This case arises out of an oil and gas royalty dispute between Flat River Farms and MRC Energy Company. Plaintiffs produced a one-page expert report prepared by George E. McGovern III, CPA, a certified public accountant (“CPA”). Based on his expert report, McGovern was tasked with determining if Plaintiffs’ royalties as determined by the Lease were underpaid. The report contains the following conclusions:
MRC received consistently lower payments for well production than industry standards.
MRC was not charged for expenses related to gas preparation.
The operator’s payment method doesn’t adhere to GAAP standards.
The operator transferred production ownership to a third-party at below-market cost. A third-party marketer then prepared the product for sale.
The gas’s monetary value to MRC and royalty payments were discounted to cover expenses and lease burdens
The Court addressed two motions relating to McGovern filed by Defendant MRC Energy Company (“MRC”). McGovern is Plaintiffs’ expert witness. The first motion is a Daubert motion to exclude the testimony of McGovern. More specifically, MRC seeks to exclude or limit at trial any opinion testimony from McGovern on the element of damages. MRC contends that McGovern’s expert testimony is not based on sufficient facts or data, his testimony is not the product of reliable principles or methods, and he has not reliably applied the principles and methods to the facts of this case. MRC submits that his testimony would only serve to confuse the trier of fact.
The second motion is a motion in limine to exclude McGovern’s expert testimony and report on the grounds that McGovern is unqualified to provide an expert opinion in this case and his testimony is not the product of reliable principles and methods.
Accounting Expert Witness
George E. McGovern III has been a Certified Public Accountant since 1972. He worked for international accounting firm Touche Ross (now Deloitte Touche) and was a full time accounting professor at Centenary College for eight years. He has qualified as an expert in oil and gas accounting, and testified as such in numerous cases across multiple jurisdictions.
McGovern could not explain the basis of his conclusion
During his deposition, McGovern was unable to explain his opinions in conjunction with actual evidence or analysis. He could not recall the prevailing industry rate for the respective time period and did not recollect the documents or information he had or that he used to establish the prevailing industry rate. He also could not explain the basis of his conclusion that MRC was paid at a price that was consistently lower than the prevailing and industry standard price for the respective time period.
MRC contended that McGovern was unqualified to provide an expert opinion in the case
To begin with, McGovern admitted that he had not prepared for the deposition. Based on the contents of the report and McGovern’s deposition testimony, MRC contended that McGovern was unqualified to provide an expert opinion in the case and that his report was not based on any reliable facts or data. MRC submitted that McGovern was unqualified to provide an opinion regarding the various methods of allocating and recouping expenses, and the various methods in which non-operating working interest owners were assessed costs, directly or indirectly, in the oil and gas production process. Besides, MRC maintained that McGovern’s trial testimony would not be the product of reliable principles and methods, and that he had not reliably applied the principles and methods to the facts of the case.
The Court agrees that portions of McGovern’s opinions are not sufficiently grounded in any actual evidence or analysis, thereby rendering them void of the necessary indicia of reliability. Without more reliable methodology and factual support for his analysis, McGovern’s opinion that the per unit monetary value of the gas received by MRC, and upon which it paid royalties to Plaintiffs, does not reflect the true price, but rather a discounted price to account for the deduction of expenses and other lease burdens is inadmissible and would not be helpful to the jury. Rule 702 requires this Court to exercise its role as a gatekeeper and exclude such unreliable expert opinion. McGovern can provide no testimony regarding money, numbers or claimed damages as it relates to the instant matter. Notwithstanding, he is qualified as a CPA to opine on generally accepted accounting principles (“GAAP”) applicable to oil and gas royalty payments. Additionally, assuming the proper foundation is laid, McGovern may be able to opine generally on allocation of production and recouping expenses.
Held
In conclusion, the Court granted in part and denied in part MRC’s motions to exclude McGovern’s expert testimony.
Key Takeaway:
MRC contended that McGovern’s testimony is not based on sufficient facts or data and he is unqualified to provide an expert opinion in this case. The Court held that McGovern can provide no testimony regarding money, numbers or claimed damages as it relates to the instant matter. Notwithstanding, he is qualified as a CPA to opine on generally accepted accounting principles (“GAAP”) applicable to oil and gas royalty payments.
Between 1983 and 1986, MSI, a music company solely owned by Nealy, engaged a number of recording artists and created a catalog of popular sound recordings and musical compositions. MSI was administratively dissolved in 1986, and Nealy was arrested and later sentenced to a twenty (20) year prison term in late 1988. During Nealy’s first incarceration from 1988 to 2008, unbeknownst to and without authorization from Nealy, former MSI Vice President, producer, and recording artist, Tony Butler (“Butler”) began unlawfully transferring rights to use and exploit the Subject Musical Works.
Defendant Artist Publishing Group LLC’s (“APG”) entered into a publishing agreement with the author of the compositions at issue in this case, Tony butler, through his wholly owned company, 321 Music, LLC, pursuant to which APG agreed, inter alia, to license certain musical compositions authored by Butler to third parties, for which APG was paid a percentage of the royalties earned from those efforts (the “APG/321 Music Agreement”).
As part of a separate administration agreement between APG and Defendant Warner Chappell Music, Inc.’s (“WC”), WC assumed certain of APG’s duties in the APG/321 Music Agreement, including licensing the musical compositions to third parties in exchange for licensing fees and royalties. It was alleged that no monies earned from the licensing of the compositions at issue in this case were ever received by APG, other than the royalties it was entitled to receive as publisher pursuant to its publishing agreement with 321 Music, LLC. Those monies have been accounted to Plaintiffs in discovery in this case, totaling $125,738.81.
Both WC and APG filed Daubert motions to exclude the testimony of John Menneci.
Accounting Expert Witness
John Menneci joined Gelfand, Rennert & Feldman (GRF) in 2001 and works out of its White Plains, New York office. He currently co-heads the New York arm of GRF’s New York Royalty Examination Group.
John specializes in conducting royalty examinations on behalf of prominent recording artists, songwriters and merchandise licensors and has over 25 years of experience in this field. He has travelled across the globe to conduct examinations on behalf of the firm’s clients and has audited an array of different licensees in both the physical and digital space with great success. John also specializes in conducting due diligence and valuations in connection with copyright acquisitions and estate tax matters.
The Menneci Report formed the basis for two opinions: (1) Defendants received $410,920.10 in gross publishing income from copyright infringements and (2) Defendants, or parties connected to Defendants, received $54,960,000 in master recording income from copyright infringement of Plaintiffs’ works.
Menneci’s conclusion that Defendants, or parties connected to Defendants, received $54,960,000 in master recording income from copyright infringement of Plaintiffs’ works must be excluded
Starting first with the eye-popping damages figure of almost $55 million, the Court held that the Report did not specify how Menneci reached this conclusion. Indeed, when asked several different times at the Hearing to provide either the methodology or data utilized in reaching this astronomical figure, Plaintiffs’ counsel was unable to provide a response. Even when the Court broke the inquiry down further by asking Plaintiffs’ counsel to explain how Menneci calculated alleged foreign income through some sort of extrapolation, Plaintiffs’ counsel was simply unable to proffer or explain the methodology employed by his damages expert.
Also, Menneci relied on whole album sales, despite the fact that only a handful of isolated tracks remain at issue in this case. In conclusion, Menneci’s calculation includes revenue generated from individual tracks not at issue here, as well as album versions that do not include a single track at issue in this case.
Menneci’s conclusion that Defendants received $410,920.10 in gross publishing income from copyright infringements must also be excluded
The Court noted that Menneci improperly included funds received by other entities in his calculations—apparently on a theory of contributory infringement by non-party Interscope Records.
In addition to being premised on an incorrect theory of recovery, Menneci’s conclusion that Defendants received $410,920.10 in gross publishing income from copyright infringements is not based on sufficient facts and data or reliable principles or methods.
Further, since these monies are not accounted for in the financial documentation produced by Warner Chappell, Menneci conceded that he “estimated” the songwriter’s share of performance income based on his “assumption” that “music publishing income is generally split 50/50 between the [song]writer and publisher.” Similarly, Menneci improperly assumed that Warner Chappell administered 100% of the musical composition for “Weekends”—when in reality, Warner only received 33% of the publishing monies. The Court held that such assumptions fail to meet the standard imposed by Rule 702 for expert testimony.
However, the Court will bifurcate this trial as to liability and damages. During the initial liability phase, Plaintiffs may attempt to establish that Defendants should be held jointly and severally liable for the profits of other entities given the existence of a “practical partner” relationship. If the jury returns an initial verdict finding that Plaintiffs have established either a practical partnership or predicate act, the Court will hold a brief status conference with the parties as to how Plaintiffs intend to prove their joint and several damages and foreign profits damages, given that the Menneci Report is excluded in its entirety under Rule 702.
Held
The Court granted Warner’s Daubert motion to exclude the testimony of John Menneci but denied as moot APG’s Daubert motion.
Key Takeaway:
The Court decided that even a cursory review of the Menneci Report—which spans a mere five pages—indicated significant gaps in methodology and numerous missing data points. Menneci’s deposition did little to clarify his methods; on the contrary, the lack of reliable methodology was further exposed and made even more readily apparent.
Plaintiff, a prominent telecommunications service provider, has established the well-known marks “LIGHTSPEED” and “LIGHTSPEED VOICE” in connection with its telecommunications services. When Defendant opened a business called LIGHTSPEED CONSTRUCTION GROUP, Plaintiff alleged that the mark was nearly identical to its marks in connection with the offering of confusingly similar telecommunications services.
Plaintiff added that such use creates a likelihood of confusion with Plaintiff’s customers.
In this trademark infringement case, Plaintiff sought, among other things, disgorgement of Defendant’s profits during the period of alleged infringement.
Plaintiff obtained an expert report from accountant Kevin Kwan. Defendant claimed that the report simply added two numbers together and filed a motion to exclude his testimony.
Accounting Expert Witness
Kevin Kwan has over 23 years of experience providing consulting and expert witness services in various business disputes, complex commercial litigation matters, and financial investigations. Kevin’s experience includes development of complex financial models, as well as compilation, organization, and analysis of large volumes of historical data through the development of databases.
Defendant did not contest Kwan’s qualifications or reliability, but argued that his testimony would not be helpful to the factfinder.
The Court found that Kwan’s relevant testimony is limited to calculating Defendant’s sales. He also opined that “disgorgement of Defendant’s profits appear[s] to be a reasonable measure of monetary relief in this matter.” But the appropriate form of relief in this case is a legal conclusion, and expert witnesses “may not offer legal conclusions” outside of exceptional circumstances.
Since the Court has already determined that actual damages for injuries like lost profits are inappropriate, Kwan’s support for a disgorgement remedy was—at best—an unnecessary restatement. Besides, Kwan offered that conclusion because he “did not see any particular lost profits that could be claimed” by Plaintiff.
In trademark cases, profits subject to disgorgement are calculated as the infringing sales less the incremental costs associated with those sales. Yet Kwan “did not perform an analysis of Defendant’s incremental costs associated with generating the infringing sales.” He also admitted that he has no opinion on Defendant’s costs. Kwan’s testimony is, therefore, limited to the amount of Defendant’s sales during the alleged infringement.
Kwan’s estimate of Defendant’s infringing sales is the sum of two numbers. The numbers originated from two documents that Defendant produced to show their sales in 2022 and 2023. Kwan added these numbers together to derive Defendant’s total infringing sales. The Court held that simple addition is within the bailiwick of the average lay person and can be presented in closing arguments. Therefore, Kwan’s testimony does not merit admission.
Held
The Court granted Defendant’s motion to exclude the testimony of Kevin Kwan and excluded Kwan from testifying at trial.
Key Takeaways:
The appropriate form of relief in this case is a legal conclusion, and expert witnesses “may not offer legal conclusions” outside of exceptional circumstances.
Simple addition is within the bailiwick of the average lay person and can be presented in closing arguments. Expert testimony generally will not help the trier of fact if it “offers nothing more than what lawyers for the parties can argue in closing arguments.”
Case Details:
Case Caption:
Lightspeed Clec, Inc. V. Lightspeed Construction Group Llc
Plaintiff, Paul Sullivan was employed as a GSI Analyst II in the City’s Public Works Department. His employment was terminated as part of a reduction in force (“RIF”).
During a restructuring of the Public Works Department, which led to the RIF, the City eliminated both of its GIS Analyst II positions, one of which was Sullivan’s. It also created a GIS Analyst III position, which was filled by another employee on August 12, 2019, several months before the RIF. On October 2, 2019, Sullivan asked his direct supervisor to consider him for the GIS Analyst III position. He was informed that there was no open GIS Analyst III position at that time. Sullivan sued the City, alleging that he was terminated in retaliation for engaging in alleged protected activity in violation of the Family Medical Leave Act and the Fair Claims Act.
Sullivan designated Andrew Dakers as an expert witness to testify regarding his economic damages and lost earnings.
The City filed a motion to exclude portions of Dakers’ opinions because they were based on the incorrect assumptions that Sullivan asserted a failure-to-promote claim, that Sullivan would have been promoted to the GIS Analyst III position, and that Sullivan would have received the highest listed salary for the GIS Analyst III position.
Finance Expert Witness
Andrew Dakers is a financial professional with more than twenty years of experience in financial analysis, budgeting, forecasting, project and company assessment, and leading cross-functional teams.
Dakers has a Bachelor of Science in Economics from Carnegie Mellon University and a Master of Business Administration from Yale. Although not currently a practicing or licensed accountant, Dakers successfully passed the Certified Public Accountant examination. Having spent his career in the world of finance, Dakers’ has now begun a new practice providing expert testimony related to employment damages.
Dakers was asked to calculate the financial impact of Sullivan’s alleged wrongful termination under three scenarios. First, Dakers was to assume that Sullivan was promoted to the GIS Analyst III position and was paid at the maximum salary of the published salary range for the position, with annual raises based on the anticipated inflation rate. Second, he was to make the same assumption, but without annual raises. And, third, he was to assume that Sullivan would receive the same salary and fringe benefits that he would have received without termination.
Dakers’ calculations based on the wages for a GIS Analyst III are not based on sufficient facts or data
First, the City argued that Dakers’ calculations were not based on sufficient facts or data because Sullivan did not plead a claim for failure to promote. In his deposition, Dakers testified that he assumed that Sullivan asserted a failure-to-promote claim. He further testified that that would make a difference in his calculations because he could not base his calculations on a similarly-situated position if Sullivan did not assert failure to promote.
The Court rejected Dakers’ calculations based on the wages for a GIS Analyst III because Dakers testified that he would not have used the wages for a GIS Analyst III as part of his damages calculations if he had known Sullivan did not allege a failure-to-promote claim.
Dakers’ report provided no basis for asserting that Sullivan was likely to receive a promotion for a position that was not open at the time of his termination
Second, the City argued that Dakers’ calculations were not based on sufficient facts or data because, at the time that Sullivan sought the GIS Analyst III position, there were no openings. Dakers testified that the damages calculation based on the GIS Analyst III position would only be applicable if this was a position that Plaintiff “was most likely to move into.” But the evidentiary record established that, at the time of Sullivan’s termination, there was no open GIS Analyst III position. And Dakers admitted that, without the likelihood of this promotion at the time, there was no basis for the assumption that Plaintiff’s damages would include lost wages for the position.
Dakers’ use of the maximum salary for the GSI Analyst III position is based on evidence in the record
Third, the City argued that Dakers’ calculations were not based on sufficient facts or data because Dakers had no basis to choose the highest salary in the range for the GIS Analyst III position. When he was terminated, Sullivan’s salary was $57,700. The listed salary range for the GIS Analyst III position was between $50,201 and $72,720. Dakers testified that he chose the highest amount in that range for his calculations because Sullivan was later rehired in a different department at a salary exceeding the maximum for the GSI Analyst III position.
The Court held that Dakers’ use of the maximum salary for the GSI Analyst III position was based on evidence in the record and objections to those calculations go to the weight, not the admissibility, of his damages calculations.
Held
The Court granted in part and denied in part Defendant City of Dallas’ motion to exclude portions of Andrew Dakers’ expert report.
Key Takeaway:
Since Sullivan did not plead a claim for failure to promote, the Court rejected Dakers’ calculations based on the wages for a GIS Analyst III because Dakers testified that he would not have used the wages for a GIS Analyst III as part of his damages calculations had he known that Sullivan did not allege a failure-to-promote claim.
Dakers testified that the damages calculation based on the GIS Analyst III position would only be applicable if this was a position that Plaintiff “was most likely to move into” but at the time of Sullivan’s termination, there was no open GIS Analyst III position.
A district judge in Texas admitted the insurance expert’s testimony about the cost to repair or replace the damaged areas.
This is a commercial property insurance coverage dispute arising from hail and wind damage to Plaintiff’s property located at Midland, Texas. Landmark insured the Property under a commercial policy. Landmark received notice that the Property had sustained storm damage with the date of loss claimed as June 19, 2020.
On March 28, 2022, Landmark sent Plaintiff a letter explaining that investigation revealed that the roof was exposed to multiple hail events on April 16, 2017; on May 16, 2017; and/or on April 23, 2019, but did not support that a hail event occurred at the Property on or about June 19, 2020. Plaintiff subsequently filed suit against Landmark for alleged property damages with a date of loss of June 19, 2020.
Plaintiff designated Kevin Funsch, “a licensed public adjuster and owner of US Insurance Adjusters, LLC.” On March 22, 2024, Landmark filed a motion requesting that the Court exclude Plaintiff’s expert witness, Funsch’s testimony and strike his expert report.
Insurance Expert Witness
Kevin Funsch is a public adjuster and the owner of an insurance adjusting firm with a solid background in claims handling and estimating. He is experienced in adjusting property losses and performing appraisals.
Landmark sought for Funsch’s report to be struck and his testimony excluded because: (1) Plaintiff’s expert designation and Funsch’s report did not comport with Federal Rule of Civil Procedure 26(a)(2); (2) Funsch’s report and opinions were unreliable; and (3) Funsch’s report and opinions were irrelevant.
Funch’s Compliance with Rule 26 and Rule 702
Defendant asserted that Funsch’s expert report is deficient for multiple reasons: (1) it “did not contain a complete statement of the basis and reasons for Funsch’s opinions as to the damages sustained to the property and the cost of repairs”; (2) Funsch did not “explain in his report how his experience as an insurance adjuster led him to reach his conclusions”; (3) the report “did not include any explanation as to the basis or reliability of the estimate”; (4) it “failed to demonstrate that Funsch’s opinions on the damages and necessary repairs are based on sufficient facts or data”; and (5) “that Funsch reliably applied those principles and methods in forming his estimate as required by Rule 702”.
After thoroughly scrutinizing Funsch’s report, the Court found it satisfied both Rule 26 and Rule 702. It added that Landmark’s reliance on its cited Rule 702’s advisory committee note was inapplicable to Funsch’s expert report in this case, as he stated that he relied on multiple other documents and conversations with Neil Hall in forming his opinions, rather than relying solely on experience as the advisory committee note contemplated.
The Court addressed Landmark’s arguments that Funsch failed to demonstrate his opinions on the damages and necessary repairs are based on sufficient facts or data, the product of reliable principles and methods; and that he reliably applied those principles and methods in forming his estimate as required. The Court noted that Plaintiff designated Funsch as his damages expert. Funsch is offered as an expert to provide opinion testimony only on the cost to repair or replace the damaged areas identified in the Hall Report.
Reliability of Kevin Funsch’s Opinions
Next, Landmark asserted Funsch’s “opinions regarding the costs of repairs are unreliable because he relied on unexplained assumptions about the Property that have no factual basis.” Landmark’s argument is premised on Funsch’s deposition testimony. In his deposition, Funsch stated most of the quantities and measurements in his estimate were copied over from the Berkley estimate. Then, because Hall’s report “only called for replacing some sections of the roof and the Berkeley estimate called for replacing all of them, Hall told Funsch to just use ‘about half’ of some of the Berkeley quantities.” Funsch admitted he “wasn’t able to verify every single one of the quantities.” Funsch concluded ‘these quantities, the number of items seems reasonable’ which Landmark asserted were “assumptions” by Funsch instead of “actual quantities” actually rendered the entirety of Funsch’s opinions unreliable.
The Court, citing Rule 703, found Funsch’s testimony and report reliable.
Relevancy of Kevin Funsch’s Opinions
Landmark argued Funsch’s opinions were irrelevant because: (1) his repair estimate was based on prices as of April 2023, when the Policy required valuation based on the date of loss; (2) his repair estimate was a replacement cost estimate, not an actual cash value estimate; and (3) his opinions were not tied to “covered causes of loss.”
His repair estimate was based on prices as of April 2023, when the Policy required valuation based on the date of loss
Defendant first asserted Funsch’s opinions were irrelevant and/or not helpful to the jury because his report contained prices from April 2023 instead of 2019, and the Policy’s valuation provision mandated the cost of repairs be in 2019 (the alleged date of loss).
The Court found that the date of Funsch’s damage estimate did not render it completely irrelevant and unhelpful; rather the exact weight to be given to Funsch’s testimony and expert report was for the fact finder to determine.
His repair estimate was a replacement cost estimate, not an actual cash value estimate
Landmark argued Funsch’s opinions were irrelevant and/or not helpful to the jury because his report contained only a replacement cost estimate, and “[i]n order to receive Replacement Cost coverage, the Policy stated that Plaintiff must first ‘actually’ repair or replace the property.” However, “it was undisputed that Plaintiff did not make the necessary repairs and the very minor repairs Plaintiff did make were not made until over two and a half years later.”
The Court noted that whether Plaintiff could recover replacement cost value or actual cash value damages was a point of contention currently being litigated. Thus, without an order barring Plaintiff from recovering replacement cost damages, the Court found Funsch’s opinion as to replacement cost damages was relevant.
Funsch’s opinions are irrelevant and/or not helpful because his opinions are not tied to a covered loss
Landmark argued Funsch’s opinions are irrelevant and/or not helpful because his opinions are not tied to a covered loss. The Court emphasized that Plaintiff designated Funsch as his damages expert. Funsch is offered as an expert to provide opinion testimony only on the cost to repair or replace the damaged areas identified in the Hall Report.
Held
The Court denied Landmark’s motion to strike and exclude the testimony of Kevin Funsch.
Key Takeaways:
It is not unusual in insurance coverage cases to have separate causation and damages experts, and to have the damages expert rely on causation opinions from the separate expert.
Simply because Funsch relied on Hall’s opinion and his own analysis of photographs, does not render Funsch’s reliability below Rule 702’s threshold, as this is exactly the kind of facts and data experts in Funsch’s field reasonably rely on in forming their opinions.
Case Details:
Case Caption:
William Douglas C/O The Havens Group, Inc. V. Landmark American Insurance Company
Alan Solomon with the University of Tennessee (“UT”) developed the 11-1F4 antibody, and the “ownership of the Antibody materials and associated materials are held by Plaintiff.” The Antibody is effective in treating amyloidosis.
In 2009, Solomon applied for and received two different orphan drug designations for two indications of the 11-1F4 Antibody. Defendant Caelum Biosciences, Inc. was founded to advance the clinical development research from Solomon. Plaintiff University of Tennessee Research Foundation alleged that Defendant’s “sole focus and mission was to commercialize the Antibody technology, which it has renamed to CAEL-101.”
Plaintiff entered into several different agreements relating to the Antibody. In 2013, Plaintiff entered an Inter-Institutional Agreement (“IIA”) with former party, The Trustees of Columbia University in the City of New York (“Columbia” or “Columbia University”), allowing it to work on clinical trials with respect to the Antibody.
According to Plaintiff, in 2017, Defendant “began publishing press releases containing false statements regarding the ownership of the 11-1F4 technology, [made] false disclosures on its website, and . . . [made] false disclosures with the U.S. Food and Drug Administration claiming that it had licensed the 11-14F4 technology from Columbia University and that [Defendant] was now the owner of the 11-14F4 Orphan Drug Designations.”
Defendant retained Neil J. Beaton, a certified public accountant, as its damages expert. University of Tennessee Research Foundation (“UTRF”) requested that the Court exclude several opinions of Neal J. Beaton pursuant to Federal Rule of Evidence 702.
Business Valuation Expert Witness
Neil Beaton is a Managing Director with Alvarez & Marsal Valuation Services in Seattle. He specializes in the valuation of public and privately held businesses and intangible assets for purposes of litigation support (lost profits claims, marriage dissolutions and others), acquisitions, sales, buy-sell agreements, ESOPs, incentive stock options and estate planning and taxation. He also performs economic analysis for personal injury claims, wrongful termination and wrongful death actions.
Specifically, UTRF requests that the Court preclude Beaton from testifying that: (1) the release between UTRF and Columbia University “shows that UTRF itself did not regard the UTRF Assets … as having any value”; (2) “the evidence shows that UTRF itself placed little or no value on the UTRF Assets”; (3) “the alleged trade secrets UTRF has identified in this case are generally known in the industry and/or are readily ascertainable,” making damages unavailable; and/or (4) opining that UTRF only is entitled to damages of $371,600 if it prevails against Caelum in this lawsuit.
Specifically, Plaintiff pointed to paragraphs 36, 44, and 45 of Beaton’s expert report. These paragraphs provided as follows:
36. This broad release of “all claims and liability” shows that UTRF itself did not regard the UTRF Assets as of June 12, 2017 as having any value.
44. Since UTRF essentially abandoned the UTRF Assets and Solomon transferred the Investigational New Drug (“IND”) for nothing in return, the evidence shows that UTRF itself placed little or no value on the UTRF Assets.
45. As I understand is detailed in other reports being served by Caelum, the alleged trade secrets UTRF has identified in this case are generally known in the industry and/or are readily ascertainable from publications, presentations, ATCC deposits, patents, and/or other proper means such that no real economic value would be obtained from their disclosure. Thus, it is my understanding that UTRF cannot recover damages for its trade secret misappropriation claim.
Beaton’s first two opinions would not assist the trier of fact
The Court found that the first and second opinions were not within Beaton’s specialized knowledge such that they would assist the trier of fact. Beaton acknowledged that his first opinion is based on the Court’s order dismissing Columbia from this case. And his second opinion is based on his interpretation of the facts of the case, including Solomon transferring the IND without compensation.
Beaton’s third opinion is not helpful to the jury
For his third opinion, Beaton stated that his understanding is that Plaintiff cannot recover damages because other experts have opined that Plaintiff’s purported trade secrets are generally known in the industry and/or are readily ascertainable. Plaintiff argued that this testimony is not helpful but additionally, it asserted that the “rules do not permit an expert to rely on opinions developed by another expert for purpose of litigation without independent verification of the underlying expert’s work.” Experts are permitted to rely on another expert’s opinion “[i]f experts in the particular field would reasonably rely on those kinds of facts or data in forming an opinion on the subject.”
Even so, the Court found Beaton’s testimony on this issue was not helpful to the jury. Beaton is essentially stating that if there are no trade secrets, Plaintiff’s damages are zero. But the jury need not hear from an economist to reach that conclusion. The Court therefore found Plaintiff’s arguments well taken on this ground.
The Reliability of Beaton’s Opinions
Plaintiff challenged Beaton’s alternative opinion that should Plaintiff prevail on its claims, it is entitled to only $371,600. It argued that “Beaton’s conclusion is based on incorrect facts and lumps together [Plaintiff’s] breach of contract and trade secret misappropriation claims,” rendering his opinion unreliable.
Plaintiff stated that in its Amended Complaint, it alleged that Defendant breached the Confidentiality Agreement executed on March 14, 2017, but in assessing damages on the breach of contract claim, Beaton used a date of January 1, 2017—more than two months before the contract existed. Plaintiff stated that his reliance on January 1, 2017, to calculate damages is unreliable.
Defendant responded that Beaton evaluated the UTRF Assets using the date of January 1, 2017, because this is when the 2017 Caelum/Columbia Agreement was executed. Beaton explained that choosing a different date would not affect his damages calculation. Plaintiff argued that although it has separate claims for breach of contract and trade secret misappropriation, “Beaton did not provide separate damages opinions for these claims.”
The Court could not conclude that Beaton’s opinions were unreliable or unhelpful simply because he performed an aggregate damages calculation. Plaintiff cited no authority for the proposition that an aggregated damages calculation is inherently unreliable, and to the extent the jury finds Defendant liable on the trade secret misappropriation claim and the breach of contract claim, Beaton’s opinions are helpful. The Court found cross examination and jury instructions are more appropriate than exclusion on these grounds.
Held
To conclude, the Court granted in part and denied in part the Plaintiff’s Daubert motion to exclude the testimony of Neil J. Beaton.
Key Takeaways:
Experts are permitted to rely on another expert’s opinion “if experts in the particular field would reasonably rely on those kinds of facts or data in forming an opinion on the subject.”
The Court found that Beaton’s opinions regarding the value or lack thereof of Plaintiff’s trade secrets are not helpful to the jury.
At the same time, the Court found Beaton’s damages calculation reliable and helpful.
Moreover, Beaton essentially stated that if there are no trade secrets, Plaintiff’s damages are zero. The Court held that this type of conjecture claiming ‘if there was no violation, there are no damages’ does not require expert testimony; it is a rhetorical argument to make to the jury.”
Case Details:
Case Caption:
University Of Tennessee Research Foundation V. Caelum Biosciences, Inc.
Docket Number:
3:19cv508
Court:
United States District Court for the Eastern District of Tennessee
A district judge in North Carolina refused to exclude the accounting expert witness’ calculations of the Defendants’ revenues and profits earned in connection with their sales.
Plaintiff and Defendants sell heat transfer systems to industrial customers. In 2016, Plaintiff sued Defendants for trade secret misappropriation, breach of contract, unfair competition, and patent claims. That litigation terminated with a 2018 settlement agreement. According to that agreement, Defendants assigned to Plaintiff patents related to the design of a first-generation Fluid Tracing System (“FTS”) product and pledged specifically to “remove all reference to the [FTS] on its web pages and advertisements and cease all use of any materials referencing the [FTS].” Defendants also agreed not to sell products into the Sulphur field for an exclusionary period of three years, with exceptions granted for four contracts allegedly in place at the time the settlement agreement was executed (i.e., the “excepted contracts”).
Following the settlement, Defendants developed a new heat transfer product, FTS Generation 2 (“Gen. 2”). As required under the settlement agreement, Defendants amended their marketing materials to remove references to the first-generation FTS. Nonetheless, some of Defendants’ post-settlement marketing materials continued to depict FTS Gen. 1. Following the development of FTS Gen. 2, Defendants disseminated a chart indicating that the second-generation product performs better than FTS Gen. 1. Purporting to avail themselves of the excepted contracts provision of the 2018 settlement agreement, Defendants also sold their Gen. 2 product into the Sulphur field.
Plaintiff again sued Defendants in 2021, raising claims of false advertising and false designation of origin under the Lanham Act; racketeering under RICO; common law fraud, civil conspiracy, and breach of contract; and unfair and deceptive trade practices under North Carolina Law.
Expert Testimony
Plaintiff retained Glenn Newman as an expert to calculate the revenues and profits earned by Defendants in connection with their sales into the Sulphur field and sales of FTS Gen. 2 products after the effective date of the settlement agreement. Defendants offered Carson Hannah, an employee of QMax Industries, LLC, to opine on tests he designed and performed in 2019 (before Plaintiff instituted this litigation) showing that Defendants’ Gen. 2 product performs better than the Gen. 1 product for which Plaintiff holds the patent. Each party moves to exclude the other’s expert under Federal Rule of Evidence 702.
Accounting Expert Witness
Glenn Newman, a forensic accountant, has provided a variety of financial consulting and accounting services to attorneys, insurance companies, governmental agencies and public and private corporations since 1980. Newman has served as a Neutral and Special Master and has held numerous leadership positions with the American Institute of CPAs.
Defendants moved to exclude Newman’s testimony as unreliable because he failed to establish a causal link between his damages calculations and Defendants’ alleged wrongdoing. Plaintiff contended that Hannah’s report has not “been subjected to peer review and publication,” and is not falsifiable because Hannah failed to record the amount of heat-transfer compound used.
Defendants’ Motion to Exclude Newman
They argued that a damages expert must establish causation by tracing ill-gotten gains to wrongdoing alleged in the complaint. Defendants contended that for an expert report to be admissible to prove disgorgement of profits under the Lanham Act, the expert must do more than assume a correlation between the alleged wrongdoing and the profits; the expert must instead examine causation between the alleged wrongdoing and the estimate of damages.
The Court held that the Plaintiffs retained Newman to opine on merely damages; not causation.
Defendants argued that an expert’s opinion as to damages must be causally related to the alleged harm. Assuming (as the Defendants might) that the jury accepts Plaintiff’s contention that the parties are direct competitors in a two-supplier market, the Court held that Newman’s disgorgement analysis is “causally related to the alleged harm.”
Defendants added that the astronomical amount of profits Newman contended the Defendants owe intensified the unreliability of Newman’s opinion. The Court held that the Defendants’ objection concerned the weight accorded to Newman’s testimony, not its admissibility.
Defendants argued that Newman’s report was unreliable because it did not apportion damages amounts to each of Plaintiff’s claims. According to the Defendant, an expert’s “failure to apportion the disgorgement of profits as to each claim renders his opinion unreliable because there is no way for the factfinder to differentiate which profits are attributable to which claims.”
The Court recognized the merit of Defendants’ claim that Newman’s disgorgement analysis had the potential to mislead a jury, citing the Plaintiff’s lack of entitlement to a disgorgement remedy on all their claims. The Court will address this issue if it materializes at trial. However, the Court denied Defendants’ motion to exclude.
Plaintiff’s Motion to Exclude Hannah
Defendants offered Hannah, a QMax employee, to opine regarding a test that he performed to compare the performance of the Gen. 1 and Gen. 2 FTS products.
Hannah only had to provide a disclosure stating “the subject matter on which [he] is expected to present evidence” and “a summary of the facts and opinions to which [he] is expected to testify” because he is a Rule 26(a)(2)(C) witness.
Plaintiff moved to exclude Hannah on the basis that his conclusions “were not based on sufficient facts or data and were not the product of reliable principles and methods.”
In 2019, before Plaintiff brought this suit, Hannah conducted a test apparently showing that Defendants’ Gen. 2 FTS product performed between 5% and 15% better (in terms of heat transfer) than the Gen. 1 FTS product. Hannah’s Rule 26(a)(2)(C) report did not contain any data from this test. When he conducted this test, Hannah failed to record the total amount of heat-transfer compound used to connect the FTS products to their respective process pipes, which could affect the performance of the FTS products. Hannah admitted that, based on his 26(a)(2)(C) report alone, it would be impossible to evaluate or recreate his analysis.
Since Hannah’s report did not contain the data on which he based his conclusion, Plaintiff contended that “Hannah’s opinions are based on no facts or data—nevermind sufficient ones—and must therefore be excluded.”
The Court held that the spreadsheets produced by Defendants in response to Plaintiff’s discovery requests, which apparently contain the data underlying the 2019 tests belied the Plaintiff’s contention that no such data existed.
Also, the Court held that “vigorous cross-examination” and “presentation of contrary evidence” at trial instead of the Court’s gatekeeping function should address the the reliability of Hannah’s conclusions.
Held
The Court denied the parties’ motions to exclude. The Court held that the parties’ critiques were not without merit, but they ultimately concerned the weight, not the admissibility, of the relevant testimony.
Key Takeaways:
As per Daubert, that district court reliability assessments should focus “solely on principles and methodology, not on the conclusions that they generate” when Defendants added that the astronomical amount of profits Newman contended the Defendants owe intensified the unreliability of Newman’s opinion.
Peer review and publication—while one indicator of reliability—is hardly a requirement for admissibility under Daubert‘s gloss on Rule 702.
Case Details:
Case Caption:
Controls Southeast, Inc. V. Qmax Industries, Inc. Et Al
Docket Number:
3:21cv302
Court Name:
United States District Court, North Carolina Western
A district judge in Florida decided that a civil engineering expert witness cannot testify about the alleged defects of Knauf drywalls because his testimony was generic.
Defendants Knauf Gips KG and Knauf New Building System (Tianjin) Co. Ltd.’s (“KPT”) are foreign manufacturers accused of constructing defective drywalls that have been installed in homes across the country. Plaintiff Ina Helmick is the former owner of one such home.
Because of the commonality of facts, all federal litigation involving this drywall was designated as a multidistrict litigation and consolidated for pretrial proceedings in the District Court for Eastern Louisiana. Subsequently, the cases in the MDL were remanded and transferred to the relevant district. Plaintiff Ina Helmick’s case was assigned to the District Court for the middle district of Florida.
Howard Ehrsam P.E. is a civil engineer and president of Chinese Drywall Screening, LLC. He has worked in the fields of general contracting, land development, consulting and civil engineering design. He obtained his bachelor’s degree from the University of Florida in Civil Engineering in 1995. Ehrsam is a leading resource and advocate for property owners, contractors, attorneys, and real estate agents.
Shawn Macomber has a Master’s Degree in Construction Management from Louisiana State University. He has been certified as a Defective Drywall Consultant and Remediator as well as an inspector by several different certifying bodies. He is an ICC Certified Residential Building Inspector and the qualifying party for Healthy Home Solutions, LLC as a Louisiana State Residential Building Contractor.
First, Defendants sought to exclude in full the testimony and expert opinion of Ehrsam, a civil engineer and president of Chinese Drywall Screening, LLC. Plaintiff retained Ehrsam to opine on the common effects of Knauf Chinese drywall on the components of homes, including property within the home. According to Defendants, Ehrsam’s general opinions were unreliable, speculative, and otherwise unhelpful to the trier of fact.
Ehrsam Provided Generic Opinions
Ehrsam did not perform an individualized inspection or analysis of Plaintiff’s former property or any drywall allegedly within the property. Instead, he provided generic opinions on the following:
Whether defective Knauf drywall produces gasses and what gasses are emitted;
Whether defective Knauf drywall off gassing causes corrosion in the home and the extent of that corrosion;
Whether defective Knauf drywall causes damage to components in a home and which typical components (wiring, plumbing, a/c, etc.);
Whether defective Knauf drywall causes damage to personal property in the home and which items or contents are affected (computers, televisions, etc.); and,
Explain the difference between defective Knauf drywall and domestic made drywall and the off gassing that has been known to occur by each.
Ehrsam once acknowledged that there were other factors besides defective drywall that can cause corrosion or damage to property or items. In other words, he agreed that he cannot determine whether drywall caused damage in a particular Plaintiff’s home without an inspection.
Ehrsam’s generic testimony will not be helpful to the jury
The Court agrees with Defendants that this generic testimony will not be helpful to the jury considering the Plaintiff will have to prove specific and individual causation and damages at trial. As Defendants put it, “ a general opinion that KPT drywall emits gas and causes corrosion, without any correlation to the drywall or damage in Plaintiff’s property, is unhelpful and usurps the jury’s role as factfinder.” In conclusion, the potential to confuse or mislead the jury substantially outweighs the probative value of the generalized testimony.
Shawn Macomber
Defendants sought to exclude or at least limit the expert opinion and testimony of Macomber, who is a certified Chinese drywall inspector. Macomber inspected Plaintiff’s former property and estimated the cost of remediating the property. According to Defendants, “Macomber’s opinions are not relevant or helpful to the trier of fact because of the application of the economic loss rule” and “Macomber’s inspection and remediation cost opinions are unreliable and speculative.”
The Economic Loss Rule (ELR) is a legal doctrine that prevents parties from recovering economic loss in most tort actions unless the victim has also suffered personal injury or property damage.
Because of the significant limitation on damages under the economic loss rule, Macomber’s opinions on the cost of remediation are irrelevant and unhelpful to the jury.
Because of the significant limitation on damages under the economic loss rule, the Court held that Macomber’s opinions on the cost of remediation are irrelevant and unhelpful to the jury. As Defendants explain, “because Macomber’s report advances no opinion regarding damage to Plaintiff’s ‘other property,’ which is the only damage permitted pursuant to Florida’s economic loss rule, it provides no support for the damages Plaintiff may recover.”
Defendants also sought to exclude Macomber’s opinions and testimony regarding the presence of Defendants’ drywall in Plaintiff’s former home or the causes of damage to that home. Since the alleged flaws Defendants identified as to Macomber’s inspection and identification of the drywall concerned the weight to be given to the opinions and testimony, the Court denied the motion.
Held
The Court granted in part and denied in part the Defendants’ motion to exclude or limit the expert testimony of Howard Ehrsam and Shawn Macomber to the extent discussed above.
Key Takeaways:
Ehrsam cannot attach any degree of certainty to a finding that any uppercase KPT drywall impacted the property in question. In other words, a general opinion that KPT drywall emits gas and causes corrosion, without any correlation to the drywall or damage in Plaintiff’s property, is unhelpful.
Most of the damages Plaintiff seeks to qualify as economic damages are not recoverable in product liability tort claims. However, of these, only damages to ‘other property within the real property’ are recoverable. Macomber’s opinions on the cost of remediation were irrelevant and unhelpful to the jury
A district judge in California refused to exclude the testimony of an expert economist despite objections raised against his methods for establishing classwide damages. The expert economist had adequately explained why his damages analysis would provide an accurate and common method to prove classwide damages.
The Plaintiff contended that the Defendant Williams-Sonoma, Inc., and its advertising and marketing subsidiaries Williams-Sonoma DTC, Inc., and Williams-Sonoma Advertising, Inc. (collectively “WSI”) advertises and markets the thread count in certain of its Bedding Products in a way that is not only contrary to industry-accepted standards, but is also false, deceptive, or misleading to reasonable consumers.
On September 28, 2022, Perlin filed a Motion for Class Certification (“Certification Motion”) seeking to certify two classes: (1) a nationwide class of persons that purchased one of the seven lines of bedding seeking injunctive relief under the UCL, FAL, and CLRA pursuant to Rule 23(b)(2); and (2) a California subclass of persons that purchased one of the Bedding Products from WSI seeking monetary (and all other available) relief under the UCL, FAL, CLRA, and common unjust enrichment under Rule 23(b)(3).
Jennifer Frank Rhodes is the owner of Twin Gingers LLC, a consulting company serving the textile and consumer products industries specializing in the design, development and commercialization of textiles and textile consumer products, particularly bedding products. She is also employed at Thomas Jefferson University, as the Assistant Program Director, Textile Design B.S. Program and an Adjunct Professor. Rhodes has studied textile design and textile product development for more than 25 years and has worked in this field for more than 20 years.
Economics Expert Witness
Dr. Russell L. Lamb is the President and Co-Founder of Monument Economics Group. An expert in antitrust economics and applied econometrics, Lamb has more than 25 years experience as an economic consultant and more than a dozen years’ experience developing econometric models and providing expert witness and economic consulting services in cases involving antitrust, class action, and liability and damages analysis.
Having taught economics for many years at both the undergraduate and graduate levels, Lamb specializes in explaining complex economic and econometric concepts in a clear and concise manner to non-economists, including the Courts.
Prior to his work as an expert witness, Lamb developed extensive particular expertise in international and domestic agricultural economics and has undertaken extensive original research and econometric analysis related to markets for agricultural commodities. He has authored more than 50 articles in peer-reviewed journals, trade press, and major newspapers. Lamb also regularly presents at conferences on topics including the state of the U.S. Economy and farm policy.
Discussion by the Court
Jennifer Frank Rhodes
Rhodes opined that the generally accepted method for calculating thread count for bedding products sold to consumers in the United States is to count the number of warp yarns (ends) and filling, or weft yarns, (picks) in an inch. Each yarn, or thread, is counted as one thread, even if it is two-ply. Accordingly, bedding that had 300 yarns per square inch had a thread count of 300, even if the thread is two-ply. ASTM (American Society for Testing and Materials) D3775-17 is the generally accepted industry standard for calculating thread count for woven cotton bedding products sold to consumers in the United States at all times during the proposed class period.
Her testing of the WSI seven lines of bedding revealed that WSI’s advertised thread counts are not accurate. The stated thread count of each collection is approximately double the actual thread count. Each of the collections are represented to be two-ply. Accordingly, WSI improperly counted each ply in the yarn to falsely inflate the thread count, contrary to the industry standard for calculating thread count. She concluded that the various products sold under a single line or collection of bedding, such as sheeting, cases, duvets, and shams, are made of the same fabric. She explained the practical process of thread count testing and concluded that thread count could not be done with the naked eye or by the average consumer.
Motion to exclude
WSI moved to exclude her opinions of “industry standard” and “generally accepted methods” of thread count because she referred only to “industry” insider expectations that WSI argued were irrelevant and because she testified that there were no mandated “labeling requirements” for thread count and the ASTM standard she relied on was not applicable to how textiles might be marketed. WSI also argued that because Rhodes was not a consumer perception expert, she could not testify to what consumers expected regarding thread count as that was outside her area of expertise. Finally, it challenged the reliability of her opinions regarding consumer perception of thread count, contending that she improperly relied on only “a handful of articles and non-binding legal opinions” to support her conclusions.
Court’s Ruling
The Court held that WSI equation of “industry standard” with irrelevant “insider knowledge” in this consumer case is not a reason to exclude Rhodes’ opinions. While she will need to explain how she connects the existence and use (or non-use) of industry standards to her opinions, including opinions on consumer perception and opinions on how others in the industry calculate thread count, she may opine on these issues given her work and teaching experience, as well as her reliance on industry publications and textbooks.
Considering Rhodes qualifications and given her experience in the industry, she is amply qualified to opine on the existence of industry standards and use or non-use of the ASTM standard.
Dr. Russell L. Lamb
The Plaintiffs retained Lamb to opine on whether the WSI’s “challenged conduct resulted in injury to all or nearly all proposed Class members, in that they paid higher prices for the Bedding Products they purchased from the Defendants; and whether the magnitude of damages can be calculated on a class wide basis without resorting to individualized inquiry.”
Lamb proposed the benchmark analysis to measure damages on a class-wide basis. A benchmark analysis is used to compare prices paid by customers for the Relevant Bedding Products with prices that customers paid for “benchmark” bedding products. Benchmark bedding products are products of comparison that resemble the Relevant Bedding Products but are not a part of the Challenged Conduct, i.e. bedding products with properly labeled thread counts that are materially the same as or very similar to the Relevant Bedding Products. The benchmark analysis can be done in two ways: through a direct benchmark approach or a hedonic pricing model.
He explained how he would construct and run both models to support his opinions, but did not — for class certification purposes — actually run both models.
Motion to exclude
WSI first moved to strike Lamb’s opinions that are based on the materiality of thread count to consumers. It argued that his opinions assume that thread count is material without adequate expertise and without a reliable basis, given that he relied only on “cherry-picked” industry and WSI documents as well as the challenged testimony of Rhodes, and not on empirical consumer evidence, such as a survey of actual consumers regarding WSI’s Bedding Products.
WSI next moved to exclude Lamb’s opinion that a “direct benchmark approach” can be used to determine class-wide damages, because in order to complete that benchmark analysis Lamb will rely on Rhodes’ selection of “benchmark products,” meaning products comparable to the Bedding Products at issue in this case but with “properly identified thread counts.” WSI argued that the benchmark products identified by Rhodes were not comparable to WSI’s Bedding Products in numerous ways.
They also moved to exclude Lamb’s second proposed method of showing classwide damages, his proposed hedonistic-regression model. WSI argued, first, that a hedonistic-regression model did not fit the contours of this case, offering testimony from two WSI declarants regarding “actual” WSI’s pricing practices. It argued that those declarants’ testimony demonstrate that even a reduction in demand (an assumption in the hedonic model) would not result in a lower price or vice versa in the real world because WSI sets prices at a fixed rate above the supplier’s price and does not price sheets according to demand. It asserted that Lamb’s hedonic regression model, as Lamb admits, would be “artificially constructed” and should be excluded.
Finally, WSI argued that because Lamb did not conduct his proposed hedonic-regression analysis or confirm that the data needed to run that analysis existed, his opinions regarding the hedonistic-regression model must be excluded as impermissibly vague and unreliable.
Court’s Ruling
The Court determined that how material thread count is to a reasonable consumer is, of course, subject to dispute by WSI and its experts. Whether the jury agrees that thread count is material has not yet been determined. But damages experts are allowed to assume the merits of a question in order to conduct their damages work, which is what Lamb did (although he did identify numerous sources supporting the materiality of thread count to consumers). That is particularly true here, where WSI successfully bifurcated damages discovery from class discovery and the Plaintiffs have not had the opportunity to fully engage in damages discovery.
The Court held that damages experts are not required to have run their damage analyses, but instead are required to explain how they would do so and why the resulting analysis would provide an accurate and common method to prove classwide damages at the class certification stage. Lamb has satisfied that burden here with respect to the benchmark analysis.
WSI ignored that hedonistic-regression models were based on real-world transactions and real-world data regarding price and other variables.
The Court held that Lamb’s opinions regarding the hedonistic-regression model sufficed for class certification purposes.
What the final hedonistic-regression model looks like, after damages discovery has been completed and Lamb has finalized the variables selected and run the analysis, can be tested pre-trial.
The Court granted the Plaintiffs’ motion to certify a class of California purchases but denied the Plaintiffs’ motion to certify a nationwide injunctive relief class.
Held
The Court denied the Defendant WSI’s motion to exclude the Plaintiffs’ experts Jennifer Frank Rhodes and Russell L. Lamb.
Key Takeaways:
WSI’s position that industry standards were irrelevant to consumer perception may be argued to the jury and reraised post-trial if appropriate. The Court held that WSI’s challenge to Rhodes’ opinions based on a review of too few or “cherry-picked” industry or WSI documents were classic grounds for cross-examination, not exclusion. And it may raise “legal conclusion” objections in limine or during trial to her opinions regarding whether a product was “mislabeled” or is “misleading.”
At the class certification stage, damages experts are not required to have run their damage analyses, but instead are required to explain how they would do so and why the resulting analysis would provide an accurate and common method to prove classwide damages. Lamb has satisfied that burden here with respect to the benchmark analysis.
Plaintiffs are former Salesforce employees who participated in the Salesforce 401(k) Plan. They alleged Defendants breached their fiduciary duties to the Plan and Plan participants in violation of the Employee Retirement Income Security Act of 1974 (“ERISA”).
Plaintiffs alleged the Investment Advisory Committee, Joseph Allanson, Stan Dunlap, and Joachim Wettermark (collectively, “Committee Defendants”) breached their fiduciary duty of prudence by selecting and retaining investment options with high costs relative to other, comparable investments. They relied on Robert E. Conner to support their claims against Defendants—fiduciaries of the Salesforce 401(k) Plan—under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).
Robert Conner stated that Defendants’ oversight of the Salesforce 401(k) Plan was not “consistent with the standard of care of a prudent fiduciary,” and that the Plan participants incurred “losses . . . as a result of the Plan fiduciaries’ failure to provide oversight.”
Defendants sought an order excluding Conner’s opinions pursuant to Rule 702 of the Federal Rules of Evidence, arguing he was “not qualified to opine on the standard of care applicable to such fiduciaries under ERISA” and that his opinions were based on “flawed methodology and unreliable information.”
Securities Expert Witness
Robert E. Conner holds an M.B.A. in Finance from Harvard Business School. Conner is currently the President and co-founder of Datura Analytics, LLC and the co-founding officer of Thornapple Associates, Inc; two expert witness firms specializing in litigation support for investment disputes, investment industry standards, and damages. He has 46 years of experience in the securities industry serving clients in areas such as “ERISA pension and profit-sharing plans, registered and nonregistered investment managers and advisors, non-profit organizations and foundations, bankruptcy trustees, trusts and estates.”
Conner’s opinions were partly based on his experience as a fiduciary in, among other things, investment portfolio management, including within the retirement plan industry. Conner has been an expert witness in several analogous ERISA cases.
Discussion by the Court
Conner Lacks the Requisite Experience
Defendant argued that Conner never “served on a 401(k) or other pension plan committee” and has never “served as an expert witness where the ERISA fiduciary standard of care has been at issue.”
However, Conner “managed discretionary accounts” and “provided research and transactional coverage of non-discretionary accounts” including pension plans from 1977 to 1980. From 1983 to 1998, he managed equity portfolios for pension accounts as a portfolio manager, all of which experience included managing ERISA plan assets. Since 1998, Conner has worked at two expert witness firms, supporting litigation in “the securities and commodities industry” and in “investment industry disputes.”
In conclusion, the Court determined that the Defendants’ criticism of Conner’s experience only affected the weight of his opinions, not admissibility.
Conner’s Opinions are based on Flawed Methodology and Unreliable Information
Conner opined the Committee breached its fiduciary duty by choosing “investments and share classes with higher expenses even though identical investments with lower expenses were available” by: (1) as to Target Date Funds (“TDFs”), “failing to choose or switch to the JPMorgan Smart Retirement 2020 R5 share class . . . or the R6 share class when they became available”; and (2) failing to offer the “Fidelity Contra Commingled Pool (CIT)” and “Fidelity Contra Fund K6.”
JPMorgan SmartRetirement Target Date Funds
Defendants first argued Conner based his criticism of the Committee’s failure to substitute the Institutional share class of the JPMorgan TDFs for the R5 share class “on flawed methodology and unreliable information.”
The underlying factual record indisputably showed that the Plan was invested in the Institutional (later renamed R5) class from the beginning of the Class Period through December 2017.”
Plaintiffs did not dispute that the R5 and Institutional share classes were identical. Instead, they argued the “essential part” of Conner’s TDF share class opinion “focused on . . . why the R6 share class should have replaced the more expensive [Institutional/R5] share classes” more promptly, and, as Plaintiffs also pointed out, the supporting data contained in the exhibit submitted in connection with Conner’s report could support a calculation demonstrating the difference between the Institutional/R5 and R6 share classes. In light thereof, the Court found the above-described error concerned the weight, rather than the admissibility, of Conner’s opinions.
Defendants next criticized Conner for ignoring the benefit of revenue sharing to offset Plan administrative expenses, which was provided by the R5 class but not the R6 class. Although Conner conceded that revenue sharing was applied toward expenses with the fund, he stated he did not account for the revenue sharing credit paid by the Institutional/R5 share class in his damages calculations because revenue sharing made recordkeeping and administrative costs interdependent with plan participant returns and reduced the investment returns plan participants received.
The Court found that the above challenge primarily concerned the merits of Plaintiffs’ claims, rather than whether the report was based on sufficient facts and data.
Collective Investment Trusts
Defendants also sought to exclude Conner’s opinion that the Defendants breached their fiduciary duty of prudence by failing to replace the JPMorgan TDFs, the Fidelity Contrafund K, and the Fidelity Diversified International Fund K on the Plan’s investment menu with cheaper CITs sooner than they did. They argued Conner’s methodology was flawed because he inappropriately compared mutual funds with CITs, which were entirely different investment vehicles with different features. Conner did not dispute the above-referenced differences but offered his opinion that such concerns did not permit a prudent fiduciary to “rule out” CITs entirely. The Court again found Defendants’ challenge questioned the merits of Plaintiffs’ claims rather than the admissibility of Conner’s opinions in support thereof.
Damages
Defendants first sought to exclude Conner’s damages calculations because he did not obtain the underlying data himself and failed to properly assure its accuracy. Conner testified that he verified the numbers upon which he relied and based his own opinions upon. Accordingly, the Court declined to exclude Conner’s testimony on the basis of his use of such data.
Flaws:
Defendants additionally argued Conner’s damages calculations suffered from several fundamental flaws specifically:
(1) He treated the R5 and Institutional share classes of the JPMorgan TDFs as distinct share classes;
(2) He failed to account for the difference in expense ratios varying over the 2015 to 2017 period and by vintage; and
(3) He multiplied his calculation of expense ratio differences by Plan assets in the challenged funds as of year-end keeping in mind expenses accrued throughout the year rather than at year end.
As to the first of the above-listed “flaws,” the Court declined to exclude Conner’s damages calculations because, as discussed above, it isolated the mistake from the rest of Conner’s analysis.
As to the second flaw, Conner acknowledged that the share class expense ratios could change at different times causing smaller or larger spreads, but he explained that the difference typically is about 0.10%, which is the figure he opted to use. The Court held that an expert’s arguably improper focus on damages at a particular point in time is a question of fact, rather than grounds for exclusion.
Similarly, as to the third “flaw,” the Court found the parties’ respective experts’ disagreement as to whether it was preferable to use monthly asset averages, as was done by Defendants’ expert, or instead to use year-end assets, as was done by Plaintiffs’ expert, concerned the weight of each such opinion, not its admissibility.
Opinions as to Excluded Claims
Defendants sought to exclude Conner’s opinions to the extent they pertained to claims brought solely in the Second Amended Complaint, which Plaintiffs were not permitted to file, and to claims whose dismissal from the First Amended Complaint was affirmed by the Ninth Circuit. Plaintiffs agreed that such opinions “could be stricken.”
Held
The Court denied the Defendant’s motion to exclude Securities Expert Witness Robert Conner with the exception of the opinions as to excluded claims.
Key Takeaways:
Requisite Qualification: Conner managed discretionary accounts and provided research and transactional coverage of non-discretionary accounts. He also worked at two expert witness firms. The Court held that he was qualified to opine.
Methodological Basis: The Court’s decision emphasized that Conner thoroughly checked the numbers used in his damages calculations, ensuring that he based his opinions on a sound methodology.
Challenge to Merits: Defendants argued that Conner’s methodology was flawed because he inappropriately compared mutual funds with CITs, which were entirely different investment vehicles with different features. The Court held that the Defendants’ challenge concerned the merit of Plaintiff’s claims.
