This is a case under New York’s Debtor & Creditor law to set aside a February 2019 transfer of the “Halston” and “Halston Heritage” trademarks to Defendants. Comfortex, a garment manufacturer based in Hong Kong alleged that Xcel had used its domination over House of Halston (“HOH”) and its wholly owned subsidiaries (defined below as the “Halston Entities”) to obtain the trademarks for $9 million when the Halston Entities were insolvent and fair consideration would have been $21 million or more.
On July 6, 2018, Xcel obtained an appraisal of the trademarks prepared by Consensus Securities LLC. By August 4, 2018, the Halston Entities owed the Bank of HaPoalim, an Israeli bank, approximately $5.5 million dollars. On October 9, 2018, Xcel and the Halston Entities signed a letter of intent to transfer the “Halston” and “Halston Heritage” trademarks to Xcel for $11 million dollars. Consensus provided a second appraisal of the trademarks to Xcel on November 18, 2018.
At some time before January 2019, Xcel asked Consensus to prepare a fairness opinion to determine an appropriate purchase price for the “Halston” and “Halston Heritage” trademarks. On January 23, 2019, Consensus Valuation Benchmarking and Analytical Services had presented its findings (the “Consensus Report”). The Consensus Report provided a $17,170,000 low value estimation, $21,655,000 middle value estimation, and $29,088,000 high value estimation. On October 31, 2022, Xcel served an expert report prepared by Andrew Jassin. Jassin provided an expert opinion on the elements of a fair market valuation of a trademark and whether the Consensus Report had included a fair market valuation of the “Halston” and “Halston Heritage” trademarks.
Plaintiff Comfortex Company Limited filed a motion pursuant to Federal Rules of Evidence 403 and 702, to exclude the opinion testimony and expert report of Andrew Jassin.
Management Consulting Expert Witness
Andrew V. Jassin is founder and managing director of the Jassin Consulting Group, a management consulting firm providing strategy development and implementation services exclusively to the fiber, textile, apparel and home furnishings industries and related supply chain companies.
In 1989 he formed the Marketing Management Group, Inc. (“MMG”), a consulting firm which helped fashion and retail businesses function effectively and provided independent expert counsel to top management on issues related to brand management, licensing, marketing and product evaluation. Jassin became one of the most influential and respected advisors in the fashion industries.
Jassin opined that the Consensus Report was not a fair market valuation because it was prepared for Xcel, a buyer, when “fair market valuations are created for the benefit of the seller not for the buyer.” Specifically, Jassin stated a fair market valuation would contain 14 different factors, as he defined them.
Moreover, Jassin’s report did not include any financial estimates about the value of the trademarks.
Jassin failed to review the July 6, 2018 and November 21, 2018 appraisals conducted by Consensus
Here, Jassin’s conclusion that the Consensus Report did not include a fair market valuation of the “Halston” and “H by Halston” trademarks was based, in part, on the Report’s failure to include a discussion of the 14 factors that Jassin contended were required to qualify as a fair market value report. As Comfortex pointed out, the Consensus Report explicitly referred to and incorporated prior appraisals prepared by Consensus on July 6 and November 21, 2018. It was undisputed that Jassin did not review the appraisals, both of which were produced in discovery and were available to the Defendants.
The Defendants argued that Comfortex failed to explain why the July 6 and November 21, 2018 appraisals would affect Jassin’s methodology.
But Comfortex noted that the appraisals included a recitation of the 14 factors Jassin opined were necessary for a fair market value report. Defendants never disputed this point. In other words, Jassin did not review directly relevant parts of the record, which rendered his opinion unreliable.
Because Jassin did not review relevant parts of the record, the Court found Jassin’s expert report was based on data that was “simply inadequate to support the conclusions reached,” such that Jassin lacked good grounds for his opinion that the Consensus Report was not a fair market value report.
Jassin did not offer an opinion as to the value of the trademarks
Comfortex argued that the report should be excluded under Rule 403 because it did not offer an opinion as to the value of the trademarks, and thus had no probative force. However, because Jassin’s expert report did not meet the requirements of Rule 702, the Court need not analyze whether it should also be excluded pursuant to Rule 403.
Held
The Court granted Comfortex’s motion to exclude Andrew Jassin’s expert report.
Key Takeaways:
Inadequate Data: When an expert opinion is based on data or a methodology that are simply inadequate to support the conclusions reached, Daubert and Rule 702 mandate the exclusion of that unreliable opinion testimony.
This case involves contract disputes. The first contract between Plaintiff, SIS, LLC (“SIS”) and Defendant, Orion Group Holdings, Inc. was the Professional Services Agreement (“PSA”). It was entered into in June 2010. Under the PSA, Plaintiff provided software consulting services for Defendant. After over ten years of performance under the PSA, the parties entered into a second agreement, the SaaS Services Agreement (“SaaS Agreement”), which was to last five years. It was entered into in 2020. Under that agreement, Plaintiff provided Defendant with different software, including but not limited to Microsoft Dynamics 365, which Defendant purchased as part of a project to implement a new enterprise-wide software system.
Eventually, a disagreement occurred, and Defendant stopped payment under the SaaS Agreement. Defendant only paid one of the five required payments. Plaintiff sued Defendant to recover the remaining payments. As part of Defendant’s answer, it asserted a counterclaim. The counterclaim alleges that Plaintiff’s “services” under the PSA failed in their entirety.”
Plaintiff argues that (1) the PSA makes no warranties as a matter of law, and (2) Defendant failed to plead compliance with a condition precedent to recovery.
Pursuant to the First Amended Scheduling Order (the “Scheduling Order”), SIS designated its two experts on January 5, 2023. Neither expert served the required report.
James Bowman and Mark Kershteyn had been designated to testify whether the professional services rendered by SIS to Orion under the parties’ Professional Services Agreement, especially those intended to aid Orion in selecting, purchasing, and utilizing the Microsoft and SIS software defined as “Services” in the parties’ SaaS Agreement, (1) met or exceeded industry standards, (2) complied with all federal, state, local laws, statutes, and ordinances, and (3) otherwise fulfilled all warranties made by SIS to Orion regarding those professional services.
The Court addressed the Motion to Strike concerning Bowman’s designation as a liability expert and his report (the “Bowman Report”). The motion sought to strike the report for three main reasons: (i) the report was served on June 16, 2023, five months beyond the deadline specified in the Court’s Agreed Scheduling Order; (ii) Bowman failed to demonstrate his competence to render liability expert opinions; and (iii) the report was deemed wholly conclusory without citing any evidence, thereby violating Rule 702 of the Federal Rules of Evidence and Rule 26(a)(2) of the Federal Rules of Civil Procedure.
Additionally, although Kershteyn was timely designated, he never served a report. SIS was deemed to have no excuse for its failure to produce Kershteyn’s report on any topic. Despite subsequent interrogatories revealing SIS’ alleged damage claim as $2,186,316, representing the remaining contract balance for the last four years of the SaaS Agreement, Kershteyn asserted that SIS’ lost net profit was “irrelevant.” SIS refused to produce its lost profits evidence, contrary to the legal standard for breach of contract damages. Consequently, Kershteyn’s damages methodology was considered fundamentally flawed as a matter of law. Orion also objected to SIS’ designation of Mark Kershteyn and moved to strike the same.
Management Consulting Expert Witness
James Bowman has more than 40 years of experience as an executive, entrepreneur and thought leader in the technology services arena, including 17 years as president and CEO of SBS Group where he oversaw growth from a small, local partner to a leading international Microsoft solution provider. He has demonstrated acumen in consulting services, sales, marketing, and daily operations overseeing multiple business units. He boasts of extensive experience within the Professional Services, Distribution, and Manufacturing industries.
Discussions by the Court
Orion sought to strike the expert designation and report of James Bowman (“Bowman”), who was designated as SIS’ expert for rebutting liability in relation to Orion’s breach of warranty counterclaim. Orion argued that Bowman’s report was both untimely and conclusory. Furthermore, Orion asserted that Bowman lacked the competence required to provide liability expert opinions under the Daubert standard. The Court initially addressed the issue of Bowman’s competence to testify as an expert under Daubert.
Under Daubert, trial courts are tasked with a gatekeeping function to assess the scientific validity of expert testimony and its applicability to the facts in question. The text outlines Rule 702 criteria, stating that a qualified expert can testify if their specialized knowledge assists the trier of fact, rests on sufficient facts and reliable principles, and the witness has reliably applied those principles to the case’s facts. The proponent of expert testimony must demonstrate its reliability by a preponderance of the evidence.
The Court examined Bowman’s credentials, revealing that he served as Chairman of the Board at Velosio, a competitor of SIS and Microsoft’s largest independently owned solution provider for Business Applications. Bowman’s resume indicated his role as Chief Revenue Officer at Velosio from 2018 to 2021, overseeing Sales, Marketing, and Cloud efforts, acting as the primary relationship manager for Velosio’s Microsoft connection, and liaising with service/implementation teams. SIS contended that Bowman was qualified to testify as an expert based on his extensive work experience, attendance at industry conferences, participation in industry organizations, and involvement in sales and acquisitions.
The Court determined that Bowman’s background and experience were satisfactory, establishing by a preponderance of the evidence that he was qualified to testify as a rebuttal expert regarding SIS’ performance under the PSA. The Court cited Federal Rule of Evidence 702(a)-(d), emphasizing Bowman’s “knowledge, skill, experience, training, or education.” SIS pointed out that Bowman possessed over thirty years of industry experience and had participated in “more than 500 implementations,” including those relevant to the ongoing lawsuit.
According to the First Amended Scheduling Order, the deadline for designating Plaintiff’s experts and providing reports was January 5, 2023. SIS conceded that Bowman did not submit an expert report by the specified date. However, SIS argued that Bowman’s report was intended solely for rebuttal, addressing Orion’s counterclaim, and was thus timely filed on June 16, 2023. The Court, in the Amended Order Granting Defendant’s Unopposed Motion, allowed Plaintiff’s designated retained expert to serve a rebuttal report within 30 days after Defendant’s expert reports were served. Orion contended that the report was untimely and should be dismissed due to not meeting the original January deadline. The Court determined that Bowman was explicitly designated as a rebuttal expert witness, and therefore, his rebuttal report, filed on June 16, 2023, was considered timely within the 30-day window following Orion’s submission of expert reports on May 19, 2023.
Orion raised concerns about the content of Bowman’s report, asserting that it did not adequately establish or address the designated components: industry standards, compliance, and warranties. Orion further argued that Bowman failed to cite any evidence and did not rebut any portion of Orion’s liability expert, Greg Crouse, or mention Crouse’s report. In the appendix to his rebuttal report filed on June 16, 2023, Bowman provided a list of documents he relied on, including recordings of internal meetings between SIS and Orion during the relevant period. SIS countered by highlighting that Bowman’s opinions were firmly grounded in a Statement of Facts, wherein he precisely identified the basis for each observation.
The Court rejected Orion’s motion to strike Bowman’s rebuttal report but issued a caution. Bowman was restricted to providing testimony exclusively in rebuttal. During the trial, he was confined to presenting opinions that were both outlined in his report and specifically offered as direct rebuttals to Orion’s designated liability expert concerning the breach of warranty counterclaim.
SIS designated Mark Kershteyn (“Kershteyn”), a co-owner of SIS, to serve as a fact witness concerning SIS’ damages under the SaaS Agreement. Additionally, Kershteyn was designated as a non-retained expert to provide testimony on SIS’ standard of performance under the PSA. According to Rule 26(a)(2)(C), a witness who is not “retained or specially employed to provide expert testimony in the case” is classified as a non-retained witness and is not required to file a report. The distinction lies in the fact that a retained expert is recruited solely to offer expert testimony without prior personal knowledge of the case’s facts, while a non-retained expert’s testimony stems from their direct involvement in the events leading to the litigation.
As a non-retained expert witness, Kershteyn was not obligated to provide an expert report on the issue of SIS’ standard of performance under the PSA. Similarly, he was not required to submit a report on SIS’ damages under the PSA, as he qualified as a lay witness testifying from personal knowledge of the transaction. Orion contended that Kershteyn’s interrogatory responses on the issue of damages should be excluded due to his alleged failure to identify SIS’ claimed lost profits. The Court, in a previous ruling, had already stated that Kershteyn’s affidavit was enough to raise a genuine issue of fact as to direct lost profits damages associated with the alleged breach.
Therefore, Kershteyn, as a non-retained expert, was not mandated to submit a report on Orion’s breach of warranty counterclaim. Additionally, Kershteyn was permitted to testify as a lay witness regarding SIS’ alleged damages based on the SaaS Agreement.
Held
The Court denied Orion’s Motion to Strike SIS’ Designation of Experts and the Expert Report submitted by James Bowman.
The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.
Key Takeaways
In this case involving contract disputes between SIS, LLC (“SIS”) and Orion Group Holdings, Inc., the Court addressed challenges to expert testimony provided by James Bowman and Mark Kershteyn. The dispute centered around SIS’ performance under the Professional Services Agreement (PSA) and the SaaS Services Agreement (SaaS Agreement). Bowman, designated as an expert for rebutting liability in Orion’s breach of warranty counterclaim, faced objections over his competence to render liability expert opinions. Kershteyn, a co-owner of SIS, served as a fact witness and non-retained expert. The Court determined that Kershteyn was not required to serve an expert report as a non-retained expert on Orion’s breach of warranty counterclaim.The key takeaway underscores the Court’s careful consideration of objections related to expert testimony, ensuring compliance with procedural rules and evaluating the sufficiency of evidence presented in the context of contract disputes.
