacks the fundamental knowledge of and experience with the services provided by home health agencies.
The Court found Stratmann qualified due to his “knowledge, skill, experience, training or education.” While an economist, he focused on CON laws and has both researched and written extensively on the topic. The Court disagreed with MAHC’s contention that Stratmann’s opinions “are not helpful in determining any material issues in this case.”
Defendants will have the opportunity to vigorously cross examine Stratmann on the facts and methods he relied on in forming his conclusions. Cross examination specific to the lack of CMS and Mississippi data in his report will be helpful to the Court, however, at this point the Court does not believe these claims alone are reason to exclude Stratmann.
Held
The Court denied MAHC’s motion to exclude Dr. Thomas Stratmann’s expert report.
Key Takeaway:
The Court is primarily concerned with MAHC’s contentions that “all of Stratmann’s opinions … are not based on sufficient facts and data” and that he “failed to consider or address the relevant Mississippi-specific facts and data in forming his opinions regarding improvements of health, quality, accessibility, acceptability and continuity of care.” However, Stratmann admittedly does research CON laws across the country, and this Court believes the national context and background on CON laws more likely than not will be beneficial to it during the bench trial.
Case Details:
Case Caption:
Slaughter V. Dobbs
Docket Number:
3:20cv789
Court:
United States District Court, Mississippi Southern
