Plaintiff Duane Anthony Beyenhof alleged that his former employer Defendant Schwan’s Consumer Brands, Inc. (“Schwan’s”) wrongfully terminated him in retaliation for reporting illegal activity at work and because of his age.
Schwan’s claimed he was terminated for not wearing a seatbelt in violation of Defendant Schwan’s Consumer Brands, Inc.’s (“Schwan’s” or “Defendant”) zero tolerance Seat Belt Policy.
Defendant Schwan’s Consumer Brands, Inc. requested the Court to issue an order in limine excluding the testimony of and any reference to the expert reports of Plaintiff Duane Beyenhof’s designated experts, Heather H. Xitco and Anthony E. Reading as they did not meet the admissibility requirement of the Federal Rules of Evidence (“FRE”) 702 and would have presented evidence that was needlessly cumulative and unduly prejudicial to Defendant.
Psychology Expert Witness
Anthony E. Reading is a licensed psychologist in the State of California. He is a Clinical Professor in the Department of Psychiatry at the David Geffen School of Medicine at UCLA. He is a member of the American Psychological Association, the California State Psychological Association, the British Psychological Society.
Click here to purchase Anthony Reading’s Expert Challenge Study and learn about the 86 cases where his testimony has been subjected to a challenge.
Finance Expert Witness
Heather H. Xitco is a Principal with Dolan Xitco that provides litigation support, financial analysis, and expert testimony. She holds a Bachelor’s degree in Economics from the University of Southern California and a Master’s in Business Administration, with an emphasis in Finance, from the University of San Diego. She is a practicing Certified Public Accountant in California with a Certification in Financial Forensics (CFF).
Heather Xitco’s testimony has been challenged in more than 50 cases in the past. You can click here to order an Expert Challenge Study on Ms. Xitco and learn all about the grounds of challenge, outcomes, retaining and opposing attorneys and more.
Discussion by the Court
Under Federal Rule of Evidence 703, an expert witness can base opinions upon inadmissible hearsay evidence if that evidence is reasonably relied upon by experts in the same field on the same subject. Here, Defendant was concerned that both Xitco and Reading relied on Plaintiff’s statements to form their opinions.
Court Should Exclude the Testimonies Of The Plaintiff’s Experts because They Do Not Offer Any Testimony that is Sufficiently beyond Common Experience or Knowledge That Would Assist the Trier of Fact
The Plaintiffs retained Xitco to “present evidence related to Plaintiff’s economic damages, including past, present, and future lost wages and benefits, and Defendant’s finances.”
The Defendant argued that in determining Plaintiff’s lost earnings and benefits, Xitco merely relied on his previous wages, bonus, and benefits, and then factored in an estimated 2% growth based on his past wage increases. Accordingly, the calculations in Xitco’s report were simple mathematical calculations that a non-expert witness can just as easily explain and a juror can calculate.
The Defendant alleged that Readings’ Rule 26 Report was essentially an overview of his initial—and only—consultation with Plaintiff. He based his conclusion of Plaintiff experiencing a Major Depressive Disorder following his termination on Plaintiff’s self-reported feelings. Reading failed to exhibit the level of care required in his field due to his singular visit with Plaintiff.
After reviewing the reports, the Court found that the evidence relied upon is of the kind reasonably relied upon by experts in the same fields on the same subjects.
The Court held that Defendant’s concerns about the reliability of Reading’s methods concerned the weight of the testimony, not the admissibility. It also found that Xitco’s expert testimony assisted the jury under Rule 702 by aiding the understanding of damages.
The Court should exclude Reading Because Plaintiff Failed to Comply to FRCP Rule 26(a)(2)(A-D)
Defendant filed a motion to exclude specifically Reading’s expert testimony and report because Plaintiff failed to comply with Federal Rule of Civil Procedure 26(a)(2)(A-D). Concerning failure to comply with Federal Rule of Civil Procedure 26(a)(2)(A-D), federal courts have the discretion to exclude expert witness testimony due to an untimely or inadequate expert disclosure.
The Court held that exclusion of the entire testimony would be unjustified, considering Plaintiff provided Reading’s Report on April 20, 2023, a year before the set trial date on March 5, 2024. Defendant had ample time to review the supplemental testimony.
Held
The Court denied the motions to exclude Finance Expert Witness Heather Xitco and Psychology Expert Witness Anthony Reading.
The Court dismissed the case on March 04, 2023.
Key Takeaways:
Admissibility under Federal Rule of Evidence 702: The Court resorts to exclusion only when the expert’s opinions lack fundamental support. The Court held that Defendant’s concerns about the reliability of Reading’s methods concerned the weight of the testimony, not the admissibility. It also found that Xitco’s expert testimony assisted the jury under Rule 702 by aiding the understanding of damages.
Compliance with FRCP Rule 26(a)(2)(A-D): Federal courts have the discretion to exclude expert witness testimony due to an untimely or inadequate expert disclosure. But excluding Reading’s Report was unjustified considering any errors were clearly harmless since Defendants had ample time to remedy any concerns.
Hurricane Sally, which made landfall in Gulf Shores, Alabama on September 16, 2020, damaged the Compass Point Condominium (the “Condo”). This action arises out of a disagreement between the insured, Compass Point Condominium Owners’ Association, Inc. (the “Plaintiff”), and its insurer, Landmark, regarding the extent of damage to Plaintiff’s property caused by Hurricane Sally, the necessary repairs, and the cost of those repairs. Landmark retained Sam Keke and Rob Senecal to investigate the cause and extent of the damages at the Condo and Compass Point sought the exclusion of their respective expert testimony.
Civil Engineering Expert Witness
Samuel D. Keske is an engineer who works for Wiss, Janney, Elstner Associates, Inc. with a bachelor’s, master’s, and Ph.D. in civil engineering from Auburn University. He is licensed in eight states and has worked for WJE for the past nine years. He is engaged in the investigation, assessment, and rehabilitation of a variety of new and existing structures, with a focus on the early-age and long-term performance of concrete structures. His experience includes comprehensive investigation and rehabilitation of bridges and civil infrastructure facilities; physical testing, analysis, and mitigation of building construction/design defects; and repair and strengthening design with on-site support.
Construction Expert Witness
Rob Senecal II, a Partner of Surety Division at YOUNG & Associates, started in the construction industry in 1982 as an engineering assistant with Perini Corporation. During his 30-year tenure at Perini, Senecal held various positions including Chief Field Engineer, Office Engineer, Estimator, Assistant Superintendent, Superintendent, General Superintendent, and Operations Manager. Senecal worked on a variety of projects including prisons, hospitals, waste treatment plants, pharmaceutical laboratories, casino hotel resorts, high-rise office towers, parking garages, and schools. As a Partner for YOUNG & Associates, Senecal has been involved with damage claims ranging in cost from 25K to over 100 million, including builder’s risk claims. He has consulted on the flood, hurricane, hail, fire, vandalism, and construction accident losses involving structures such as residential homes, manufacturing facilities, college and municipal buildings, exercise facilities, hotels, parking structures, restaurants, schools, and hospitals, prisons, docks and piers, highways, and high-rise construction.and schools.
Discussion by the Court
Landmark hired Sam Keske (“Keske”), an engineer from Wiss, Janney, Elstner Associates, Inc. (WJE), to conduct a damage assessment of the exterior windows, doors, and skylights of the Condo. Keske was designated to testify, among other things, regarding the wind speed and pressure generated by Hurricane Sally. Specifically, he expressed the opinion that the windows and doors of the Condo “were unlikely to have experienced wind-pressure damage from Hurricane Sally.”
Compass Point sought the exclusion of Keske pursuant to Federal Rule of Evidence 702, arguing that (1) he was unqualified, (2) his methodology was unreliable, and (3) his opinion would be of little assistance to the trier of fact, with Landmark disputing each one of the grounds.
The Court found that Keske was qualified as an expert. The record showed that Keske held a bachelor’s, master’s, and Ph.D. in civil engineering and was licensed in eight states. He had worked for WJE for nine years. Despite Compass Point’s assertion that Keske lacked sufficient experience specifically dealing with fenestration systems, Landmark pointed out Keske’s experience with condominium properties following hurricane events and his prior experience as the lead engineer investigating fenestration systems. The qualification standard for expert testimony was noted to be “not stringent,” with objections to the level of the expert’s expertise concerning the credibility and weight rather than admissibility so long as the expert was found to be minimally qualified, as cited by the Court in Hendrix v. Evenflo Co., 255 F.R.D. 568 (N.D. Fla. 2009). The Court found Keske qualified to testify in the action, after a review of the relevant supporting evidence.
The Court held that Keske’s opinions were not subject to exclusion for unreliability. Keske used winds speeds recorded at six different weather locations within a 12-mile radius of Compass Point in order to calculate the wind load on Compass Point. Compass Point argued that the methodology Keske employed to calculate wind speeds and pressure deviated from standard practices and was based on “incorrect code data.” Compass Point additionally claimed that Keske used the wrong building code to determine fenestration wind loads. The Court held that Compass Point’s objections to the data used by Keske in his calculations called into question the weight and credibility of Keske’s opinions, not their admissibility which meant that the alleged shortcomings could be adequately addressed on cross examination.
Additionally, Compass Point sought the exclusion of Keske’s testimony on the grounds that it would not assist the trier of fact. However, this argument relied largely on Compass Point’s contention that Keske’s opinions were unreliable, as discussed previously. Since the Court was not persuaded by Compass Point’s reliability argument, it also did not find that this rendered Keske’s testimony unhelpful. Moreover, the Court noted that Keske’s testimony was beyond the understanding of the average lay person and would assist the trier of fact in the action.
Finally, Compass Point argued that Keske’s opinion should be excluded because it constituted hearsay and merely echoed the findings and conclusions of his co-workers. However, upon reviewing the relevant opinions, deposition testimony, and exhibits, the Court determined that Keske’s opinion was not simply a repetition of another expert’s findings. Instead, the record showed that Keske had conducted his own investigation and had consulted with his colleagues as part of the normal course of business. Therefore, the Court was not convinced that Keske was merely conveying hearsay, and exclusion was deemed unnecessary.
In response to Compass Point’s motion to exclude Landmark’s expert Sam Keske (“Keske”), Landmark submitted a new affidavit from Keske containing new opinions and calculations and Compass Point responded by requesting the Court to strike paragraphs 7 and 9 of the Keske Affidavit. Since the Court had decided that Keske’s opinions need not be excluded without consideration of the affidavit submitted by Keske, Compass Point’s Motion to Strike was deemed moot by the Court.
Rob Senecal, a building consultant for Young and Associates (Y&A), was designated to provide expert testimony regarding the reasonable and necessary costs for repairing the damage to the Condo. Y&A was hired by Landmark after Hurricane Sally to inspect and prepare a global repair estimate of damages caused to the Condo. Y&A conducted its first inspection of Compass Point in September 2020. According to Compass Point, this initial inspection formed the basis of the ultimate estimate provided by Y&A which was presented as part of Senecal’s expert disclosure.
Compass Point sought the exclusion of Senecal under Rule 702, arguing that (1) the reason he could not recall details of the estimate was because he did not prepare it, (2) he disregarded his own cost assessment methodology outlined in the Xactimate user manual, and (3) his opinions were unreliable and would not assist the trier of fact. Additionally, Compass Point sought exclusion of Senecal’s testimony as per Rule 703 arguing it constituted hearsay. Each of these grounds were disputed by Landmark.
The Court was not convinced that Senecal’s testimony should be excluded under Rule 703 as hearsay. The expert report disclosed by Senecal was not the same report which Compass Point repeatedly pointed out was not prepared by Senecal. Rather, an initial report was prepared by other Y&A consultants followed by nine more reports, and then ultimately the report which was disclosed, was in fact prepared by Senecal. While the Court appreciated Compass Point’s position that the ultimate report was based, in large part, on a previous report, it was not persuaded that Senecal should be prevented from testifying because his report also included estimates from previous reports. Rather, in this instance, it was evident that Senecal personally oversaw the project beginning in October 2020 which required his actual involvement in the mitigation and rebuild efforts, and he personally drafted the report submitted with his expert disclosures.
The Court was additionally not persuaded that Senecal’s testimony should be excluded under Rule 702. Senecal’s estimate was prepared using the software application Xactimate, which had been accepted by Courts as a reliable method of construction cost valuation. Although Compass Point raised concerns about Senecal’s failure to seek out independent cost estimates and/or verify the amounts by the insured according to the Xactimate user agreement/manual, the Court deemed these objections to be more related to the weight of Senecal’s testimony rather than its admissibility.
The Court was not persuaded that exclusion of Senecal’s testimony was warranted on the grounds that it would not assist the trier of fact. This argument, like the previous ones, relied largely on Compass Point’s assertion that Senecal’s opinions were unreliable. Since the Court did not find Compass Point’s reliability argument convincing, it also did not find that this made Senecal’s testimony unhelpful. Additionally, the Court noted that Senecal’s testimony was beyond the understanding of the average lay person and would assist the trier of fact in the action. Therefore, exclusion was deemed unnecessary.
Held
The Court denied Compass Point’s Motions to exclude the expert testimony of Sam Keske and Rob Senecal. Additionally, Compass Point’s Motion to Strike paragraphs 7 and 9 of the Keske Affidavit was deemed moot.
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 the case regarding the damage caused to Compass Point Condominium as a result of Hurricane Sally, expert testimony played a crucial role. Sam Keske, retained by Landmark American Insurance Company, was found qualified despite challenges from Compass Point regarding his expertise and methodology. The Court deemed Keske’s qualifications sufficient, emphasizing his background in civil engineering and his experience investigating fenestration systems. Despite objections to the reliability of his opinions, particularly regarding the methodology employed by him and data accuracy, the Court ruled that these concerns affected the weight of Keske’s testimony rather than its admissibility, allowing for cross-examination to address any discrepancies. Additionally, the Court determined that Keske’s testimony would assist the trier of fact. Similarly, Rob Senecal, a building consultant for Young and Associates, faced challenges regarding the admissibility of his testimony from Compass Point, including concerns about his involvement in preparing the estimate and the use of Xactimate for construction cost valuation. However, the Court found Senecal qualified as an expert based on his direct supervision of the project and extensive experience in the construction industry. Objections to the reliability of Senecal’s testimony were once again deemed issues of weight rather than admissibility. Ultimately, the Court ruled that both Keske’s and Senecal’s testimonies would assist the trier of fact, emphasizing the importance of expert knowledge in understanding complex issues related to damage assessment and repair costs.
Case Details
Case Caption:
Compass Point Condo. Owners’ Ass’n, Inc. v. Landmark Am. Ins. Co.
Plaintiff Brand Design Company, Inc., d/b/a House Industries (“House”), a design studio and typeface foundry is in the business of developing and marketing proprietary fonts. House accused Defendant Rite Aid Corporation of appropriating one of these proprietary fonts and its corresponding font software—Neutraface—in the pharmacy chain’s rebranding effort, with the assistance of Defendants GA Communications, Inc., d/b/a PureRED Creative, LLC (“PureRED”), Burns Group, NYC, LLC (“Burns Group”), and Sway Creative Labs, LLC (“Sway”) (collectively, “Defendants”), violating licensing agreements that prohibited them from using Neutraface for this purpose in this breach of contract, unfair competition, and unjust enrichment lawsuit. House alleged that Defendants obtained access to Neutraface by purchasing a “standard form ‘desktop’ license” from House. House contended that certain uses of the Licensed Software and Fonts and glyphs generated were expressly prohibited.
House hired Graham D. Rogers, an economic consultant, to identify damages resulting from Defendants’ alleged actions. His report calculated damages in two general categories: (1) actual damages sustained by House, and (2) disgorgement of each Defendants’ profits.
Defendants Burns Group and PureRED filed a Daubert motion to exclude the testimony of Rogers. The parties also sought to seal various portions of Rogers’ report and their Daubert motion briefing.
Economic Damages Expert Witnesses
Graham D. Rogers’ professional career spans more than 35 years. For more than 25 of these years, Rogers has been assisting clients with their intellectual property needs. He has been retained as an expert to determine economic damages in a variety of litigation matters including patent infringement, trademark infringement, theft of trade secrets, and copyright infringement disputes. He has quantified economic damages that include the calculation of lost profits, the determination of reasonable royalties including hypothetical negotiation scenarios, the quantification of unjust enrichment, the identification and quantification of actual damages for both trademark and trade secret matters, and the assessment of the economic value of intellectual property. Rogers has testified in several federal jurisdictions as well as various state courts.
Discussion by the Court
While calculating actual damages sustained by House, Rogers explained in his report that the “commonly accepted remedy of actual damages” in a licensing dispute is “lost profits in the form of lost licensing profits”—in other words, the value of the hypothetical license that Defendants were obligated to, but did not, obtain.
In order to determine the value of this hypothetical license, Rogers utilized the methodology set forth in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F.Supp. 1116 (S.D.N.Y. 1970) which listed evidentiary factors which helped determine a reasonable royalty for a patent license, such as “the rates paid by the licensee for the use of other patents comparable to the patent in suit”; “the commercial relationship between the licensor and licensee”; “the duration of the patent and the term of the license”; and “the extent to which the infringer has made use of the invention; and any evidence probative of the value of that use.” Roger stated that this methodology provided helpful guidance to experts and the parties when determining a hypothetical license value in non-patent license disputes before concluding that “House [would be] in a strong bargaining position during the hypothetical negotiation” with Defendants. And, extrapolating from prior licensing agreements negotiated by House considering those factors, he ultimately concluded that the total lost profit from Defendants’ hypothetical license was approximately $7.5 million.
In the alternative, Rogers utilized the “income approach,” to calculate the lost profits if Defendants had sought to purchase (rather than license) House’s font—something his report acknowledged “is not common practice in the industry.” The “income approach,” values an intangible asset based on the present value of the future income streams expected from the asset under consideration. Rogers testified that following hypothetical negotiations, Defendants would have agreed to purchase, and House would have agreed to sell, Neutraface for approximately $7.7 million.
With regards to disgorgement of profits, Rogers’ report aimed to identify the percentage of Defendants’ revenue that could be reasonably attributed to their improper use of Neutraface. As to the advertising agencies, he opined that their “profits were directly tied to either their alleged breach of the licensing agreements or alleged unjust enrichment.” After totaling the invoices related to the Rite Aid rebranding, and offsetting this sum by his estimation of deductible costs, Rogers concluded that the profit subject to disgorgement from PureRED, Burns Group, and Sway was approximately $6 million, $775,000, and $41,000, respectively.
Both Burns Group and PureRED challenged the fit of Rogers’ expert opinions, arguing (albeit for somewhat different reasons) that his report would not assist the trier of fact. PureRED objected to Rogers computing House’s lost licensing profits by evaluating a hypothetical negotiation between House and Rite Aid, rather than a hypothetical negotiation between House and the other Defendants because it rendered the opinions in his report irrelevant as to any damages caused by PureRED’s alleged breach of contract. Rogers responded by stating that his damages’ estimate reflected the lost value of a license that would have been utilized by all four Defendants to this action, not just the damages resulting from Rite Aid’s own alleged breach of contract.
The Court observed that even though PureRED attacked Rogers’ views about the likelihood of a sublicense, as well as his conclusion that an analysis of a hypothetical negotiation between House and Rite Aid accurately incorporates the damages that are attributable to the other Defendants, such disagreements went to the correctness of Rogers’ opinions making it a question for the trier of fact to decide when the expert is subjected to cross-examination.
Second and relatedly, PureRED argued that Rogers’ testimony would be unhelpful to a jury citing his failure to connect his damages estimate to the specific actions of each Defendant. By way of background, Pennsylvania requires Plaintiffs claiming breach of contract to “show a causal connection between the breach and the loss” to recover damages. PureRED contended that Rogers did not provide any evidence that the alleged damages were proximately caused by PureRED’s alleged wrongful act. The Court held that the burden of establishing causation lies with House as part of its case-in-chief— not with the expert it hired to opine on damages. In other words, even if Rogers’ report was entirely silent with regards to causation, that would still not be a basis to exclude his testimony.
Rogers’ report relied on an assumption about causation that if Rite Aid would have obtained a single Neutraface license that could have also been utilized by its advertising agencies, it would make all four Defendants jointly liable for the lost value of that license. Thus, as his report put it, “Lost Licensing Profits would encompass all Defendants.” The Court held that an assumption about causation was not an objective fact, and Rogers was not allowed to present it as such in his trial testimony. But even if Rogers relied on an assumption about causation as a starting point, it was not a basis to exclude his conclusions.
Third, Burns Group attacked Rogers’ opinions concerning House’s lost opportunity to sell Neutraface. It did not object to the methodology itself—i.e., Rogers’ “income approach” for valuing an intangible asset—but rather homed in on the caveat that selling fonts “was not a common practice in the industry and that in the normal course of business House would not sell Neutraface.” Thus, Burns Group argues, because Rogers’ opinions regarding lost opportunity to sell damages were premised on an admittedly improbable scenario, they qualified for exclusion on account of their lack of bearing on this dispute. But again, the Court held that it is axiomatic that “a qualified expert may answer hypothetical questions.” And that is exactly what Rogers’ report did. The credibility of this scenario as a realistic measure of damages in this case is a question for the trier of fact.
Finally, both PureRED and Burns Group sought to exclude Rogers’ opinions regarding profits subject to disgorgement, highlighting significant gaps in his accounting of the income and expenses associated with the Rite Aid rebranding efforts in his report. But during discovery, House’s interrogatories specifically requested that each Defendant disclose all payments made by Rite Aid to each agency in connection with the New Rite Aid Logo or Rite Aid’s Rebranding and as Rogers’ report explained, he based his calculations on the records Defendants provided in their responses. The Court held that Defendants had every opportunity to examine discrepancies between Rogers’ opinions and these records as they sought to undermine his credibility at trial. But, particularly since Defendants were specifically asked to produce a complete accounting of their profits, the Court dismissed their complaints about Rogers’ report’s alleged failure to reflect documents that were not made a part of the record.
Burns Group also challenged the reliability of Rogers’ testimony. The question of “reliability” goes to the reliability of an expert’s methods. Courts must assess whether a particular methodology is scientifically valid, considering factors like whether it “has been subjected to peer review and publication, the frequency by which the methodology leads to erroneous results, the existence and maintenance of standards controlling the technique’s operation, and whether the methodology has been generally accepted in the scientific community.” As with the question of fit, the proponent of expert testimony bears the ultimate burden of establishing its reliability by a preponderance of evidence. With regards to House’s alleged lost licensing profits, Burns Group first objected to Rogers utilizing the Georgia-Pacific framework, arguing that that case involved a claim for patent infringement, not breach of contract.
The Court held that regardless of the change in context, the measure of damages in Georgia-Pacific—i.e., the value of a hypothetical license that “the parties would have agreed upon, if both were reasonably trying to reach an agreement,” was precisely the same as the “lost licensing profits” Rogers sought to estimate. Burns Group never explained why that case’s methodology for determining the value of such a hypothetical license was an inappropriate tool for the question Rogers was attempting to answer, nor did it cite any authority for its claim that the Georgia-Pacific factors were unreliable considerations outside patent royalty disputes. Next, Burns Group attacked how Rogers evaluated and weighted several of the Georgia-Pacific factors, arguing that his analysis relied on “nonsensical” assumptions, improper analogies, and ultimately produced a “grossly inflated” damages estimate. The Court observed that its briefing spends considerable time setting fire to straw men, casting doubt on opinions that Rogers did not actually render. It was established that Rogers’ report included an estimation of profits associated with Neutraface (as part of his computation of profits subject to disgorgement) despite the Burns Group contending that Rogers “made no attempt to isolate the profit associated with the Neutraface font” while evaluating the thirteenth GeorgiaPacific factor (“The portion of the realizable profit that should be credited to the [font] as distinguished from [non-font] elements, the manufacturing process, business risks, or significant features or improvements added by the infringer”)
As for the opinions that Rogers did offer, Burns Group did not sufficiently demonstrate that Rogers’ conclusions regarding the Georgia-Pacific factors methods were erroneous or otherwise unreliable. At most, it demonstrated that reasonable experts might disagree regarding some of his assumptions. For example, when evaluating the first Georgia-Pacific factor (“The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty”), Rogers identified a license negotiated between House and Baskin-Robbins as “a starting point for assessing a likely licensing fee between House and Rite Aid.” An expert hired by Burns Group, in contrast, opined that the “desktop licenses” actually obtained by several Defendants in this case were a more reasonable starting assumption. The Court held that this kind of battle-of-the-experts constituted a quintessential example of a dispute that a Daubert motion could not resolve.
Burns Group alleged that Rogers’ followed “speculative and unreliable” methods to calculate Defendants’ profits subject to disgorgement since the company “had no profits” and that Rogers “overstated the profitability of Burns.” The Court once again held it to be a a dispute of fact, not an issue of reliability under Daubert. And while Burns Group further claimed that Rogers “failed to consider the impact of the relationship between Burns and Rite Aid on Burns’ profits,” it offered no explanation for why this supposed omission affected the reliability of Rogers’ expert opinions.
PureRED briefly argued that Rogers’ testimony must be excluded because its probative value was substantially outweighed by a danger of unfair prejudice as per the Federal Rule of Evidence 403. The Court observed that the only explanation it offered for why this evidence would be unfairly prejudicial was that “Rogers’ opinions on actual damages were solely based on considerations relating to Rite Aid, not PureRED. The Court held that it fell well short of the threshold for excluding evidence under Rule 403.
The parties had also moved to seal portions of their Daubert briefing and accompanying exhibits. House had sought leave to redact the portions of the parties’ Daubert briefing and its attachments (including Rogers’ report) containing three categories of information: (1) information regarding House’s proprietary pricing structure; (2) details of confidential contract terms and negotiations with non-parties; and, (3) details regarding House’s historical revenues. As its motion explained, public disclosure of this information would have caused House to suffer a competitive disadvantage in the marketplace by undermining its negotiating position in future licensing ventures. In addition, and for much the same reason, Burns Group and PureRED had sought redactions relating to non-public financial data of each Defendant, such as their historic revenues. The Court, having reviewed the documents in question and the parties’ proposed redactions, had agreed that release of this information had the strong potential to result in financial injury, warranting its sealing.
In addition to its proposed redactions to the parties’ briefing, PureRED had also moved to seal Rogers’ report in its entirety, arguing that it contained “specific confidential data.” The Court had noted that PureRED offered no explanation for why sealing Rogers’ report in toto (as opposed to redacting portions of it) was necessary to prevent a clearly defined and serious injury and had denied that portion of PureRED’s motion.
Held
The Defendants’ motions to exclude the testimony of Graham D. Rogers was denied, and the parties’ respective motions to seal was granted in part and denied in part.
Key Takeaways:
In the case, key takeaways regarding expert testimony included the necessity for experts to provide relevant and helpful opinions to the trier of fact, with disagreements over the correctness of the expert’s opinions typically considered issues for the trier of fact to resolve rather than grounds for exclusion. The burden of establishing causation rested with the Plaintiff, not with the expert hired to opine on damages, requiring transparency regarding any assumptions about causation and precluding the presentation of such assumptions as objective facts. Courts assessed the reliability of an expert’s methodology by considering factors such as peer review, frequency of erroneous results, maintenance of standards, and acceptance in the relevant scientific community, with disagreements about methodology typically resolved through cross-examination and presentation of opposing expert testimony. Experts were permitted to calculate profits subject to disgorgement based on available records provided by Defendants during discovery, with challenges to the accuracy or completeness of such calculations addressed through cross-examination. Arguments that the probative value of expert testimony was outweighed by the danger of unfair prejudice under Rule 403 of the Federal Rules of Evidence required meeting a high threshold for exclusion, with mere differences in opinion regarding relevance or scope generally insufficient to warrant exclusion under Rule 403.
Case Details:
Case Caption:
Brand Design Company, Inc. V. Rite Aid Corporation Et Al
Docket Number:
2:22cv1174
Court:
United States District Court, Pennsylvania Eastern
Judge Joshua Wolson of Delaware District Court noted that, “Economists love assumptions. One joke recites that a physicist, a chemist, and an economist find themselves on a desert island with a single can of food. The physicist offers to calculate the force needed to use a coconut to open the can. The chemist offers to make a solution that will eat through the can’s top. The economist tells them they are making it too complicated and just to assume a can opener.”
Economic assumptions are very crucial when it comes to assessing patent damages, especially the one which assumes that both the infringer and patent holder participated willingly in negotiating a license right before the infringement began. Yet some participants are more willing than others in this hypothetical negotiation.
The Plaintiff, Wirtgen America, Inc. possessed patents that provided it with a competitive edge over one of its main rivals, the Defendant, Caterpillar, Inc. Wirtgen claimed that Caterpillar had been involved in the manufacture, use, sale, and/or importation of specific road milling machines within the United States. These machines were claimed to incorporate Wirtgen’s patented technology, thus infringing the Asserted Patents.
Wirtgen had asserted nearly 20 claims across 7 patents, all related to road construction equipment-primarily cold planers- but they covered a range of varied features. The ‘309 Patent disclosed road building machines capable of adjusting the machine’s height relative to the frame or chassis. Similarly, the ‘530 and ‘972 Patents disclosed road construction machines equipped with a drum, adjustable ground supports, and lifting sensors. The ‘641 Patent disclosed a method for working ground surfaces with a milling drum, including raising the drum off the ground. Furthermore, the ‘788 and ‘474 Patents disclosed road construction machines that are height-adjustable for milling depth or slope. Lastly, the ‘268 Patent disclosed aspects of the drive train in a road construction machine.
Wirtgen presented the expert testimony of Pallavi Seth, who provided an estimation of a reasonable royalty that Caterpillar would have paid to Wirtgen if they had engaged in a hypothetical negotiation before the first alleged infringement. Seth supported his estimate by referencing evidence indicating Wirtgen’s reluctance to license its patents to Caterpillar, even under favorable terms, citing Wirtgen’s history of not licensing its patents to Caterpillar in the past.
Seth utilized a willing licensor/willing licensee framework to estimate the highest amount that would ensure Caterpillar found the agreement profitable (otherwise known as Caterpillar’s maximum willingness to pay or “MWP”) and the lowest amount that would ensure Wirtgen found the agreement profitable (otherwise known as Wirtgen’s minimum willingness to accept or “MWA”). He defined Caterpillar’s MWP as the expected incremental profits earned from utilizing the Asserted Patents, and Wirtgen’s MWA as the profits it anticipates to lose should Caterpillar practice the Asserted Patents. The difference between Wirtgen’s MWA and Caterpillar’s MWP equaled the “joint surplus value” in Seth’s analysis.
Wirtgen’s MWA was determined to be its lost profits resulting from infringement. These lost profits consisted of both potential sales of machines as well as sales of spare and replacement parts associated with those machines, which Wirtgen would have had the opportunity to make if Caterpillar had not allegedly infringed the Asserted Patents.
Seth suggests that the joint surplus value may not entirely relate to the Asserted Patents, so she apportioned it to isolate the incremental value contributions of those patents to the accused products. She apportioned the joint surplus value using an apportionment rate derived from a count of family-level forward patent citations. The Rubinstein bargaining model is a framework used to analyze bargaining situations between two parties over the division of a surplus using which she divided the apportioned joint surplus value between the parties. Finally, she calculated damages by adding Wirtgen’s split of the apportioned joint surplus value to Wirtgen’s MWA. Wirtgen’s MWA accounted for approximately 95% of her total damages figure.
Seth asserted that the method for calculating Wirtgen’s MWA would remain consistent regardless of which patents the jury found Caterpillar infringed, although the actual amount of the MWA might vary due to different patents being in effect at different times. However, she acknowledged during her deposition that she did not conduct any patent-by-patent apportionment while calculating the MWA.
The Defendant filed a motion to exclude the testimony of Pallavi Seth deeming her reasonable royalty analysis deficient.
Intellectual Property Valuation Expert Witness
Dr. Pallavi Seth is a Principal at The Brattle Group, Inc. and serves as the Co-Chair of Brattle’s Intellectual Property practice. With a Ph.D. in Economics from Boston College and an B.A. in Economics and Mathematics, magna cum laude, from Mount Holyoke College. Her expertise lies in applying economic principles to intricate business litigation matters and public policy, particularly in the realm of intellectual property. Seth’s professional experience at Brattle, an international consulting firm specializing in business consulting and litigation support, underscores her proficiency in this domain.
Discussion by the Court
A reasonable royalty, on the other hand, is often “based upon a hypothetical negotiation between the patentee and the infringer when the infringement began.” Nonetheless, “given the great financial incentive parties have to exploit the inherent imprecision in patent valuation, courts must be proactive to ensure that the testimony presented—using whatever methodology—is sufficiently reliable to support a damages award.” Apportionment requires that “a patentee must take care to seek only those damages attributable to the infringing features.” The Federal Circuit requires that “to be admissible, all expert damages opinions must separate the value of the allegedly infringing features from the value of all other features.”
The entire market value rule “is a narrow exception” to the rule of apportionment. It states that if it can be shown that the patented feature drives the demand for an entire multi-component product, a patentee may be awarded damages as a percentage of revenues or profits attributable to the entire product.”
The Court acknowledged that a patent owner, having prevailed on liability, may receive a reasonable royalty or lost profits, but not both for the same infringing units.
The Court observed that Seth failed to properly apportion her reasonable royalty analysis as required by law. She combined Wirtgen’s MWA with the joint surplus value in order to calculate the royalty payment, but only apportioned the joint surplus value, neglecting to apportion Wirtgen’s MWA/lost profits. Consequently, she set a 95% of her damages figure in a way that included the value of all the other features in the machines. This approach was deemed impermissible for not invoking the entire market value rule.
In her reasonable royalty calculation, Seth was allowed to consider the profits on sales Wirtgen might lose by granting a license, with lost profits potentially playing a significant role in determining the ultimate reasonable royalty figure. However, Seth’s approach to lost profits posed a problem because it did not isolate the value of the allegedly infringing features from the value of all other features. Therefore, the issue stemmed from Seth’s use of unapportioned lost profits.
Seth’s apportionment approach was considered inconsistent even in comparison to the cases cited by Wirtgen. Typically, when a expert conducts a lost profit analysis as per the factors outlined in Panduit Corp. v.Stahlin Bros. Fibre Works, 575 F.2d 1152, 1156 (6th Cir. 1978), and then incorporates that analysis into the reasonable royalty rate calculation, it may naturally address apportionment concerns. Alternatively, an examination of licenses to comparable technology could also serve to address this issue.
The Court further observed that Seth did not utilize the Panduit factors to determine her lost profits figure, nor could she rely on comparable licenses due to Wirtgen’s lack of prior patent licensing. While it was acceptable that she did not use the Panduit factors or comparable licenses, in their absence, she was required to find another suitable method to apportion her damage award considering the specifics of this case.
Seth attempted to address the requirement for apportionment through her analysis of Georgia-Pacific’s Factor 13, as mentioned in the case Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970), but her attempt was deemed inadequate. While she acknowledged the rule of apportionment in her analysis, noting that the Accused Product as a whole incorporated value from other patents, know-how, human capital, and raw materials, in addition to the value contributed by the technology embodied by the Asserted Patents, she only passingly suggested that the sales data she relied on already accounts for apportionment. However, without a more thorough analysis, it remained unclear how machine sales data could account for apportionment. Wirtgen’s counsel was unable to provide a satisfactory explanation during the hearing. Merely mentioning apportionment in discussing the thirteenth Georgia-Pacific factor did not ensure that Seth properly apportioned her damages, nor did it render her analysis admissible.
Caterpillar conducted an analysis of several of Wirtgen’s patents around the time of the hypothetical negotiation. For some patents, Caterpillar concluded that it had no workaround, causing significant harm to its market position due to its inability to provide the patented technology. However, for the ‘309 Patent, Caterpillar determined it could develop a workaround in a shorter time frame and at a relatively low cost. Seth’s approach, assuming Wirtgen’s MWA to be its lost profits and setting it as a damages floor, failed to consider that patents like the ‘309 Patent were less valuable to Caterpillar. Apportionment could have addressed this issue.
Wirtgen’s counsel defended Seth’s work by asserting that she conducted a hypothetical negotiation of Wirtgen’s entire patent portfolio. However, this approach was flawed because the portfolio consisted of unrelated patents covering different features of the machines. Furthermore, the hypothetical negotiation should have only included patents that the jury found infringed, rather than the entire portfolio. Seth’s approach thus raised the possibility of awarding damages for features that the jury did not find to be infringing.
A failure to apportion impacts admissibility, not weight. If Wirtgen prevails on liability, it will be entitled only to a damage award which captures “the value of what was taken” meaning the patented technology. Given that 95% of Seth’s damages figure consists of unapportioned lost profits, admitting this evidence risked skewing the damages horizon for the jury.
Wirtgen proposed the possibility of Seth still being able to testify. However, the Court stated that it hadn’t received Seth’s revised expert report nor had it been able to fully analyze the excerpts provided to assess the merits of Wirtgen’s request. Consequently, the Court did not outright reject the possibility of Seth testifying on matters not addressed in the current opinion, but it also did not explicitly approve it.
The Court concluded that Seth’s assumption that Wirtgen would have been a reluctant licensor, while reasonable, led her to award Wirtgen all of its lost profits without determining if any particular patented technology justified such a recovery. This failure to apportion and ensure that Wirtgen would only receive the benefit of its patented technologies in her damages analysis resulted in her analysis violating governing Federal Circuit precedent and requiring exclusion. Wirtgen was instructed to disclose any parts of Seth’s opinion it believed could withstand this analysis to Caterpillar promptly, with any remaining disputes to be resolved at the final pretrial conference.
Held
The Court granted the Defendant Caterpillar, Inc.’s Motion to Exclude Certain Expert Testimony of Pallavi Seth’s damages opinion. Further the Court asserted that Wirtgen must disclose to Caterpillar which parts of Seth’s expert report it intends to offer at trial by February 6, 2023, at 3 p.m. EST. Any disputes may be raised at the final pretrial conference on February 8, 2024, after the parties meet and confer.
The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.
Key Takeaways
Wirtgen’s expert, Pallavi Seth, estimated a reasonable royalty that Caterpillar would have paid to Wirtgen in a hypothetical negotiation, supported by evidence of Wirtgen’s reluctance to license its patents. However, Seth’s failure to adequately apportion the damages, particularly in considering lost profits, raised significant concerns. She attributed a substantial portion of the damages to Wirtgen’s lost profits without ensuring whether or not they were specifically related to the patented technologies. The Court observed that Seth’s approach violated governing Federal Circuit precedent, necessitating the exclusion of her testimony. Seth’s reliance on a hypothetical negotiation involving Wirtgen’s entire patent portfolio, rather than just the patents found to be infringed, further complicated the issue. Without proper apportionment, admitting the damages analysis risked biasing the jury’s assessment.
James Swain Rieves, who operated Platinum Vapor, LLC, doing business as Cloud 9 Hemp faced legal trouble when the Town of Smyrna Police Department (hereinafter “SPD”) discovered the sale of Cannabidiol (CBD) products by the business in May 2017. The Smyrna Police Department raided Cloud 9’s premises and seized tens of thousands of dollars in inventory, along with other items. Despite the clear legality of industrial hemp products, including CBD, under Tennessee law, the SPD continued its investigation yet both Rutherford County and the Town of Smyrna failed to investigate the case during the four months and eighteen days they possessed the materials seized from CLOUD 9. This prolonged scrutiny caused significant harm to Rieves’ business, leading to severe emotional distress, loss of enjoyment of life, and a substantial decline in Cloud 9’s income. The reputation of the business and Rieves himself suffered irreparable damage during this ordeal.
The Plaintiff, James Swain Rieves, enlisted the services of CPA Tom Price, an expert in damages and business valuation, to assess the financial impact on his business resulting from the events in question. The Defendants, Town of Smyrna, did not dispute the admissibility of Price’s opinions outlined in the Price Report. However, they countered the same with their own expert, CPA Robert Vance, who is a highly skilled forensic economist retained to challenge the foundations of Price’s conclusions and provide an alternative assessment of the Plaintiff’s damages. Rieves did not contest Vance’s qualifications or the relevance of his opinion but questioned the reliability of Vance’s conclusions as presented in the Vance Report.
The Vance Report comprised two main sections. The first section critiqued the opinions presented in the Price Report, while the second section contained Vance’s own “Damage Calculation.” The Plaintiff raised objections to three opinions expressed by Vance in his critique of the Price Report, seeking their exclusion as unreliable. These included Vance’s assertions that Price’s calculations were unreliable due to the use of “national level statistics” which were applied to the Plaintiff’s “small, local CBD store and his online business”; that the Price Report failed to consider the lack of capital and credit in the damages analysis; and that it overlooked competition from local retail establishments in Smyrna and the potential impact of “big box” stores entering the CBD market when computing damages. Additionally, the Plaintiff contested Vance’s own damages calculation.
Accounting Expert Witness
Robert Vance is a highly skilled forensic CPA and forensic economist based in Memphis, Tennessee. His professional focus lies in various areas including business valuation, divorce litigation support, commercial lost profits, personal injury economic damage calculations, forensic investigations, and expert witness testimony. He earned his Bachelor of Science in Business Administration in Accounting from the University of Tennessee in 1985. With a wealth of credentials, Robert holds designations as a Certified Public Accountant (CPA), Accredited in Business Valuation (ABV), Certified in Financial Forensics (CFF), Certified Valuation Analyst (CVA), and Certified Financial Planner (CFP). Robert is the principal of Forensic & Valuation Services, PLC in Memphis, Tennessee.
Discussion by the Court
The Plaintiff contested Vance’s opinions on Price’s valuations, asserting that Vance failed to provide any reliable data sources to support his views. Instead, Vance relied on snippets from five online news articles, none of which claimed scholarly status or cited legitimate data sources. Furthermore, the Plaintiff argued that Vance’s opinions were flawed, as he mistakenly believed Rieves’ business was a “brick-and-mortar, local, storefront retailer” of CBD products, whereas it functioned as a manufacturer, wholesaler, and online retailer. Additionally, Vance erroneously assumed the business was primarily sold locally, whereas Rieves testified in his deposition, quoted by Vance himself, that only a small percentage of sales were to Tennessee residents. Based on these discrepancies, the Plaintiff contended that Vance’s opinion, suggesting a comparison to local retail businesses, lacked support from the record or the documents Vance relied upon and was not sufficiently reliable for jury consideration.
The Court determined that Vance’s fundamental misconception of Rieves’ business as a small brick-and-mortar store with some online presence undermined and rendered his critiques of Price’s analysis unreliable. Vance’s mischaracterization of the business demonstrated a lack of understanding of its nature, customer base, and actual competitors. Specifically, Vance questioned Price’s analysis, citing differences between the “micro-level environment for small retail stores” and the “macro-level sales considerations of manufacturers of CBD products.” However, the Court noted that Rieves’ business was not a small retail store but, in fact, a manufacturer.
Furthermore, the Plaintiff highlighted that Vance’s citation of an article to support his claim that such types of establishments operate in different environments was merely an online piece by a “startup consultant.” This article broadly outlined “5 variables every business owner should pay attention to,” including competition, political climate, the economy, trends, and technology. The Plaintiff also noted that Vance criticized Price’s growth projections as “miraculous” without providing a basis for such criticism. Interestingly, one of the articles Vance cited referred to a “recent study out of Boulder, Colorado,” estimating a tenfold increase in the market for CBD products in the next five years.
Vance criticized the Price Report for purportedly neglecting to factor in competition in the area in his damages analysis. The Plaintiff testified that his business had minimal dependence on local establishments, with a very small percentage of sales coming from Tennessee. Additionally, Vance listed 52 retail establishments in Smyrna selling CBD products but failed to specify whether these were preexisting competitors or new entrants into the market.
The Plaintiff raised objections to Vance’s criticism of Price, claiming a failure to consider Mr. Rieves’ lack of capital and credit in the damages analysis. Vance supported this critique by citing an online article from CNBC.com outlining common reasons for small business failure, including “empty pockets” due to “poor cash flow.” However, the Plaintiff argued that Vance overlooked the alleged cause of Rieves’ cash flow and credit issues, claiming they have stemmed directly from the Defendants’ seizure of assets and shuttering his business twice. Additionally, the Plaintiff noted that the cited article lacked scholarly credibility and did not conduct any specific analysis to support Vance’s assertions.
The Court concluded that all of Vance’s critiques of Price’s analysis were deemed unreliable and inadmissible. This decision stemmed from Vance’s mischaracterization or misunderstanding of the business type involved and his reliance on non-scholarly and only tangentially relevant online articles. The Court also deemed these articles inadmissible. Importantly, it was emphasized that Vance’s critiques, largely based on common sense, did not necessitate an expert to cross-examine Price regarding perceived inadequacies and oversights in his opinions.
Vance presented his own valuation of the Plaintiff’s damages, relying on an analysis of the business’s actual income and expenses for eight months leading up to the initial seizure in September 2017. However, Vance used income figures from only the three months preceding the seizure to project future earnings and calculate “alleged damages” over a 25-month period, aligning with the Tom Price report spanning from September 2017 through September 2019. His analysis assumed no business growth over time due to factors such as a negative trendline, lack of capital, and increased competition. Vance also explained why he discounted the Plaintiff’s $91,000 claim for damages resulting from the seizure of inventory and materials, deeming it as double-dipping. According to Vance, the total damages arising from the Defendants’ actions amounted to $319,380, a considerable difference from Price’s assessment of total lost income at the “gross profit level,” ranging between $1.27 million and $2.33 million.
The Plaintiff sought to exclude Vance’s damages calculation, deeming it unreliable. This objection arose from Vance’s use of only eight months of data, despite the Plaintiff’s yearly earnings being available since 2015. This approach led to Vance basing projections on a negative growth trend for the months of July through September 2017, instead of utilizing yearly earnings or even earnings for the entire eight months he purported to have reviewed that could have shown an upward trend. The Plaintiff also criticized the Vance Report for neglecting to consider significant market growth for CBD products, failing to analyze the impact of increased competition, and not providing an explanation for how low capital, combined with these factors, would have hindered the Plaintiff’s business growth over the next 25 months.
The Court determined that the Plaintiff’s critiques of Vance’s damage calculation were more relevant to their weight rather than their admissibility. Citing In re Scrap Metal Antitrust Litig., 527 F.3d 517, the Court emphasized that the rejection of expert testimony is the exception rather than the rule. The traditional and appropriate means of challenging such evidence involve vigorous cross-examination, presenting contrary evidence, and providing careful instruction on the burden of proof. In Vance’s case, his damage calculation relied on data supplied by the Plaintiff and mathematical equations based on that data. His assumptions projecting no growth for the Plaintiff’s business were based on his own observation of the trendline for the Plaintiff’s business for the last three months for which data were available.
The Court concluded that the Plaintiff’s challenges to Vance’s damage calculation were more about their weight than their admissibility. The jury would not be presented with inaccurate facts but rather with a calculation based on assumptions that the jury may or may not agree with. Consequently, the motion to completely exclude Vance’s damage calculation was denied.
Held
The Court granted in part and denied in part the Plaintiff’s Motion in Limine to Exclude Expert Testimony of Defendants’ Retained Expert Robert Vance. The motion against Vance was granted to exclude the opinions presented in the first part of the Vance Report critiquing the Price Report and to exclude the five articles cited in support of those opinions. However, the motion was denied in so far as it sought to exclude Vance’s calculation of the Plaintiff’s damages.
The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.
Key Takeaways
The Court granted the motion to exclude opinions presented by expert Robert Vance, critiquing the analysis of another expert, Tom Price. Vance’s mischaracterization of Rieves’ business type and reliance on non-scholarly articles led the Court to deem his critiques unreliable and inadmissible. The Court emphasized that rejecting expert testimony constituted an exception and directed that Vance’s damages calculation, while subject to challenges about its weight, was ultimately considered admissible, rooted in observable facts and data. This case underscores the importance of a thorough and accurate understanding of the type of business at issue when presenting expert opinions and the need for a reasonable factual basis in damages calculations.
Plaintiff Joanna P. Mattson filed a legal action, both individually and on behalf of the Milliman, Inc. Profit Sharing and Retirement Plan, along with a class of participants and beneficiaries affected by the alleged misconduct of the Milliman Defendants. The lawsuit is based on a claim of breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA). The named Defendants include Milliman, Inc., the Board of Directors of Milliman, Inc., “the Investment Committee” responsible for selecting investment options for the Plan and its members, as well as “the Administrative Committee” in charge of Plan administration and its members (collectively referred to as “Milliman” or “Milliman Defendants”).
The Plaintiff asserted that three Wealth Preservation Strategy Funds (the “WPS Funds” or “Funds”) should not have been used in the Milliman, Inc. Profit Sharing and Retirement Plan (the “Plan”). These funds, managed by Unified Trust Company (“Unified”), included the Milliman Managed Risk Strategy (MMRS), an equity risk management approach. Unified, as the investment manager, opted to invest the WPS Funds’ underlying assets in exchange-traded funds (ETFs) representing different segments of equity markets (i.e., small-cap, mid-cap and large-cap, international and emerging market) and various fixed-income products (i.e., bonds and government obligations). Subsequently, Unified engaged Financial Risk Manager (FRM) as a sub-advisor to implement MMRS, which aimed to manage volatility and preserve capital. MMRS comprised two distinct components: a volatility management component using futures contracts to adjust exposure to underlying equity investments and moderate volatility, and a capital protection component utilizing futures contracts to replicate a five-year rolling put option, creating a cash cushion to offset significant market losses.
To conclude, Plaintiff Joanna Mattson only worked at Milliman, Inc. (“Milliman”) from 2002 to 2004. She enrolled in the Milliman, Inc. Profit Sharing and Retirement Plan (the “Plan”), a 401(k) plan governed by the Employee Retirement Income Security Act of 1974 (“ERISA”). Despite having not worked for Milliman for nearly two decades, she commenced this action claiming that three Wealth Preservation Strategy Funds (“WPS Funds” or “Funds”) should have been removed from the Plan before 2016.
The Defendants sought to exclude the opinions and testimony provided by the Plaintiff’s experts, Horacio A. Valeiras and Arthur B. Laffer.
Finance Expert Witness
Horacio A. Valeiras is the CEO and Co-Founder of Frontier Global Partners LLC, an entity specializing in managing private funds and separate accounts, including multi-asset and retirement accounts. As an SEC-registered investment adviser, he holds a Master of Business Administration degree with a focus on Finance from the University of California, Berkeley, and a Master’s Degree in Chemical Engineering from the Massachusetts Institute of Technology. With a wealth of experience spanning 31 years, Valeiras has been actively engaged in the management of large investment portfolios for institutional money managers. His expertise includes the evaluation and selection of investment products for multi-asset accounts.
Economics Expert Witness
Arthur B. Laffer holds the position of Chairman and Chief Economist at Laffer Associates, an economic research and consulting firm he founded. Graduating from Yale University in 1963, he furthered his education by obtaining a Master of Business Administration and a Ph.D. in Economics from Stanford University. Laffer’s expertise in fiduciary responsibility stems from his advisory roles for governments, extensive service on various boards of trustees, boards of directors for both private and publicly traded companies, and his leadership as Chairman and Chief Economist of Laffer Investments.
Discussion by the Court
The Defendants contested the reliability of Horacio Valeiras’ damages opinions and anticipated testimony on two grounds.
The Defendants argued that Valeiras’ damages calculations and testimony regarding the Plan were not reliable, asserting that his damage models were not tailored to the only component of MMRS that he challenged, the capital protection component. They maintained that damages should be tailored to the accumulation phase of retirement savings. In response, the Plaintiff argued that Valeiras had incorporated both the capital protection and volatility management components into his calculations, as the Defendants had used both components of the overall overlay of MMRS simultaneously. The Plaintiff further contended that Valeiras’ damages calculations could be considered reliable, as he integrated the overlay into his calculations in a manner consistent with how the Defendants might have employed it in practice. Despite Valeiras expressing concerns about the volatility management component, the Plaintiff asserted that his testimony was not necessarily unreliable, as he contended that the overlay as a whole adversely affected the Plan. Valeiras stated that the overlay’s attempts to manage volatility were costly and ineffective. The Plaintiffs argued that Valeiras’ testimony remained reliable, as they contended that his inclusion of the volatility management component of the overlay in his damages calculations did not necessarily undermine its reliability.
The Defendants contested Valeiras’ inclusion of the Funds’ investors who were in the draw down phase in his damages calculations. In response, the Plaintiffs argued that Valeiras’ opinion was relevant as ERISA damages encompassed all damages incurred by the Plan. The Court determined that the “returns of the Plan as a whole” were a reasonable approximation of losses to the plan, asserting that the Defendants’ challenges to Valeiras’ testimony pertained to weight and not admissibility. The Court concluded that the amount of damages, if any, would be best determined after considering the evidence at trial.
The Defendants’ motion aimed to exclude the opinions and testimony of Arthur Laffer, focusing on four specific issues.
The Defendants sought to exclude Laffer’s testimony regarding the removal of the three Wealth Preservation Strategy Fundsfrom the Milliman, Inc. Profit Sharing and Retirement Plan before January 2016, arguing that the performance history was not sufficiently long for him to opine on such a decision. The evaluation of ERISA breach of fiduciary duty claims is fact intensive. Despite other Courts rejecting ERISA claims based on only three years of performance data, the Court stated that this challenge addressed the weight of Laffer’s testimony rather than its admissibility, as the factual nature of the inquiry warranted consideration of the evidence at trial.
The Defendants sought to exclude Laffer’s testimony on any conduct predating January 2016, including the alleged “seeding” of the Funds with Plan money in 2012, citing ERISA’s statute of repose which barred it. The Plaintiff argued that such testimony should be admissible, contending that the Defendants’ conduct constituted a singular, ongoing breach. According to 29 U.S.C. § 1113(1), any ERISA action brought more than six years after “the date of the last action which constituted a part of the breach or violation” is barred. The Court acknowledged that the duty to exercise prudence in selecting investments at the outset of the Plan exists “separate and apart from” from the duty to prudently monitor Plan investments and remove underperforming investments, as established in Tibble v. Edison Int’l, 575 U.S. 523, 529, 135 S. Ct. 1823, 191 L. Ed. 2d 795 (2015). While recognizing that the selection and retention are not a continuous breach, the Court decided not to exclude Laffer’s testimony about the Defendants’ selection of the Funds. Defendants’ selection of the Funds, regardless of whether such selection was prudent or not, is distinct from the Plan’s retention of the Funds. ERISA fiduciaries were obligated to continually monitor their plan’s investments, with the specific requirements dependent on various factors such as the plan’s nature, investments, and the plan sponsor. In the present case, the process employed by the Plan in selecting the Funds could shed light on whether the subsequent decision to retain the Funds was prudent. Consequently, Laffer’s testimony regarding the initial investment in the Funds was deemed relevant, and the Plaintiff was permitted to present it to support the claim that the Defendants acted imprudently in retaining the Funds.
The Defendants argued that Laffer’s opinions on the Plan’s investment policy statement (IPS) were legally unsound. Laffer was presented as an expert to assess whether the Defendants demonstrated an appropriate level of prudence and fiduciary responsibility toward managing the Plan and its participants. The Court acknowledged that Laffer’s testimony regarding the Plan’s IPS could be beneficial in assessing whether the Defendants fulfilled their fiduciary duties. Furthermore, since the case would be a bench trial, the Court reasoned that there was no prejudice risk as there was no jury to potentially give undue weight to Laffer’s testimony.
The Defendants contended that Laffer’s remaining opinions lacked proper support and were characterized as mere ipse dixit. They argued that Daubert and the Federal Rules of Evidence do not mandate a district court to admit opinion evidence solely supported by the expert’s assertion without a connection to existing data.The Court, exercising its discretion in assessing the analytical gap between data and opinions, noted that for non-scientific testimony, reliability rested heavily on the expert’s knowledge and experience rather than a specific methodology or theory. Given Laffer’s substantial expertise in evaluating investments and advising retirement plans and their fiduciaries, as well as other trusts, the Court deemed his knowledge and experience appropriate to provide a sufficiently reliable basis for his expert testimony. The Defendants argued that Laffer’s opinions lacked reliability as he did not cite specific surveys, studies, or documentation supporting his views. The Court deemed this argument as pertaining to the weight of his testimony rather than its admissibility. Similarly, the Defendants’ claim that Laffer’s experience with other types of retirement plans and fiduciary investors was insufficient went to the weight of his testimony. As Laffer based his opinions on extensive experience in the investment industry and as a fiduciary advisor, the Court concluded that these opinions could not be excluded before trial.
Held
The Court denied both of the Defendants’ motions to exclude the opinions and testimony of Plaintiffs’ experts Horacio A. Valeiras and Arthur B. Laffer.
Key Takeaways
In the legal proceedings involving Plaintiff Joanna P. Mattson and the Milliman Defendants, the Court addressed key issues related to the expert testimonies of Horacio A. Valeiras and Arthur B. Laffer. The Plaintiff’s claims were centered around the contention that three Wealth Preservation Strategy Funds should have been removed from the Milliman, Inc. Profit Sharing and Retirement Plan before January 2016. The Court considered challenges to the reliability of Valeiras’ damages opinions, with the Defendants arguing that his calculations did not address the capital protection component of MMRS adequately. The Court ruled that these challenges pertained to the weight of the testimony, not its admissibility. Similarly, the Court addressed Laffer’s opinions on the Plan’s investment policy statement (IPS) and other issues, ruling that the objections raised by the Defendants went to the weight of his testimony rather than its admissibility. The Court highlighted Laffer’s extensive experience and knowledge in the investment industry as a basis for deeming his expert testimony sufficiently reliable. Ultimately, the Court denied the Defendants’ motions to exclude the expert testimonies, allowing them to be presented at trial.
Hayward Industries, Inc. (the Plaintiff), a company in the pool industry, filed a complaint against competitors (the Defendants) over the sale of aftermarket replacement salt cells for use in Plaintiff’s chlorine generator systems. Chlorine generators, also known as “salt cell systems,” convert dissolved salt into chlorine to sanitize pools. Chlorine generator systems replace the need for liquid or tablet chlorine. The salt cell has a limited use life and is replaced by inserting a new salt cell into the overall system when the prior cell is exhausted. Hayward manufactures and sells pool chlorination systems, and the dispute centers around the Defendants’ alleged violations of the Lanham Act and other claims. The Plaintiff contends that the Defendants’ advertising is misleading and creates confusion among customers, making them believe that the aftermarket products are actually Hayward’s.
The Plaintiff presented Juli Saitz’s expert report in the legal proceedings to bolster their damage claims, particularly focusing on her assessment of lost profits the Plaintiff is entitled to. Saitz conducted an analysis of the relevant market, characterizing it as a two-party market. This characterization suggested that Hayward, the Plaintiff, would have secured sales of replacement salt cells if not for the Defendants’ alleged false advertising and trademark infringement.
The Defendants filed a Motion in Limine, pursuant to Federal Rules of Evidence 702, in order to exclude the testimony of the Plaintiff’s damages expert, Juli Saitz.
Accounting Expert Witness
Juli Saitz is a Certified Public Accountant with nearly 25 years of experience. She has been appointed as an expert in matters of forensic accounting on more than 20 occasions. Saitz has testified in both litigation and arbitration for disputed values in excess of $100 million. She has served as an expert in matters involving business divorces; shareholder disputes; fraud claims; breach of contract matters; patent, trademark, and copyright infringement; and royalty disputes.
Saitz has a background in commercial disputes and financial consulting services related to financial analysis, investigations, and damage analysis. She is experienced across a range of industries including entertainment, real estate, hospitality, food and beverage, consumer products, financial services, and manufacturing.
Discussion by the Court
Federal Rules of Evidence 702 requires that an expert’s opinion testimony be “based on sufficient facts or data” and must be “the product of reliable principles and methods.” Daubert, as was held in Sardis v. Overhead Door Corp., 10 F.4th 268, 281 (4th Cir. 2021), provides non-exhaustive “guideposts” to aid in the required analysis as to whether an expert’s testimony is reliable: (1) whether the expert’s theory or technique “can be (and has been) tested”; (2) whether the theory or technique has been subject to prior review and publication; (3) “the known or potential rate of error” inherent in the expert’s theory or technique; and (4) whether the expert’s methodology is generally accepted in his field of expertise.
The Defendants are seeking to exclude Saitz’s report, asserting three main arguments. Firstly, they claim that Saitz used a patent damages framework (the Panduit test) inappropriately for Lanham Act cases. Secondly, they argue that Saitz did not establish a connection between the Defendants’ alleged infringing conduct and the assumed transferred sales to Hayward, thus failing to show causation as required to support a lost profits award. Lastly, the Defendants assert that Saitz overlooked significant and undisputed evidence, including factors like pricing influencing consumer decisions, the market for the goods at issue—replacement salt cells for pool chlorination systems-not being a two-party structure as assumed, and issues related to Hayward’s supply chain disruptions and inventory during the relevant damages period.
The Court has rejected the Defendants’ motion. The challenges raised by the Defendants regarding Juli Saitz’s expert report were deemed as concerns about the weight of her testimony rather than its admissibility. The Court acknowledged that Saitz’s methodology, which had been employed by other courts, is acceptable in cases involving essentially a two-party market. The ruling suggests that the Defendants can contest Saitz’s methodologies during cross-examination concerning damages but doesn’t deem them grounds for excluding her testimony.
Held
The Court denied Defendants’ motion to exclude Saitz’s expert report and testimony from trial. As of now, the Court has not reached a verdict in this case, as there are still pending issues that await resolution.
Key Takeaways:
The key takeaways from the court proceedings on expert testimony are grounded in the Federal Rules of Evidence, particularly Rule 702, which mandates that expert opinions must be based on sufficient facts and reliable principles and methods. The Daubert standard, as elucidated in Sardis v. Overhead Door Corp., provides guiding criteria to evaluate the reliability of expert testimony, including whether the theory or technique is testable, has undergone prior review, the potential rate of error, and general acceptance in the field.
In this specific case, the Defendants sought to exclude the expert testimony of Juli Saitz, raising three primary objections. Firstly, they argued that Saitz improperly utilized a patent damages framework for Lanham Act cases. Secondly, they contended that Saitz failed to establish a connection between the alleged infringing conduct by the Defendants and the assumed transferred sales to Hayward, thereby lacking causation necessary for a lost profits award. Lastly, the Defendants asserted that Saitz overlooked crucial evidence, such as pricing influences on consumer decisions, the market structure not aligning with the assumed two-party framework, and issues related to Hayward’s supply chain disruptions.
Despite these challenges, the Court denied the Defendants’ motion, emphasizing that the concerns raised pertained to the weight of Saitz’s testimony rather than its admissibility. The Court acknowledged the acceptance of Saitz’s methodology in similar contexts and allowed the Defendants to challenge her methodologies during cross-examination. Saitz, with nearly 25 years of experience, brings expertise in forensic accounting and has been involved in diverse disputes, ranging from business divorces to intellectual property matters. The Court’s decision underscores the importance of cross-examination in scrutinizing expert testimony, granting the Defendants an opportunity to challenge Saitz’s methodologies and findings while allowing her testimony to remain admissible.
Case Details
Case Caption
Hayward Industries, Inc. V. Blueworks Corporation Et Al
Docket Number
3:20cv710
Court
United States District Court, North Carolina Western
This legal scenario revolves around a dispute between newspaper carriers, Bextermueller News Distributors, Inc., and Tom Richards, and the Defendants, Lee Enterprises, Inc., Lee Enterprises Missouri, Inc., Pulitzer, Inc., St. Louis Post-Dispatch, LLC. The carriers had agreements granting them exclusive rights to deliver St. Louis Post-Dispatch newspapers in specified geographic areas. Allegedly, the Defendants breached these agreements by implementing an electronic delivery system of the Post-Dispatch, impacting the carriers’ revenue and customer relationships.
The Plaintiffs claimed damages for breach of contract and breach of implied covenant of good faith and fair dealing. They engaged Melissa Gragg, a Certified Valuation Analyst, to quantify their lost revenue due to the Defendants’ actions. Gragg’s methodology involved assessing the number of digital-only subscribers within the carriers’ assigned routes from 2017 to 2023 and calculating the lost revenue by multiplying this number with the fee that Defendants are required to pay to Plaintiffs for each newspaper they delivered.
Defendants moved to exclude Gragg’s testimony, arguing that her calculations were flawed. They contested the notion that Plaintiffs were entitled to fees for every digital subscriber within their territories, stating that not all digital subscribers would have been print subscribers for which Plaintiffs would have received fees. Defendants claimed Gragg’s calculations were based on an incorrect premise, rendering her testimony irrelevant and unreliable.
In response, the Plaintiffs argued that according to their agreements, they were entitled to fees for deliveries within their designated areas, regardless of the delivery method or subscriber type. The Plaintiff-Carriers argued that Melissa Gragg’s calculations were in accordance with Missouri contract damages law. They contended that her calculations showcased the breach committed by the Defendants, specifically emphasizing the breach of the contractual obligation to abstain from establishing an alternative delivery system.
The crux of the dispute lay in whether Gragg’s damage calculations adhered to legal principles. Defendants contested the premise that Plaintiffs could claim fees for all digital subscribers within their territories. The Court held oral arguments to resolve this issue, considering the relevance and reliability of Gragg’s testimony in light of Missouri’s contract damages law.
Valuation Expert Witness
Melissa Gragg specializes in business valuations and provides expert witness testimony for litigation purposes. Her expertise spans diverse areas such as marital dissolution, shareholder disputes, commercial litigation, business interruption claims, personal damage calculations, and lost profits assessments. In cases involving divorcing spouses, she calculates maintenance, aids in understanding tax implications and cash flow, and traces separate assets. Gragg also contributes to fraud investigations for privately-held companies, government entities, and municipalities, lending her expertise to uncover fraudulent activities in these contexts.
Discussion by the Court
The admissibility of Gragg’s damages testimony hinged on whether her opinions were founded on a mistaken legal premise. Consequently, the Court’s analysis commenced with a review of the permissible damages under Missouri law for the claims presented, namely, breach of contract and breach of the implied covenant of good faith and fair dealing.
According to Missouri law, damages for breach of contract are restricted to compensating for the loss of the contract’s benefits. The primary objective is to restore the wronged party to the position they would have occupied had the contract been fulfilled. This principle was articulated in the case of Randy Kinder Excavating, Inc. v. J.A. Manning Constr. Co., Inc., 899 F.3d 511, 520 (8th Cir. 2018).
Actual damages aimed to compensate for the direct loss or injury resulting from the wrongful act.
Consequential damages encompassed those reasonably foreseeable damages caused directly by the breach, including those that could have been contemplated by the Defendant at the time of the agreement.
Benefit-of-the-bargain damages, also known as lost profits damages, refer to the net profits the Plaintiff would have gained had the contract not been breached. These damages aimed to put the Plaintiff in the financial position they would have occupied had the contract been fulfilled as agreed upon.
The Plaintiffs contended that Melissa Gragg’s calculations represented their benefit-of-the-bargain or lost profit damages. They argued that according to the Agreements granting them exclusive distribution rights within their designated territories, every digital-only subscriber in those areas constituted lost revenue for the Plaintiffs. Their stance was irrespective of whether these digital subscribers would have ever opted for a print newspaper subscription.
Emphasizing that the Agreements made no exception for digital deliveries, the Plaintiffs asserted their entitlement to a fee for all deliveries within their exclusive territories. They highlighted Gragg’s assumption in her report that deliveries to subscribers within these territories warranted fees for the Plaintiffs, as stipulated in their agreements.
The Plaintiffs’ argument emphasized that the interest of digital customers in the printed version was immaterial to their claim for fees. They maintained that the Agreements explicitly entitled them to compensation for deliveries occurring within their exclusive territories, regardless of the customers’ preferences for print or digital versions.
The Court considered the Plaintiffs’ argument that, according to their interpretation, the Agreements mandated the Defendants to pay a fee for every delivery within their designated territories, regardless of the method or deliverer. In this scenario, if the Defendants commenced digital deliveries within these territories, the Plaintiffs could claim that the Agreements required compensation for all deliveries, including digital ones made by the Defendants.
Under this interpretation, if the Defendants refused payment for these digital deliveries, the number of digital subscriptions multiplied by the applicable delivery fee could represent the lost profits the Plaintiffs would have gained if the contract hadn’t been breached. Awarding damages equivalent to these fees would align with the objective of placing the Plaintiffs in the position they would have been in if the contract had been fulfilled.
However, the Court noted that the Plaintiffs hadn’t directed attention to any specific provision in the Agreements explicitly entitling them to fees for every delivery in their territories, irrespective of the deliverer or method. The Agreements stated the Defendants were required to pay the Plaintiff-carriers a fee “for each… copy of the St. Louis Post-Dispatch… delivered to home delivery subscribers by the Carrier.” This language didn’t encompass digital deliveries, and the breach alleged by the Plaintiffs wasn’t centered on the Defendants’ failure to pay for deliveries within the territories as stipulated in the Agreements.
The Court highlighted that Gragg’s opinion, seemingly based on the presumption that the Agreements entitled Plaintiffs to fees for every digital delivery, lacked support from the Agreements’ language. As a result, the opinion was fundamentally unsupported and couldn’t provide assistance to the jury.
The Defendants contended that Melissa Gragg’s approach to damages contradicted the legal principle governing breach of contract damages, which aims to restore the wronged party to the position they would have held if the contract had been fulfilled. Specifically, in cases seeking lost profits as damages, the goal is to quantify the net profits the wronged party would have gained had the contract not been breached.
The Court agreed with this legal principle and found Gragg’s damages calculations inconsistent with it. The Court highlighted a significant flaw in Gragg’s approach: she didn’t attempt to ascertain how many digital subscribers represented revenue that the Plaintiffs would have acquired in the absence of a digital-only delivery system. Gragg acknowledged during her deposition, a fact seemingly undisputed by the Plaintiffs, that some digital-only subscribers might have had no inclination toward a print newspaper and would never have become print subscribers even without a digital-only option. Consequently, the revenue that the Plaintiffs would have gained from these subscribers in the absence of the breach was effectively $0.
The Court noted that Gragg’s calculations failed to address or account for these subscribers who would not have contributed any revenue if the breach hadn’t occurred. Despite the potential inclusion of such subscribers in her calculations, Gragg didn’t make an effort to differentiate or adjust for these cases where revenue wouldn’t have materialized. Instead, she incorporated them into her calculations without distinction.
The Defendants argued that Melissa Gragg’s approach to calculating damages contradicted the legal principle dictating that a Plaintiff could only seek damages resulting directly from the alleged breach of contract. The Court agreed with this argument, emphasizing that under Missouri law, the purpose of breach of contract damages is to restore the wronged party to the position they would have held if the contract had been fulfilled. In cases seeking lost profits damages, the focus is on the net profits the wronged party would have gained had the breach not occurred.
The Court identified a critical flaw in Gragg’s methodology: it didn’t address the determination of how many digital subscribers would have contributed revenue to the Plaintiffs in the absence of a digital-only delivery system. Acknowledging this flaw, Gragg, as indicated in her deposition, acknowledged that some digital-only subscribers might have had no inclination toward a print newspaper and wouldn’t have subscribed in any circumstances.
The Court highlighted that Gragg’s calculations failed to account for or differentiate these subscribers who would not have generated any revenue if the breach hadn’t occurred. Despite this, Gragg included them in her calculations without accounting for the zero revenue they would have contributed, contrary to Missouri law on breach of contract damages.
During oral arguments, the Court posed a hypothetical scenario to Plaintiffs’ counsel, illustrating that under Gragg’s approach, damages would include fees from households that would never have subscribed to print deliveries, placing the carriers in a better financial position than if no breach had occurred. This approach contradicted Missouri’s contract law, which prohibits placing the wronged party in a more advantageous position than if the breach had not occurred.
Consequently, the Court concluded that Gragg’s method of calculating lost revenue lacked relevance and reliability under Missouri law. Her calculations didn’t analyze the actual revenue lost due to the alleged breach, incorporating fees that would never have been realized even without the breach. Thus, her opinion was deemed irrelevant and unreliable for assisting the jury and was consequently excluded.
The Court found that the cases cited by the Plaintiffs did not alter its conclusion. Despite Plaintiffs heavily relying on Machine Maintenance Equipment Co. v. Cooper Industries, Inc., 634 F. Supp. 367 (E.D. Mo. 1986), the Court clarified that this case reinforced the general principles it had previously relied upon. It reiterated that damages resulting from a breach of contract or breach of the duty of good faith must be those directly resulting from the breach and should aim to place the non-breaching party in the position they would have been in if the breach had not occurred. However, the cited case did not lend support to Gragg’s method of calculating lost revenue.
Furthermore, the other cases referenced by the Plaintiffs during oral arguments discussed the general principles relevant to the implied covenant of good faith and fair dealing. These cases highlighted that the implied covenant prevents a contracting party from denying the other party the expected benefits of the contract. However, in the context of the present motion, the Court established that there was no dispute regarding the deprivation of the expected benefit of the Agreements for the Plaintiffs – namely, the exclusive right to distribute the newspaper within their designated territories. Nevertheless, these cases did not offer support for the specific method used by Gragg in calculating lost revenue.
Held
The Court, after detailed consideration, concluded that the Plaintiffs failed to meet the burden of demonstrating the admissibility of Melissa Gragg’s testimony under Rule 702. Consequently, the Court granted Defendants’ motion to exclude her testimony from the case.
It’s important to note that while the Court made this decision regarding Gragg’s testimony, it hasn’t reached a final decision on the overall outcome of the case. Several other issues in this legal matter remain pending and await resolution by the Court.
Key Takeaways
The admissibility of expert testimony in breach of contract cases relies on its alignment with legal principles governing damages. Damages sought should directly result from the breach and aim to place the wronged party in the financial position they would have occupied if the contract had been fulfilled. Missouri law categorizes breach of contract damages into various types, including actual, consequential, and benefit-of-the-bargain damages. Lost profits, a subset of benefit-of-the-bargain damages, aim to represent the net profits the Plaintiff would have gained if the contract hadn’t been breached. Expert calculations should align with the actual loss caused by the breach. Flawed methodologies that include damages from sources unrelated to the breach’s impact lack reliability under the law. Expert opinions should align with explicit provisions within the contract, and claims for damages must align with contractual entitlements. If expert opinions include calculations or assumptions unrelated to breach-caused damages, they might be deemed irrelevant and unreliable, leading to exclusion. Cited cases should directly support or substantiate the methodology used by the expert in calculating damages. In cases involving the breach of the implied covenant of good faith and fair dealing, the focus should center on whether the breach deprived the party of expected contractual benefits. The burden of proof lies with the party presenting expert testimony to demonstrate its admissibility and alignment with legal principles. If expert testimony fails to meet these standards, it may be excluded from consideration in the case.
This case involved a dispute between Tankmax, Inc. (Tankmax) and its former employee, Wayne Duran, as well as Duran’s new company, American Gas Services LLC (AGS). Tankmax sued Duran and AGS for violations of trade secret laws, computer fraud, tortious interference, unjust enrichment, breach of fiduciary duties and conversion.Wayne Duran was employed by Tankmax and its predecessor, Pacific Meter & Equipment, from 2003 until January 3, 2022. Subsequently, Duran went on his own venture under American Gas Services LLC, which currently competes with Tankmax. The Plaintiff claims that the Defendant unlawfully appropriated trade secrets, specifically customer lists and scheduling calendars. Additionally, the Plaintiff asserts that Duran either stole or neglected to return parts and equipment owned by Tankmax.
The facts, considered in favor of the Plaintiff, reveal that Tankmax, a Washington corporation based in Spokane, hired Wayne Duran in 2003. In March 2021, Pacific Meter & Equipment Inc. (PME), Duran’s former employer, merged with Tankmax. The merger was formalized through a Stock Purchase Agreement, involving the acquisition of PME for around $2 million. As part of this acquisition, all of PME’s assets, encompassing goodwill, phones, customer lists, and related information, were successfully purchased by the Plaintiff.
Following the merger, the Plaintiff initiated a mobile-based operation at PME, introducing a new position known as the Mobile Proving Service Manager. On March 29, 2021, Defendant Duran was promoted to this role. His responsibilities encompassed traveling to customer locations in Washington, Oregon, and Idaho to conduct tests, calibrations, and repairs on propane equipment. He was also tasked with managing company test schedules for specific locations and ensuring compliance with Department of Transportation (DOT) standards by testing and inspecting cargo tanks. Subsequent to the promotion, Defendant spent the majority of his working hours outside the shop.
The Plaintiff equipped Defendant with essential tools for his role, providing an iPhone, a laptop computer, and a tablet computer. Access to these devices required passwords. Defendant chose his own password for the iPhone, while for the laptop computer, he utilized the password designated by the Plaintiff.
During the final years of Defendant’s employment with PME, the company covered the costs of his monthly cell service bill, although it did not buy the phone itself. In the summer of 2021, Plaintiff purchased a new iPhone for Defendant after his original phone was damaged. Despite Plaintiff instructing Defendant to set up an Apple ID using his Tankmax email address, Plaintiff used his personal email for this purpose. Consequently, all the data from Defendant’s previous PME phone was transferred to the iPhone purchased by Plaintiff. Defendant utilized this information, including customer contacts, while scheduling on behalf of Plaintiff.
The iPhone also contained Defendant’s personal data, such as banking information, contacts for friends and family, and photos taken by him. Before terminating his employment with Plaintiff, Defendant acquired a new iPhone for AGS and configured it using the same Apple ID used for the phone provided by Plaintiff. This allowed him to transfer all the data to his new AGS iPhone.
Due to Defendant Duran’s aversion to computers, he maintained customer and tank inspection records on index cards, including customer names, unit numbers, and inspection dates. These cards lacked phone numbers and were exclusively used by Defendant. Customer contact information for scheduling services and testing of truck-mounted propane tanks was stored on Defendant’s iPhone, purchased by Plaintiff. The card file was kept at the shop when Defendant worked there, but upon becoming a mobile prover, he stored it at his house, where it remains. Defendant also used a day planner for scheduling work with customers, and this information was never transferred to any electronic format.
Defendant resigned from Plaintiff’s employment on January 3, 2022, and immediately commenced servicing Plaintiff’s customers the following day. Subsequently, Defendants hired Adam Wright, a former employee of Plaintiff, in May 2022.
Defendant allegedly took various steps while still employed to compete with Plaintiff, including registering his business, American Gas Services, using his work iPhone for competitive purposes, intentionally neglecting to schedule work for Plaintiff after his resignation, ordering equipment for customers to serve under AGS, withholding customer needs from colleagues, resetting his iPhone without authorization, deleting emails, failing to return Plaintiff’s property, returning a non-working mobile prover, providing incorrect information to Ferrellgas, and copying decals, forms, pricing, and the mobile operation concept from Plaintiff.
During the Discovery process, Defendants requested Tankmax to provide evidence supporting the allegations of theft and the value of the stolen parts and equipment. In response, Tankmax submitted 26 pages of ledgers and receipts. The production comprised four documents:
1. An accounting of Tankmax’s Kent shop as of October 1, 2021 (pages 1-14).
2. An accounting of Tankmax’s Kent shop as of July 27, 2022 (pages 15-22).
3. An inventory dated January 20, 2022, detailing parts and supplies Tankmax purchased to replenish what went missing from the truck utilized by Duran (page 26).
4. An inventory dated May 16, 2022, outlining parts and supplies Tankmax purchased to replenish what was missing from the truck utilized by Adam Wright (page 25).
To substantiate its damages claim, Tankmax engaged economist Erick West, who published a report evaluating the purported lost income stream. West also offered an opinion on the damages related to tools, equipment, and inventory that Tankmax accused Mr. Duran of stealing.
In addressing the equipment loss, economist West dedicated three paragraphs in his expert report. According to Tankmax’s claims, it was asserted that Duran failed to return certain tools, equipment, service parts, and gas bottles upon the termination of his employment. Howard, in response to RFP No. 18, provided a QuickBooks report comparing the inventory valuation of the Kent shop on October 21, 2021, to July 27, 2022. This report indicated a missing inventory worth $61,023, attributed to items allegedly taken by Duran before January 3, 2021.
Another document produced in response to RFP No. 18, dated May 18, 2022, summarized the value of missing items amounting to $11,001 from the truck returned at the end of Adam Wright’s employment at Tankmax. Howard attributed these missing items from the truck to additional items allegedly taken and used for the financial benefit of the Defendants. In total, West included $72,024 in damages related to the equipment loss. He noted that this analysis would be updated as additional documentation became available through the ongoing discovery process.
Defendants aimed to exclude the testimony of Plaintiff’s forensic economic expert concerning the $72,024 in damages associated with equipment loss attributed to Defendants. Defendants sought to exclude this particular opinion, arguing that West’s valuation of the missing tools, equipment, and inventory was deemed entirely unreliable. His opinion on this topic fell outside his expertise, lacked foundation, and was unhelpful to the jury.
Forensic Economics Expert Witness
Erick C. West has over two decades of experience as an economics expert. He holds both bachelor’s and master’s degrees in economics from Washington State University. Over the course of his career, West has previously worked as a Financial Advisor at Merrill Lynch,and was a Senior Economist at Harper Incorporated. He currently leads West Economics, Inc. as President, specializing in areas such as business valuation, forensic financial analysis, appraisal services, and quantifying economic losses to both personal and commercial matters.
Discussions by the Court
District Courts serve as gatekeepers for expert testimony, applying Rule 702 to ensure its relevance and reliability. This obligation, established by Daubert, involves assessing if the expert’s knowledge aids the trier of fact, is based on sufficient facts, relies on reliable principles, and has been reliably applied. The proponent of the evidence bears the burden of proving adherence to Rule 702. The trial judge must balance admitting helpful testimony with excluding potentially misleading or confusing content. The relevance of expert opinion testimony hinges on its valid connection to the pertinent inquiry.
Defendants contested that the opinion presented by West, asserting that Tankmax incurred $72,024 in damages due to equipment loss attributed to Defendants, was considered beyond the scope of his training or experience. West lacked the qualifications to provide an opinion on the reasonable value of missing inventory. He was unable to identify the missing parts or equipment, nor could he determine their fair market value. The argument contended that his opinion amounted to merely endorsing a ledger printed out by Tankmax, as acknowledged in his own report.
Even if the Court were to acknowledge that West had the qualifications to express an opinion on the value of the missing inventory, the argument contended that his opinion would not be helpful to the jury. The assertion was that West’s contribution was limited to a simple computation, wherein he added two figures provided by Tankmax’s co-owner, Kelly Howard. The argument emphasized that this task did not demand advanced skill, training, or experience and could be accomplished by anyone with a basic education, even at the grade school level.
West, according to the argument, took no steps to verify any of the figures presented in the ledgers. He did not examine the invoices that formed the basis of the ledgers to ensure their accuracy in reflecting the value of the missing inventory. No inquiry was made into the procedures for inspecting, cataloging, or entering the inventories. West lacked knowledge regarding whether the ledgers underwent reconciliation because he did not inquire. Additionally, he had no information about whether the equipment or parts were new or used, and he was unaware of their reasonable market values. Furthermore, there was no adjustment made for depreciation or appreciation of the inventory in his analysis.
West was not presented with any evidence to indicate that Defendants had actually taken the purportedly missing inventory. Instead, he straightforwardly accepted Howard’s attribution that the items were taken by Defendants.
In summary, the argument asserted that there was no foundation for West’s opinion on equipment loss, and his conclusions were deemed mere speculation.
The Court determined that Defendants’ arguments pertain to the weight of West’s testimony, not its admissibility. The contention is that if the jury believes West’s testimony, it would be beneficial in calculating damages. Defendants have the opportunity to challenge the reliability of West’s damage calculations through cross-examination.
Genuine factual disputes exist regarding whether certain information qualifies as trade secrets under state and federal laws, and if Plaintiff took reasonable secrecy measures. Questions also arise about Defendant’s potential unauthorized access to his iPhone, preventing summary judgment on the Computer Fraud and Abuse Act claim. The Court refrains from granting summary judgment on remaining state law claims, as preemption and other issues require trial evidence. The unjust enrichment claim is not preempted. Overall, because a reasonable jury could rule in Plaintiff’s favor on misappropriation and related claims, Defendants are not entitled to summary judgment.
Held
The Court denied Defendant’s Motion for Summary Judgment and also denied Defendants’ Motion to Partially Exclude the Expert Testimony of Erick West. The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.
Key Takeaways
Defendants filed a motion to exclude expert testimony from Plaintiff Tankmax’s forensic economic expert related to $72,024 in damages attributed to allegedly stolen equipment. Defendants argued the expert’s methodology for calculating these damages was unreliable.
The Court denied Defendants’ motion and found the expert’s testimony admissible. The judge ruled that the objections raised by Defendants did not warrant exclusion under Daubert, but rather went to the weight and reliability of the testimony – issues that could be adequately addressed through cross-examination at trial.
Specifically, the Court found that the expert’s specialized knowledge in calculating economic damages would be helpful to the jury if required to determine a damages award. Additionally, the judge ruled that the expert had applied reliable principles and methods to the available facts of the case.
Therefore, the key takeaways regarding expert testimony here are that challenges to an expert’s data and assumptions generally go to credibility rather than outright exclusion. The Court also emphasized cross-examination provides the appropriate venue for scrutinizing expert methodology. Absent particular red flags, expert opinions meeting the basic thresholds of relevance and reliability under Rule 702 warrant admission, not exclusion.
This case involved an insurance dispute between Plaintiffs Bradford and Christy Boone (The Boones) and Defendant State Farm Fire and Casualty Company. The allegations centered around State Farm’s alleged failure to fulfill contractual obligations, engaging in bad faith practices, and committing constructive fraud in relation to the insurance claim made by the Plaintiffs. In April 2020, the Boones’ home suffered wind and hail damage. They submitted an insurance claim to State Farm, their insurer. The Boones alleged that State Farm conducted inadequate and delayed inspections of the property and offered inadequate compensation.
Throughout the claims process, the Boones used contractor Bedlam Construction (Bedlam) and public adjuster Express Estimators (Express). After a September 2020 inspection, the State Farm adjuster allegedly informed Express that it was a “full buy,” leading Plaintiffs, Bedlam, and Express to assume that State Farm would cover the entire claimed damages to the dwelling, pool house, and carport. Subsequently, Plaintiffs engaged Bedlam for repairs. State Farm initiated its initial payments of $25,822.04 in October 2020, following the commencement of these repairs. In December 2020, after the completion of repairs, Plaintiffs approached State Farm to inquire about the status of the claim and outstanding payments. The claims process continued through 2020 and into 2021, prompting Plaintiffs to seek legal representation in January 2021 and file a lawsuit in September of the same year.
In August 2022, State Farm enlisted Michael Berryman to conduct an additional inspection of Plaintiffs’ property. Berryman provided his estimate of the claim in September. By December 2022, State Farm, relying on Berryman’s estimate, indicated that a supplemental payment would be issued. In January 2023, a payment of $33,232.54 was issued.
In March 2023, State Farm disclosed Berryman as an expert witness, and his report, based on the August 2022 inspection, documents, and deposition transcripts, became the focus of Plaintiffs’ motion. Berryman intended to testify on: (1) the extent of storm damages on the date of loss and expected repair costs; (2) the reliability of Bedlam’s damage estimate and its performance as the property restoration contractor; and (3) the reliability of Express’s damage estimates.
Berryman listed his conclusions as follows:
Hail impacted the roof systems of the home, detached carport, and pool cabana during their service lives. While the hail caused minor cosmetic denting to gutter screens, downspouts, and copper chimney flues, it was insufficient in size to damage the 30-year laminated asphalt roof shingles of the home or the modified bitumen roof of the pool cabana. Wind damage was observed on the home’s roof but not on the roofs of the detached carport and pool cabana. Interior damage in the home was limited to the ceilings of the Northeast Bedroom and potentially a portion of the Formal Living Room. The work undertaken for the interior by Boone was considered excessive.
Bedlam, the involved party, was noted for failing to cooperate with State Farm as expected, and they did not keep their customer, the Boones, adequately informed during the property restoration process. The scope of repair work carried out by Bedlam was considered excessive, surpassing what was necessary to address storm damages.
The Boones engaged the services of a public adjuster named Express Estimators (Express). Estimates created by Express on August 17, 2020, and August 18, 2020, were deemed inadequate for determining the required cost to restore the property to its pre-loss condition. These estimates failed to support the Boones’ claim or the scope of work and costs presented by Bedlam.
The Boones moved to exclude Berryman’s testimony as unhelpful and relying on insufficient basis.
Construction Expert Witness
Michael James Berryman is a construction expert witness based in Oklahoma. Berryman earned a Bachelor of Arts degree in Molecular Biology from Vanderbilt University in 1979. He currently serves as the President and CEO of Berryman Enterprises, Inc., an Oklahoma-based general contracting and consulting company that he owns and operates. Berryman also works directly as a general contractor and consultant in Oklahoma City, Oklahoma. Over the course of his extensive career, he has published works relating to the construction industry.
Discussions by the Court
The analysis of Plaintiffs’ motion begins with Rule 702, which sets forth criteria for expert testimony admissibility. The rule requires the proponent to demonstrate that the expert’s knowledge will aid the trier of fact, the testimony is based on sufficient data, relies on reliable principles and methods, and reflects a reliable application of those principles to the case. The Court serves as a gatekeeper to ensure the reliability of expert testimony. In this case, Plaintiffs did not contest Berryman’s qualifications or the reliability of his principles and methods but argued that his opinions were unhelpful and based on insufficient facts.
Most of the Plaintiffs’ arguments center on the issue of whether Berryman’s testimony would be helpful to the trier of fact. Specifically, Plaintiffs contended that (1) an expert witness was unnecessary in this case, as State Farm did not employ one when assessing Plaintiffs’ insurance claims; (2) Berryman’s testimony would contravene the principles established in Buzzard v. Farmers, 1991 OK 127, 824 P.2d 1105, since he relied on information that was not considered by State Farm during the handling of Plaintiffs’ insurance claims; (3) Berryman’s opinions concerning the performance and estimates of Plaintiffs’ contractors lacked relevance; and (4) Berryman’s viewpoints would encroach upon the trier of fact’s role in assessing witness credibility.
Plaintiffs contended that Berryman’s testimony would not aid the trier of fact, asserting that State Farm never deemed an expert necessary to assess their claim. State Farm countered by asserting that it did hire Berryman to evaluate the claim and utilized his estimate to provide additional insurance benefits to Plaintiffs. The Court rejected Plaintiffs’ argument, emphasizing the lack of a legal basis to claim that hiring an expert for litigation requires prior expert involvement before litigation commenced.
Plaintiffs argued that Berryman’s report should be excluded under Buzzard, contending that State Farm used his expert opinion as a post-denial rationalization for denying their claim. Plaintiffs claimed that the majority of materials in Berryman’s report were unknown or not relied upon by State Farm during the initial claim evaluation. The Court rejected the argument that Berryman’s involvement in handling Plaintiffs’ claims should automatically render his opinions admissible, leaving the decision to the district judge, particularly if Berryman testifies as a fact witness under Rule 701.
A bad faith insurance claim hinges on the actual reason provided by the insurance company when denying the claim, not on a post-denial rationalization, making evidence supporting the latter inadmissible under Buzzard. However, such evidence may be admissible for other purposes.
In this case, Berryman’s opinions extend beyond State Farm’s alleged bad faith, encompassing issues such as the physical damage caused by the insured event and the reasonableness of expenses incurred by the Boones. These aspects directly relate to Plaintiffs’ damages, a crucial element of their claims. The relevance of Berryman’s testimony to the trier of fact is evident, as it addresses essential components of the breach of contract and bad faith claims. State Farm argues that if Plaintiffs’ expert testimony is deemed helpful, Berryman’s rebuttal would also provide valuable insights to the trier of fact.
The remaining portion of Berryman’s testimony focuses on assessing the adequacy of Plaintiffs’ contractor’s performance. The admissibility of expert testimony hinges on its helpfulness to the trier of fact, as established in Wilson v. Muckala, 303 F.3d 1207, 1219 (10th Cir. 2002). In situations where laymen jurors possess sufficient experiences and qualifications to draw conclusions from presented facts, expert testimony becomes unnecessary and inappropriate. Similar to the evaluation of damages estimates, the standards by which contractors operate in specialized circumstances may not be readily understood by laypersons. Moreover, Berryman’s testimony on the adequacy of the contractor’s performance is relevant to determining the causation and extent of Plaintiffs’ damages, thereby serving as valuable information for the trier of fact.
Plaintiffs contested the inclusion of Berryman’s report and testimony regarding their general contractor, Bedlam, arguing that State Farm’s non-delegable duty of good faith made actions by third parties irrelevant. Berryman provided opinions on Bedlam’s overall performance and practices, including compliance with its contract, industry standards, communication with Plaintiffs, and cooperation with State Farm. Plaintiffs claimed that the actions of third parties like Bedlam were irrelevant, given State Farm’s duty. However, Berryman’s analysis was considered directly relevant to the extent of damages suffered by Plaintiffs, and State Farm argued that it needed further information to evaluate the claim. The Court did not preemptively exclude Berryman’s testimony on the basis of Bedlam’s contract but left room for reconsideration during trial and evaluation of potential confusion or unfair prejudice.
Plaintiffs argued that Berryman’s testimony was not helpful to the jury, contending that it intruded on the jury’s role in assessing credibility and reliability. The Court rejected this argument, noting that Berryman’s testimony addressing the substance of other experts’ opinions and the reliability of damage estimates had already been deemed admissible. Additionally, the Court rejected the notion that Berryman impermissibly commented on the credibility of other witnesses, citing legal precedent that credibility determinations are generally not appropriate subjects for expert testimony. The Court clarified that Berryman’s report focused on the quality and accuracy of others’ work and provided rebuttal evidence to Plaintiffs’ claimed damages, without making explicit credibility determinations. Consequently, the Court found Berryman’s testimony permissible, allowing him to testify on the reliability of estimates provided by Express, while Bedlam could explain any faults in the estimates.
Plaintiffs’ final argument revolves around the adequacy of the facts or data on which Berryman based his testimony. They claimed that Berryman relied on inaccurate and incomplete information, specifically noting his omission of depositions from State Farm Team Manager Roger Clark and corporate representative Brett Barthelme. Defendant countered that Berryman did not have access to these depositions at the time of his report and, if the opinions were affected, a supplemental report would have been provided. The Court, applying the standard from Rule 702, aimed to ensure that Berryman’s testimony met the intellectual rigor of his field and concluded that, while Plaintiffs asserted Berryman overlooked certain details, the overall basis for his opinions was likely sufficient. The Court deemed any issues with omitted information as matters of weight, not admissibility, and highlighted the opportunity for cross-examination and presentation of contrary evidence during trial.
Held
The Court issued an order denying Plaintiffs’ Motion to Strike Defendant’s Expert Michael Berryman and his Expert Report. The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.
Key takeaways
This case demonstrates that expert witness testimony may still be helpful and admissible even if the Defendant did not rely on an expert when initially handling the underlying claim or transaction. The testimony cannot serve as a post-hoc rationalization prohibited by Buzzard, but it may permissibly go to other disputed issues like causation and damages.
Additionally, expert testimony rebutting the opinions and estimates provided by the opposing party’s experts is likely to be helpful to the trier of fact. Evaluating the reliability of evidence goes to weight, not necessarily admissibility.
Finally, critiquing the methodologies and conclusions of another expert or participant in the events does not always equate to an impermissible credibility determination. Assessing reliability does not usurp the role of the fact-finder in assessing truthfulness.
